Part I of this post examined citizenship under the US immigration and nationality rules, how to relinquish citizenship under these 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) and the procedures and factors used by the Department of State in dealing with such cases. It also examined which route (relinquishment by renunciation, or by performance of an expatriating act) might be “better”. Part II focussed on the other form of US citizenship – that is, “US tax citizenship”. It discussed how the concept came into being, what it means to be a US “tax citizen”, the confusion generated by the current “tax citizenship” laws enacted in 2008, as well as the concern regarding ongoing US tax citizenship status of many who had relinquished US citizenship years before. It also examined the recently published viewpoint espoused by the Tax Section of the American Bar Association concerning the expatriation provisions as applied to certain individuals who had relinquished US citizenship years before the current laws were ever enacted.
Today’s post will look, in part, at the view of another prominent attorney, John Richardson of Toronto, Canada. John is all too familiar with these laws and the difficult issues they create for individuals who had relinquished US citizenship many years before. Today’s Part III of the post also sets 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 the backward reach of the relevant Internal Revenue Code Sections — Section 877A and 7701(a)(50). Caution is necessary lest the tax professionals, themselves, create a situation where one professional blindly follows the next resulting in a scenario where, without the requisite aforethought and due consideration, the provisions come to be applied retroactively.
Possible Interpretations of Sections 877A(g)(4), 7701(a)(50) and Resulting Consequences
Possible Interpretation 1: Literal but Non-Sensical?
Some practitioners interpret the law in full literal fashion. Under this view, individuals who ceased being “citizens” for immigration law purposes prior to June 3, 2004 nonetheless remain “tax citizens” under Section 877A because of the precise and literal wording of the statute which mandates that citizenship continues until the date a Notice Event occurs (e.g., the date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of a specified act of expatriation).
As far as I am aware, these practitioners have not analyzed beyond the literal words even if this literal interpretation does not make much sense in the grand scheme of the evolution of the expatriation provisions. See Patrick Martin – author of the “Tax-Expatriation” blog: excerpt below
“To put this statute in practice, let us assume a dual national living in Country X, goes to the US Embassy or Consulate in Country X in the year 2014 (May 4, 2014, to be exact) to request a relinquishment of citizenship back in time, i.e., to the “relinquishing act” for immigration law purposes. He or she is able to convince the US Department of State that the relinquishing act was in December of 1989. The CLN that is later issued, reflects the December 1989 date. Unfortunately, the tax statutes referenced above, clearly state the earliest date of “relinquishment of citizenship” occurs on the date the dual national went to the US Department of State, i.e., on May 4, 2014.
Not a day earlier than 4 May 2014.”
Possible Interpretation 2: A Reasonable Interpretation?
Under another possible interpretation, individuals ceasing to be “citizens” for immigration and tax law purposes prior to June 17, 2008, are not to be treated as “tax citizens under Section 877A. This far more persuasive and reasonable interpretation is espoused in the ABA Tax Section Report, discussed more fully in Part II of this blog post:
“In our view, sections 877A and 7701(a)(50) should not be considered to apply to individuals who had ceased to be citizens, for both nationality and federal tax purposes, prior to June 17, 2008, and a contrary application of the law would be inconsistent with Congressional intent, as manifested in the 2004 Act [which had deliberately grandfathered under former section 7701(n), all individuals, such as Mr. Doe, who relinquished citizenship on or before June 3, 2004]. It also excludes individuals who relinquished their citizenship in accordance with the requirements of former section 7701(n) after June 3, 2004 and prior to June 17, 2008.”
The ABA Tax Section Report supports its interpretation in several ways: First, it points out that Congress could not have intended in the 2008 HEART Act to change the noncitizen status of persons such as Mr. Doe whose non-citizenship status had been deliberately grandfathered four years earlier under the 2004 Act. Second, the ABA Tax Section Report highlights that if Congress truly had intended to overturn the well-settled expectations of numerous expatriates, the statute or the legislative history would likely have been more explicit on this point. In fact, neither the statute nor the legislative history make any mention that the 2008 HEART Act was meant to overturn results of pre-June 4, 2004 expatriations. Third, the ABA Tax Section Report then discusses the well-established principle that a statute “must not be interpreted to compel absurd results” and raises the position that retroactively applying Section 877A to pre-June 4, 2004 expatriations (such as the case of Mr. Doe) may raise serious Constitutional issues. In this regard, the ABA Tax Section Report points out that the “well recognized doctrine that doubtful statutory construction involving possible unconstitutionality should always be rejected in favor of a reasonable construction by which the constitutional conflict can be avoided.”
Reasonable People, Equally Informed, Seldom Disagree?
I wholeheartedly agree with the conclusions of the ABA Tax Section Report, and as further support, I point out another attorney’s view on this precise issue. My colleague, John Richardson, is a lawyer based in Toronto, Canada. John has tried to make sense of the messy expatriation rules in Code Sections 7701(a)(50) and 877A by focusing on the plain words of the statute.
The Plain Reading of Sections 7701(a)(50) and 877A and How They Interact
John provides a reasonable and balanced approach to the issue. John points out that the “plain wording” of Section 877A suggests that it should have prospective application only. John’s complete analysis can be found here.
I have summarized his points below.
Johns starts with the wording of Section 7701(a)(50):
“(50) Termination of United States citizenship
(A) In general
An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A (g)(4). [emphasis added]”
John emphasizes use of the word “individual” in that Section and notes that the word “individual” in Section 7701(a)(50) is a very broad term and can presumably include anyone. However, John points out that the term “individual” in Section 7701(a)(50) is then further defined by reference to Section 877A(g)(4). He examines how Section 877A(g)(4) might apply to clarify the term. The language in Section 877A(g)(4) refers to a “citizen”; it does not use the word “individual”. A “citizen” is a specific type of individual.
Specifically, Section 877A(g)(4) provides that “A ‘citizen’ shall be treated as relinquishing his United States citizenship on the earliest of [the Notice Events are then listed].” The wording does not say, “An ‘individual’ shall be treated as relinquishing his United States citizenship on the earliest of [Notice Events]”.
In emphasizing the importance of the statute’s use of these two different words, John examines the rationale behind the two Code sections. He postulates, and I believe correctly, that the purpose of Sections 7701(a)(50) and 877A(g)(4) was to separate the definition of “tax citizen” for US income tax purposes, from the definition of “citizen” for immigration and nationality purposes. With this as the backdrop, John postulates that Section 877A(g)(4) must be referring to an individual who was in fact a “citizen” on June 16, 2008 under the immigration and nationality laws as in effect on June 16, 2008, the date that Section 877A(g)(4) became effective. Section 877A(g)(4) describes the conditions under which one who is currently a “citizen” (or one who was a “citizen”, at the time that Section 877A took effect), ceases (or ceased) to be a “tax citizen”. Once an individual ceases to be a “tax citizen”, the individual is no longer subject to US tax liability. Therefore, the starting premise for application of Section 877A(g)(4) is that one must actually have been a “citizen” for immigration and nationality purposes on June 16, 2008.
By way of emphasis, John states:
[Section] 877A(g)(4) does not use the word “individual”. It does not use the words “former citizen”. It does not use a phrase “anyone who was ever a citizen”. It specifically uses the word “citizen”.
Therefore, John suggests that what Section 877A(g)(4) means is:
A person who is a “citizen” or who was a “citizen” (for immigration and nationality purposes) on June 16, 2008, will be a ‘tax citizen’ until he meets one of the Notice requirements of Section 877A(g)(4).
If this is correct, then Section 877A(g)(4) would have no application to someone who was not a ‘citizen’ (for immigration and nationality purposes) on June 16, 2008 – the date that Section 877A took effect.”
John summarizes the ‘tax citizen’ status of individuals who relinquished US citizenship on the various significant dates that reflect statutory changes to the expatriation regime:
1. Relinquishments prior to June 3, 2004
Those who relinquished US citizenship and ceased to be citizens for US immigration purposes prior to June 3, 2004 cannot be subject to Section 877A(g)(4) [Notice Events].
2. Relinquishments after June 16, 2008
Those who relinquished US citizenship and ceased to be citizens for US immigration purposes after June 16, 2008 are clearly subject to Section 877A(g)(4) [Notice Events].
3. Relinquishments between June 3, 2004 and June 16, 2008
Those who relinquished US citizenship during this intermediate period were subject to old Section 7701(n) of the Internal Revenue Code. Section 7701(n) provided that a person who relinquished US citizenship under Section 349(a) of the Immigration and Nationality Act was treated as a US citizen for tax purposes until the date that the individual notified the State Department and filed an information return with the IRS. In other words, US tax liability on worldwide income continues until the individual gives the required notification of expatriation.
While old Section 7701(n) makes clear that this individual would continue to be treated as a citizen for US tax purposes until the requisite notice is given, what is not clear is what happens if:
Between June 3, 2004 and June 16, 2008 the individual ceased to be a “citizen” without giving the notice required in Section 7701(n). Upon giving notice, would this person be subject to the Exit Tax and other provisions contained in Code Section 877A which were enacted in 2008 with the HEART Act?
Employing John Richardson’s analysis we know that on June 16, 2008 the “individual” was no longer a “citizen” for immigration and nationality purposes, but that he remained a US “tax citizen” since he was subject to the provisions of the old Section 7701(n), which deemed US tax status to continue until the required notice was given. When the individual eventually gives the required notice, John’s view is that this individual could not be treated as a tax citizen for Section 877A purposes (e.g., Exit Tax) effective on June 17, 2008 since he or she was not a “citizen” for immigration and nationality purposes on such date. However, that individual could still be subject to the so-called “alternative tax regime” of the expatriation rules that existed on that date (under this regime, certain items of income are re-characterized so as to have a US source, and are thus taxable to the nonresident alien individual – for example, gains on sales of US stocks).
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. You’d be surprised what can happen with interpretation; it somehow builds on itself and flourishes of its own accord. Thus, prudence is advised when it comes to interpreting the law. It has been suggested, for example, that a century-old misinterpretation of the US Constitution’s Citizenship Clause has taken on a life of its own, resulting in many individuals being treated as US citizens by the fact of their mere birth in the United States when such an interpretation “simply does not comport with either the text or the history surrounding adoption of the Citizenship Clause, nor with the political theory underlying the Clause.”
John Richardson puts forth a similar call to caution using these words:
“A self-fulfilling prophecy
Americans abroad who retain professional tax advisers generally follow the advice they receive from the adviser. U.S. law can be very complicated. U.S. law can be very unclear. Therefore, advisers often formulate their advice based on how their colleagues interpret the law. Therefore, if a “critical mass” of tax advisers presumes that S. 877A has retroactive application, and enough advisers follow this advice, S. 877A may evolve to the point that it does – in practice – have retroactive application.
To put it another way: Might the tax community create a situation where S. 877A is understood to be retroactive and (in practice) becomes retroactive? This is what has gradually happened in the world of TFSAs (treating them as Foreign Trusts) and other areas of uncertainty (3.8% Obamacare surtax anyone?). The taxation of U.S. citizens abroad is fraught with areas of difficulty and uncertainty.
The tax advisers who advise that S. 877A is retroactive should be asked to clearly explain the reason for this advice.
Remember: U.S. tax law is NEITHER created NOR enforced by the IRS – It’s created by Congress and enforced (in practice and interpretation) by the lawyers and accountants.”
With regard to the expatriation provisions contained in the Internal Revenue Code, we have, on the one hand, an interpretation of statutory terms in a precise and literal fashion. Under this view, individuals who ceased being “citizens” for immigration law purposes prior to June 3, 2004 nonetheless remain “tax citizens” under Sections 877A and 7701(a)(50) because of the precise and literal wording of the statute – citizenship continues until a Notice Event occurs (for example, the date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of a specified act of expatriation).
On the other hand, we have the position of the ABA Tax Section, John Richardson (and other tax professionals), who espouse the same basic view based on somewhat similar reasoning. This viewpoint does not ignore the wording of the statute. However, it interprets the wording of the statute by looking to its context, examining legislative history and the framework of the expatriation provisions as they developed over time. Their collective view is that Code Sections 877A and 7701(a)(50) as enacted by the HEART Act must have prospective application only.
Reasonable people, equally informed, seldom disagree? What do you think?
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