The “plain language” of S. 877A – To whom does the U.S. Exit Tax apply?

The “Plain Language” of the S. 877A Rules – To Whom does S. 877A apply? What is the “Relinquishment Date?

Synopsis:

Many Americans abroad are confused by the difference between “relinquishment” and “renunciation”. I recently wrote a post explaining that:

1. Renunciation is one form of “relinquishment”; and

2. The issue is the “relinquishment date” and not the form of “relinquishment”.

This post will explain exactly why the date of relinquishment matters.

To put it simply:

Those with a “Relinquishment Date” after June 16, 2008 may be subject to the confiscatory provisions of the S. 877A Exit Tax.

This post will make the argument that the “plain language” of the combined effects of S. 7701(a)(50) and S. 877A(g)(4) compel the conclusion that those with a “Relinquishment Date” prior to June 3, 2004 are NOT subject to the S. 877A Exit Tax.

My analysis follows.

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The analysis will make use of the following defined terms:

“Citizen(s)” = A “U.S. citizen” as defined by the 14th Amendment and the provisions of the Immigration and Nationality Act

“Relinquishment” = Committing an act pursuant to which one ceases to be a U.S. “Citizen” pursuant to the provisions of the Immigration and Nationality Act.

“Relinquishment Date”* = The date that a U.S. “Citizen” performs an expatriating act and cease to be a U.S. “Citizen” pursuant to the Immigration and Nationality Act.

“Tax Citizen(s)” = Either a current U.S. “Citizen” (who has not performed a “Relinquishment”) or a former U.S. “Citizen” who is still considered to be taxable as a U.S. “Citizen”

“Expatriate” = A “Citizen” who has performed an expatriating act act under the Immigration and Nationality Act which results in a “Relinquishment”

“Expatriation Date”* = The date that an “Expatriate” ceases to be a “Tax Citizen” within the meaning of S. 877 or S. 877A

“Expatriation Tax” = The taxes payable (if any) according to the law that applies on the “Expatriation Date” (after June 16, 2008 this would be the “Exit Tax”).

*after June 3, 2004 the “Relinquishment” Date (for non-renunciations) will be different from the “Expatriation Date”.

Purpose: We begin our analysis with what the statute actually says. All regulations and commentary are subject to the statute. The “Plain Language” of the S. 877A rules appears suggests that S. 877A does NOT have “retroactive application”.

Why The “Plain Wording” of S. 877A suggests prospective application ONLY

What the Internal Revenue Code of the United States says:

Definitions: S. 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).

(B) Dual citizens

Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.

(For a discussion of S. 7701(a)(50)(B) in conjunction with the Obama 2015 budget proposals see here.)

From S. 7701(a)(50) to S. 877A(g)(4)

Therefore, as per S. 7701(a)(50)(A), our next stop is S. 877A (g)(4) which reads:

(4) Relinquishment of citizenship

A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(5)),

(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(1)–(4)),

(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or

(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.

The purpose of S. 7701(a)(5) and S. 877A(g)(4)

The purpose of S. 7701(a)(50) coupled with S. 877A(g)(4) is to separate the definition of “Citizens” from Tax Citizens.  In other words, S. 877A says that:

Although you have none of the benefits of being a “Citizen” of the U.S.A. you are still a “Tax Citizen” (meaning that you are taxed as though you were a still a “Citizen”).

Although the S. 877A rules took effect on June 16, 2008, the question is whether on June 16, 2008, those who had:

(1) relinquished U.S. citizenship prior to June 2008

(2) ceasing to be “Citizens”

(3) without notifying the State Department (and receiving a CLN Certificate of Loss of Nationality)

became “Tax Citizens” pursuant to S. 877A(g)(4) of the Internal Revenue Code.

Let’s read and analyze carefully.

S. 7701(a)(50) reads:

“(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).”

Note that S. 7701(a)(5) refers to an “individual” (which is broad). An individual presumably would include anybody. But the “individual” in S. 7701(a)(5) is then referred to S. 877A(g)(4).

How does S. 877A(g)(4) apply?

To what “class of persons” does S. 877A(g)(4) apply?

S. 877A(g)(4) refers to a “citizen” NOT an “individual”. A “citizen” is a specific type of individual.

Specifically S. 877A(g)(4) reads:

“A “citizen” shall be treated as relinquishing his United States citizenship on the earliest of—”

(It does NOT say:)

“An INDIVIDUAL” shall be treated as relinquishing his United States citizenship on the earliest of—

Given that the purpose of S. 7701(a)(50) and S. 877A(g)(4) is to separate the definition of “Tax Citizen” from the definition of “Citizen” (for immigration and nationality purposes), it seems reasonable to conclude that:

S. 877A(g)(4) is referring to one who was a “Citizen” for immigration and nationality purposes, on June 16, 2008, at the time that S. 877A(g)(4) took effect. It is describing the conditions under which one who IS or WAS a “Citizen”, at the time that S. 877A took effect, ceases or ceased to be a “Tax Citizen”. Once someone ceases to be a “Tax Citizen” one is NOT  subject prospectively to U.S. tax liability.

Therefore, the starting premise for the application of S. 877A(g)(4) is that one MUST actually have been a “Citizen” for immigration purposes on June 16, 2008.

Once again …

S. 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, I suggest that what S. 877A(g)(4) means is:

A person who IS or WAS a “Citizen” (for immigration and nationality purposes) on June 16, 2008, will be a “Tax Citizen” until he meets the requirement of S. 877A(g)(4).

If this is correct, S. 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 S. 877A took effect.

Summary – The various dates of relinquishments

1. Relinquishments prior to June 3, 2004

Those who performed a relinquishing act prior to June 3, 2004 cannot be subject to S. 877A(g)4

2. Relinquishments after June 16, 2008

Those who performed a relinquishing act after June 16, 2008 are clearly subject to the S. 877A(g)(4)

3. Relinquishments between June 3, 2004 and June 16, 2008

Those who performed a relinquishing act during this intermediate period were subject to the old S. 7701(n) of the Internal Revenue Code. S. 7701(n) simply said that a person who relinquished U.S. citizenship under S. 349(a) of the Immigration and Nationality Act were treated as U.S. citizens for tax purposes until the date that they notified the State Department and filed an information return with the IRS. Interestingly, the old S. 7701(n) does NOT create any tax liability. It simply requires notification of expatriation.

This raises the question of what rules would apply to someone who:

Relinquished U.S. citizenship between June 3, 2004 and June 16, 2008 but did NOT meet the “notification” requirements of the old S. 7701(n).

Does S. 877A(g)(4) apply to such a person? On June 16, 2008 the “individual” was no longer a “citizen”. The person had been subject to the requirements of the old S. 7701(n). Does S. 877A(g)(4) operate to make this person a “Tax Citizen”?

To put the question another way:

Are those who relinquished U.S. citizenship between June 3, 2004 and June 16, 2008 without notifying the State Department and the IRS now subject to the Exit Tax provisions?