Q. Is a CLN necessary to relinquish US citizenship for tax purposes? A. It depends on the date of relinquishment

In a recent post, I discussed your “Taxabililty Freedom Day“. This is the day when you cease to be a taxable U.S. person. From that day you begin life free of the U.S. tax system. That post discussed the role of Form 8854 (noting that between June 3, 2004 and June 16, 2008 one had to file Form 8854 to no longer be a U.S. tax citizen). During the period between June 3, 2004 and June 16, 2008:

IF [you relinquished U.S. citizenship under the Immigration and Nationality Act)] THEN

[You continued to be treated as a “U.S. person” for tax purposes UNDER THE INTERNAL REVENUE CODE until you gave “notice” of your “relinquishment” to a government agency.] For this period part of the “notice” was filing Form 8854 with the Internal Revenue Service. In other words, there was no way to cease to be a “U.S. person” for tax purposes until you had notified the IRS.

In order to STOP being a “U.S. citizen for tax purposes” Form 8854 had to be filed with the IRS. Without filing Form 8854, you simply continued to be treated as a “U.S. citizen” for tax purposes.

The purpose of this post is to discuss the relation between the U.S. Certificate of Loss of Nationality (“CLN”) and loss of U.S. citizenship for tax purposes. This is an anxiety inducing and  confusing area. If you don’t want to read the analysis go straight to the bottom which provides the following answer to the question:

Is a CLN required in order to cease to be a U.S. citizen for either immigration or tax purposes?

Putting it all together – is a CLN necessary for relinquishment of U.S. citizenship?

  1. Prior to June 3, 2004 – NO for either immigration or tax purposes
  2. June 3, 2004 – June 16, 2008 – NO for either immigration or tax purposes.
  3. After June 16, 2008 – No for immigration purposes – Yes for tax purposes. A CLN  is necessary as a confirmation of having met the “notice requirement” to end U.S. citizenship for tax purposes.

Therefore, a CLN (for practical purposes) is necessary for relinquishment of U.S. citizenship, for tax purposes,  for expatriating acts after June 16, 2008.

And finally, a disclaimer …

These issues are complex. They are not well understood. There is some disagreement in the legal and accounting professions about these issues. I am not your lawyer. Nothing on this site is  legal advice. Get yourself competent counsel.

The rest of the post is explanation which is tedious and technical. You are welcome to it if you want.

 

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The above tweet references the following insightful comment at the Isaac Brock Society.

The comment appeared on a post discussing the new $2350 fee that applies to (non-renunciation) “relinquishments” of U.S. citizenship. Those who are entitled to “back dated” relinquishments should still attempt to seek “non-renunciation relinquishments“.

@Eido, @Allison Christians, You (Eido) state “they are now charging the same amount of money for relinquishing U.S. nationality as they are for renouncing it” and “This means that it costs ALL American nationals thousands of dollars to change their nationality.”

Let me punch some holes in what you wrote as it will improve the arguments that we from the “Borg Collective” will make.

I have argued on this board that a CLN is NOT a requirement to lose ones US Nationality if an appropriate action was taken in accordance with 8 US Code. I relinquished a decade ago, do not have a CLN but do have documentation from the US Government recognizing my relinquishment and that I am no longer a USC. That said, I do believe a CLN can be a pretty handy piece of paper to have in ones pocket!!

I would argue that this regulation further supports my argument that a CLN is not in fact required to have lost US Citizenship hence the reason I believe the above quotes by the author are incorrect.

The State Department is now acutely aware of the Expatriation Act 1868 and cites the act in 7 FAM 1200, “That any declaration, instruction, opinion, order, or decision of any officers of this government which denies, restricts, impairs, or questions the right of expatriation, is hereby declared inconsistent with the fundamental principles of this government.”

http://www.state.gov/documents/organization/120536.pdf

So how do you complete the circle between the left hand and the right hand? It is very clear that charging $2,350 to relinquish ones USC clearly runs foul to the Expatriation Act 1868 which the State Department clearly acknowledges!!

What is State charging for? They are not charging for “relinquishing” they are charging for “Documentation for Loss of Nationality.” They are charging those persons that want the State Department to issue them a piece of paper just as they charge for issuing an affidavit or notarial service.

They also state “In the past, individuals seldom requested Certificates of Loss of Nationality from the Department to document relinquishment.”

This is important for several reasons. First, it highlights in writing for those giving an FI a reasonable explanation as to why they do not have a CLN is simply that prior to the date of this notice “individuals seldom requested Certificates of Loss of Nationality.”

Second, it is not a fee for the act of relinquishment rather it is a fee to “document” same. There is a major difference between an action and documenting said action.

Now here is where Allison is on to something in stating “certainly relative to resisting the tax jurisdiction.”

I think Allison understands my above argument or if not will understand it now, but a CLN is a requirement dependent on relinquishment date to escape “tax jurisdiction.”

Effectively the IRS is now requiring the payment of an administrative fee of $2,350, circuitously through State, in order for a person to file a Form 8854 because a CLN date is required as part of that form!!

Is this action a good thing? Yes, I believe that the USG has provided another path forward for our cause. They have now confirmed in writing that CLNs were “seldom requested” which means most people that relinquished will NOT have a CLN!!! So when a FI asks a person for their CLN they can provide a reasonable explanation with their own written proof along with the State Departments own written word that such documents were “seldom requested.” The proof of not getting such a document now is the cost!!!

I do believe that State has perfected their argument on this matter but I also believe that they still need to be challenged based on the argument that this does violate the Expatriation Act 1868 and the UN Declaration. Such a challenge may force them to either back down on the fee which is good or it forces them to admit in stronger terms that the CLN is an “optional” document to have and that is good too! Arguing the case with State is a win/win for our cause.

The “bonus” in all this is that charging a fee to get a CLN, I think flies in the face with tax expatriation and Form 8854. I think if State lawyers had talked with Treasury lawyers they would not have gone down this route. It also muddies the water on the IGA agreements that were signed because many were signed when a CLN was free for to “document” a relinquishment.

OK Brockers fire back at me because iron strengthens iron. I know my argument sounds like a cheap lawyer talking but lessons were learned from the Summary Trial and the Bopp injunction. I believe that State was very careful in their choice of words.

The purpose of this post is to separate and clarify the following issues:

1. Is the loss of U.S. citizenship for nationality purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?

2. Is the loss of U.S. citizenship for tax purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?

3. What is the role of a Certificate of Loss of Nationality (“CLN”)?

4. Why is the Certificate of Loss of Nationality (“CLN”) of value?

5. What is the role of a Certificate of Loss of Nationality (“CLN”) in a FATCA inquisition?

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1. Is the loss of U.S. citizenship for nationality purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?

The answer is absolutely not. S. 349(a) of the Immigration and Nationality Act specifies conditions under which one relinquishes U.S citizenship. It reads as follows:

(a) A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily performing any of the following acts with the intention of relinquishing United States nationality—
(1) obtaining naturalization in a foreign state upon his own application or upon an application filed by a duly authorized agent, after having attained the age of eighteen years; or
(2) taking an oath or making an affirmation or other formal declaration of allegiance to a foreign state or a political subdivision thereof, after having attained the age of eighteen years; or
(3) entering, or serving in, the armed forces of a foreign state if (A) such armed forces are engaged in hostilities against the United States, or (B) such persons serve as a commissioned or non-commissioned officer; or
(4)
(A) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years if he has or acquires the nationality of such foreign state; or (B) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years for which office, post, or employment an oath, affirmation, or declaration of allegiance is required; or
(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State; or
(6) making in the United States a formal written renunciation of nationality in such form as may be prescribed by, and before such officer as may be designated by, the Attorney General, whenever the United States shall be in a state of war and the Attorney General shall approve such renunciation as not contrary to the interests of national defense; or
(7) committing any act of treason against, or attempting by force to overthrow, or bearing arms against, the United States, violating or conspiring to violate any of the provisions of section 2383 of title 18, or willfully performing any act in violation of section 2385 of title 18, or violating section 2384 of title 18 by engaging in a conspiracy to overthrow, put down, or to destroy by force the Government of the United States, or to levy war against them, if and when he is convicted thereof by a court martial or by a court of competent jurisdiction.
(b) Whenever the loss of United States nationality is put in issue in any action or proceeding commenced on or after September 26, 1961 under, or by virtue of, the provisions of this chapter or any other Act, the burden shall be upon the person or party claiming that such loss occurred, to establish such claim by a preponderance of the evidence. Any person who commits or performs, or who has committed or performed, any act of expatriation under the provisions of this chapter or any other Act shall be presumed to have done so voluntarily, but such presumption may be rebutted upon a showing, by a preponderance of the evidence, that the act or acts committed or performed were not done voluntarily.

Note that the language is “shall”. There is NO requirement that the “expatriating act” be documented with a CLN. Note also that this is ALWAYS true for immigration and nationality purposes. Note that this is unrelated to any provision of the Internal Revenue Code.

Note the relevance of this for border crossing into the United States. You either ARE or are NOT a U.S. citizen for immigration and nationality purposes. A CLN would provide proof, but would have NO EFFECT on your status as a U.S. citizen.

2. Is the loss of U.S. citizenship for tax purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?

(i)Prior to June 3, 2004

Prior to June 3, 2004, one’s U.S. citizenship for immigration and nationality purposes determined one’s citizenship for U.S. tax purposes.

(ii) Between June 3, 2004 and June 16, 2008

On June 3, 2004, the Internal Revenue Code was amended so that one could cease to be a U.S. citizen for nationality purposes, but still be treated as U.S. citizen for tax purposes. The United States created a new kind of citizen – “The U.S. Tax Citizen“.

During this period, the rules for relinquishing U.S. citizenship for tax purposes were found in S. 7701(n) of the Internal Revenue Code. The issuance of a CLN was not a condition for relinquishing U.S. citizenship for tax purposes. Relinquishment of U.S. citizenship was dependent on having met notification requirements with both the IRS and the State Department. The notification requirement was met (during the period of June 3, 2004 to June 16, 2008) by filing form 8854. Relinquishing U.S. citizenship for tax purposes was NOT dependent on the issuance of a CLN.

(iii) From June 16, 2008

On June 16, 2008 The U.S. S. 877A Exit Tax HEART Act came into force. Let’s see what the Internal Revenue Code currently says:

A. Starting with S. 7701(a)(50) of the Internal Revenue Code:

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).

Okay, so let’s go to S. 877A(g)(4) of the Internal Revenue Code:

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.

Deconstructing S. 877A(g)(4) – Beginning  with (A) and (B) …

(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)),
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.

If no issuance of a CLN then no loss of nationality for renunciations.

This means that:

If renunciation then a CLN has been issued.

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If no issuance of a CLN then no loss of nationality for notifications of relinquishing acts specified in paragraph (1) – naturalization, (2) – oath, (3) – armed forces, and (4) – employment of S. 349(a) of the Immigration and Nationality Act.

This means that:

If relinquishment then CLN has been issued.

This means that the issuance of a CLN is confirmation that one has met the notice requirement. Therefore, (for practical purposes), after June 16, 2008, the issuance of a CLN follows from the “notice requirement” having been met. That said, the date of relinquishment is NOT the date the CLN is issued, but the date that the notice was given.

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(Interestingly the “approval” of the “notice requirement” is NOT necessary for relinquishments in S. 349(a) paragraph (6) – renunciations within the United States during times of war and (7) treason. Those who commit treason against the United States are treated better than those who relinquish U.S. citizenship by becoming citizens of other nations.)

Deconstructing S. 877A(g)(4) – (C) …

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

Why would section (C) be necessary? Doesn’t the “expatriating act” always precede the issuance of a Certificate of Loss of Nationality (“CLN”)? The answer is yes. What then is the purpose of section (C)? The ONLY purpose of section (C) is to reinforce that after June 16, 2008 ANY claim of relinquishment (including renunciation) based on an expatriating act committed by the citizen requires the issuance of a CLN.

To put it another way:

If the citizen is claiming relinquishment based on specified “expatriating acts”, the relinquishment is NOT complete until the government has confirmed the expatriating act by issuing a CLN.

Deconstructing S. 877A(g)(4) – (D) …

(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.

(D) differs from (A), (B), and (C). In (A), (B), and (C) the citizen has performed an “expatriating act’. It is the job of the government to confirm the expatriating act with a CLN.

In (D) it is NOT the citizen who performs an “expatriating act”. It is the government which initiates the process by cancelling the certificate of naturalization. Since the government has performed the act, the government need not confirm an “expatriating act”. Hence, in this case a CLN is not required to complete the relinquishment of citizenship for tax purposes.

Conclusion …

For relinquishments – (Internal Revenue Code S. 877A(g)(4)(D), and Immigration and Nationality Act S. 349(a) (6) and (7) excepted) – after June 16, 2008 require that a CLN be issued.

3. What is the role of a Certificate of Loss of Nationality (“CLN”)?

For Immigration and Nationality Purposes – no relevance whatsoever

For Tax Purposes – The Internal Revenue Code

A. To End Your Taxability as a U.S. Person after June 16, 2008 – The issuance of a CLN is confirmation that the State Department has agreed that you have relinquished U.S. citizenship. A CLN is a confirmation that you have met the “notice requirement” under the Internal Revenue Code.

B. The CLN is one way (a self-certification is also possible) to satisfy “foreign banks” that you are NOT a U.S. person for tax purposes under the Internal Revenue Code. (In other words, a CLN is a “sufficient” but not a “necessary condition” to prove non-USness.)

4. Why is the Certificate of Loss of Nationality (“CLN”) of value?

It’s simple. Unless you live in the United States, life as a U.S. citizen abroad, in a FATCA, FBAR and CBT world, will be an endless source of anxiety and difficulty. A Certificate of Loss of U.S. Nationality is becoming one of the most sought after documents in the world today.

5. What is the role of a Certificate of Loss of Nationality (“CLN”) in a FATCA inquisition?

A reminder …

The Canada U.S. FATCA IGA was entered into on February 5, 2014. For those who are interested, the FATCA IGA is here:

FATCA-eng

The basic purpose of FATCA is to “hunt” for U.S. persons. See the following definition starting on page 7.

ee) The term “U.S. Person” means

(1) a U.S. citizen or resident individual,

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.

This is important because it means that for the purposes of the IGA, whether someone is a “U.S. citizen” or “resident” will be determined according to the provisions of the Internal Revenue Code. (You may want to reread part “2” which asks:  “Is the loss of U.S. citizenship for tax purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?.)”

Oh My God, I have received a “FATCA Letter” …

Many people have received “FATCA Letters“. The “FATCA Letter” serves as an accusation of  U.S. citizenship. Once accused of being a U.S. citizen, one must either admit or deny U.S. citizenship. A denial of U.S. citizenship will generally require proof.

The accusation of U.S. citizenship is triggered by various indicia (U.S. place of birth, U.S. residence, U.S. phone number, etc.). The U.S. “place of birth” is the most dangerous indicia. Those with a U.S. place of birth can rebut the accusation of U.S. citizenship with either:

A. The CLN; or

B. A “Self Certification” (that must meet specific requirements) documenting why:

– the person has relinquished U.S. citizenship; and

– does NOT have a CLN.

In general, those who have relinquished U.S. citizenship under the Immigration laws of the United States prior to June 3, 2004 are more likely to be able to “self certify” that they are NOT U.S. citizens even though they do NOT have a CLN. This position is consistent with the following August 2015 guidelines from the Canada Revenue Agency:

The CRA’s views of what may be accepted as a reasonable explanation for not having a CLN despite relinquishing U.S. citizenship for purposes of Part XVIII and the Agreement are informed by certain practical realities and how changes in law over time would have influenced reasonable courses of actions taken by individuals.

Generally, it is the CRA’s view that an explanation demonstrating a relinquishment of U.S. citizenship (other than by a renunciation before a U.S. consular or diplomatic official) before June 4, 2004, and in accordance with the U.S. Immigration and Nationality Act (Title 8 of the U.S. Code) as it existed at the time of relinquishment, is sufficient to demonstrate a reasonable explanation as to why an account holder does not have a CLN. Financial institutions are not expected to be experts in U.S. nationality law; any such explanation accepted by a financial institution is accepted for the purposes of Part XVIII and the Agreement only and is not finally determinative of tax or nationality status.

FATCA Canada Guidance gdnc-eng

Note that these guidelines from the Canada Revenue Agency would not apply to other countries. Nevertheless, to the extent that they are based on the Model 1 IGA, I would argue that they are persuasive.

The FATCA “Self Certification” is a complex topic that I will explore in a future post. Note also that the ability to “Self Certify” for FATCA purposes is NOT determinative of whether one is  a U.S. citizen.

Putting it all together – is a CLN necessary for relinquishment of U.S. citizenship?

  1. Prior to June 3, 2004 – NO for either immigration or tax purposes
  2. June 3, 2004 – June 16, 2008 – NO for either immigration or tax purposes.
  3. After June 16, 2008 – No for immigration purposes – It is necessary as a confirmation of having met the “notice requirement” to end U.S. citizenship for tax purposes

Therefore, a CLN (for practical purposes) is necessary for relinquishment of U.S. citizenship, for tax purposes,  for expatriating acts after June 16, 2008.

And finally, a disclaimer …

These issues are complex. They are not well understood. There is some disagreement in the legal and accounting professions about these issues. I am not your lawyer. Nothing on this site is  legal advice. Get yourself competent counsel.

John Richardson

 

 

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