I’ll be back: Revisiting Expatriation for tax purposes vs. Expatriation for citizenship purposes


A recent post from Phil Hodgen discussing relinquishing U.S. citizenship and expatriation ends with:

People care about this because they are angling for an earlier expatriation date than “now”, whatever “now” is. It won’t work. If you are a U.S. citizen, you will not have an expatriation date earlier than an objective event involving paperwork. Invoking the time traveler exception again, this is impossible to do unless you have that special ability. Determine your expatriation date for tax purposes as of right now (whenever “now” is for you), and compute the tax consequences accordingly.

As one commenter wrote:

As someone born ‘dual’, and unable to acquire the magical, ‘back-dated’ CLN, I am personally unaffected. However, I think this article just caused a lot of people more sleepless nights. The nightmare never ends.

In my respectful submission the 877A rules:

– apply to those expatriating after the 877A provisions took effect in 2008; and

– do NOT apply to those expatriating prior to the 877A provisions becoming law.

The 877A rules should NOT be read to operate retrospectively.

The 877A rules should be understood to apply when both the expatriating act and the “objective event confirming the paperwork” took place after the 877A rules took effect.

The reasons for my thinking …

Why the nightmare? Why is it necessary to clarify this at all?

The obvious answer is that, the S. 877A rules, taken literally say that a person has NOT relinquished U.S. citizenship for tax purposes until the U.S. government has issued a Certificate of Loss of Nationality “CLN”. S. 877A took effect in 2008. Many people expatriated prior to 2008. The right of expatriation has long been recognized. Could the requirement, stipulated in S. 877A that says that that for the purposes of the Exit Tax, that one has not expatriated until a CLN has been issued, possibly apply to those who expatriated prior to 2008? Can Congress enact this kind of legislation retrospectively? If retrospective legislation is possible, is there anything in the legislation that suggests it is intended to operate retrospectively? As a general principle, retrospective legislation is considered to be unjust and in some cases “ex post facto”. There is some authority for the view that, even if retrospective legislation is permissible that:

Laws should never be considered as applying to cases which arose previously to their passage, unless the legislature have clearly declared such to be their intention. 12 L. R. 352 Vide Barringt. on the Stat. 466, n. 7 John. R. 477; 1 Kent, Com. 455; Tayl. Civil Law, 168; Code, 1, 14, 7; Bracton, lib. 4, fo. 228; Story, Cons. Sec. 1393; 1 McLean, Rep. 40; 1 Meigs, Rep. 437; 3 Dall. 391; 1 Blackf.R.193; 2 Gallis. R. 139; 1 Yerg. R. 360; 5 Yerg. R. 320; 12 S. & R. 330; and see Ex post facto.

There is nothing in S. 877A that suggests an intention for the Exit Tax rules to operate retrospectively.

For the record, S. 877A(g)(4) reads as follows:

(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,
(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.

For example, could this possibly be interpreted to mean that:

A U.S. citizen who became a Canadian citizen in 1972, with the full understanding that becoming Canadian, resulted in the automatic loss of U.S. citizenship,  could be subjected to the 877A madness. The injustice of “retrospective legislation” is magnified by the fact that it was the United States Government that was “stripping citizens of their citizenship” in 1972.

To demonstrate the absurdity and unfairness of making this person subject to the 877A rules it would mean:

1. In 1972 the Government of the United States stripped you of your U.S. citizenship – hey, I didn’t want my citizenship taken from me;

2. From 1972 to 2008, the Government of the United States recognizes that you have accumulating retirement savings;

3. Because of a law enacted in 2008, the Government of the United States is now taking the position that are still a U.S. citizen tax chattel. Therefore your retirement savings are open to confiscation.  This is so even though the the 1972 nationality law clearly stated that you had lost your U.S. citizenship. This 1972 law did NOT require that you have a CLN.

It’s just common sense – you are governed by the laws that were in effect when you did the horrible deed.

Think of it this way:

USG: Hey, we didn’t want you as a U.S. citizen. In fact we took your citizenship. You no longer have the rights or obligations of U.S. citizens. But now we have decided to come down and shake you down for your life savings.

Me thinks this is not possible (unless you decide to simply send them a check).

The Good News and Bad News

The good news is that it is absurd to believe that the 877A provisions operate retrospectively.

The bad news is that the United States is now so tyrannical and irrational that some people actually believe they would attempt to enforce the 877A provisions retrospectively. That’s what people think of the USA today! I would argue that the perception of the U.S. is now a bigger problem than the reality of the problem.

Another U.S. Tax Lawyer weighs in …

Another comment to Mr. Hodgen’s article comes from Micheal Miller. Mr. Miller comments that:

For persons whose CLN shows a loss of citizenship date that is on or before June 3, 2004, section 877A should not apply. Even if the CLN is received today. I’ve discussed this with people at the IRS and they’ve informally stated that they agree.

Mr. Miller has put considerable thought into this question. He considers it in his article:

Expats Live in Fear of Malevalent Time Machine

His conclusion on whether S. 877A operates retrospectively is:

It should be self-evident, however, that such a result is absurd, and cannot have been intended.

Congress cannot possibly have meant to treat individuals who had long since relinquished their U.S. citizenship, and whose expatriations had always been respected for federal tax purposes, as if they had been citizens all along.

Undoubtedly, Code Sec. 877A was meant to apply solely to individuals that, on (or after) the date of enactment, were otherwise treated as citizens (or long-term residents) for federal tax purposes.

Any individual who took all steps required to successfully terminate citizenship for federal tax purposes, under the tax laws as in effect immediately prior to enactment of the 2008 Act, would not again need to relinquish U.S. citizenship and thus could not be within the intended scope of Code Sec 877A(g)(4).

Mr. Miller bases on conclusions primarily on two points:

1. The difficulties associated with retrospective legislation;

2. The fact that in in 2004, the expatriation for “tax purposes” was “untethered” (lawyerspeak) from expatriation for “citizenship purposes”. (Meaning that the time of expatriation can have one date for nationality purposes and one date for tax purposes)

He notes that the 2004 legislation made it clear that that the new definition of expatriation for tax purposes, did NOT apply to those who had expatriated prior to 2004. (See his article for further discussion on this point). Why should the 2008 rules be different? (This is presumably the reason for his reference to “2004” in his above comment.)

Possible Consequences in a FATCAesque World

What if the United States were to assert that our person who became a Canadian citizen in 1972, was still a U.S. taxpayer because they had never received a CLN? I suspect that this argument would not get very far. Interestingly, by making this claim, the U.S. is claiming that people who:

1. Are NOT U.S. citizens: from the perspective of nationality law (remember that there is nothing in the Immigration and Nationality Act that conditions relinquishment on attaining a CLN) are U.S. citizens for the purpose of the tax laws;

2. Were NOT U.S. citizens: from the perspective of nationality prior to the 2008 law were U.S. taxpayers prior to the enactment of the 2008 law.

3. Are NOT U.S. residents are U.S. taxpayers.

Once again, we have an attempted “extra-territorial application” of U.S. law.

The answer …

In enforcing retrospective legislation, the Government of the United States is saying:

Hey, we recognize that you are really not a U.S. citizen. But, you have to pay us anyway. Why?

Well, just because.

Thanks, but no thanks.

Mind your own business!

Expatriation and FATCA IGAs

We will have to see how this unfolds. Clearly those who expatriated prior to (at least 2004) must assert the obvious –  that they are simply not U.S. citizens. Why not. Well, because the nationality laws of the United States say they are not.

877 Phone Numbers are “toll free”. IRC 877 should not be interpreted to create tolls!

Finally: As always, this post should not be construed to be legal advice or any other kind of advice. You need to get specific advice from your specific adviser.

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