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Whether for ideological reasons or tax complications, many people want to shed their U.S. citizenship. There are two ways to do so: renunciation and relinquishment.  Renunciation requires swearing an oath at a U.S. consulate. A person who renounces is no longer a U.S. citizen from the date of that oath onward. Meanwhile, relinquishment refers to losing U.S. citizenship due to a prior external event called an “expatriating act.”

This article will focus on relinquishment. It is possible – although not without tax risk – to have lost U.S. citizenship for both tax and immigration reasons due to an “expatriating act” that occurred prior to 2004. The tax and immigration consequences of relinquishment are complex, so professional advice is a must.

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Common scenario

Caroline was born in the United States, and came to Canada in 1968 as a result of her ideological opposition to the Vietnam War. She became a Canadian citizen in 1978. At that time, she thought she could only hold one citizenship and that she was trading her U.S. citizenship for Canadian. As a result, after obtaining Canadian citizenship, Caroline never used any benefits of U.S. citizenship, such as renewing her U.S. passport or voting in a U.S. election. However, she never got any official proof of her loss of U.S. citizenship such as a certificate of loss of nationality (CLN), which is like a diploma acknowledging her status as a former citizen.

Fast forward a few decades. As a result of FATCA, Caroline’s bank asks if she is a U.S. citizen. She thinks not, but has no proof. The bank informs her that unless she gets a CLN, it will report her to the IRS. Trouble is, since 1978, Caroline has become financially successful. Consequently, catching up on her tax obligations to the U.S. would be extremely expensive and potentially expose Caroline to significant penalties.

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In September 2016, she goes to the U.S. State Department to get a CLN to document her loss of U.S. citizenship in 1978. But what is the exact date of Caroline’s loss of U.S. citizenship for both U.S. tax and immigration purposes?

We’ll look at this from an immigration perspective, and then from a tax perspective.

Losing U.S. citizenship for immigration purposes

The U.S. Immigration and Nationality Act (INA) sets out a variety of expatriating acts that could cause a U.S. citizen to lose citizenship. For Caroline, the most relevant options are “becoming a citizen of another country after age 18” and “swearing an oath of allegiance to a foreign state.” Caroline technically did both things when she became a Canadian citizen in 1978. In order to lose her U.S. citizenship, Caroline must prove that she intended to do so in 1978 upon becoming Canadian.

Intent can be proven in two ways. First, Caroline can state that she lost her U.S. citizenship. Second, she can point to the fact that since 1978, she has never taken advantage of the citizenship (e.g., she hasn’t voted, she doesn’t hold a U.S. passport and she’s never used U.S. consular services). If she can successfully prove this, she would be eligible for a CLN indicating that she lost her U.S. citizenship in 1978.

That’s not the end of the story, however. Caroline needs to think of the tax aspect as well.

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Losing U.S. citizenship for tax purposes

Under current U.S. tax law, it’s uncertain when Caroline lost her U.S. citizenship for tax purposes. There are two competing views:

  1. the literal approach; and
  2. the common sense approach.

Many experienced U.S. tax lawyers support both views. There is no official IRS position or binding legal precedent – although clarifying this is on the IRS’s to-do list. Let’s look at both views.

The literal approach is based on a strict reading of the law. Since 2008, U.S. tax law has set the date that a person loses U.S. citizenship as the earlier of the date that he applies for a CLN at the Department of State or the date the CLN is issued. But many people in Caroline’s situation never obtained such a certificate. Under the literal approach, because Caroline never obtained a CLN, she remains a U.S. citizen until her State Department visit in September 2016. This means she would have had tax obligations to the U.S. government for the previous 38 years – despite losing her citizenship for immigration purposes in 1978. The financial consequences would be dire.

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The common sense approach, on the other hand, relies less on the literal text of the law and more on its spirit. Among the numerous technical legal arguments in favour of this view is that courts are not supposed to interpret the law in ways that create absurd results.  And the result of the literal approach would be absurd. Caroline went about her life thinking she had given up their U.S. citizenship (and had in fact done so for immigration purposes), but she still has U.S. tax obligations for 38 years after she lost her citizenship. Applying the common sense approach means somebody in Caroline’s situation would have lost her U.S. citizenship for tax purposes at the same time she lost it for immigration purposes – in this case, 1978.

Sorting out whether the literal or common sense approach applies is ultimately the task of the IRS or a U.S. court. Until that happens, uncertainty remains. Arguments in favour of both positions are sound, although the common sense view is more likely than not to prevail. So what should clients like Caroline do?

Moving forward

Those who, like Caroline, think they lost their U.S. citizenship prior to 2004 have three options:

  1. Obtain a CLN confirming the loss of nationality (for Caroline, in 1978) and take the position that the tax obligations terminated then. However, getting a CLN is a public act that might invite IRS scrutiny.
  2. Do nothing and wait for any IRS inquiry or clarification prior to obtaining a CLN. This has the advantage of not inviting IRS scrutiny as the former U.S. citizen remains underground. The disadvantage here is the person has no formal proof. One option in this scenario is to obtain and rely on a legal opinion if the person is ever asked about U.S. citizenship status by either a bank or the U.S. government.
  3. Catch up on U.S. tax returns and renounce citizenship. This option has the least risk but the most expense. It eliminates any argument that citizenship was lost many years ago and requires the U.S. citizen to catch up on five years of tax returns prior to renouncing to avoid a big tax bill.

Ultimately, anybody in a situation similar to Caroline’s ought to seek professional advice on how to navigate the interplay between immigration and tax citizenship.

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Max Reed, LLB, BCL, is a cross-border tax lawyer at SKL Tax in Vancouver. max@skltax.com
Originally published on Advisor.ca
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Max Reed

All of the above who have commented make very good technical points (and of course Michael Miller is the originator of much of the commentary in this area). Michael has written widely from a technical perspective in this area. We will put out at some point a more technical version of this article that was designed to be “chatty” i.e. written for lay readers rather than technical readers.

And, as I note in the article, I think if you were to get in front of a judge the “common sense view” would prevail. I agree that the interpretation of the word “citizen” may carry the day – especially when combined with the retro activity point and the due process point. That interpretation relies, however, on looking beyond the plain meaning of the statute, which continues the split between the tax and immigration aspects from the 2004 revision.
But I do not think that you can discount the plain meaning risk so quickly – at least until the IRS clarifies its position. If the IRS were to assert the “literal approach” against any particular individual, the results (though absurd) would be potentially catastrophic and expensive. Because the law is, unarguably at least a bit ambiguous, people have to be careful prior to taking the position that they have relinquished. Our stock advice is for clients to not get a CLN until there is clarity from the IRS or the courts. There is no legal requirement to do so. Getting a CLN can exempt you from FATCA reporting.

Tuesday, Oct 11, 2016 at 10:30 pm Reply

Michael J. Miller

Hi Max,

Interesting topic, and of course one we’ve discussed previously.

For a detailed discussion of this topic, or at least my view, readers may wish to see the link below.

http://www.americanbar.org/content/dam/aba/administrative/taxation/policy/030215comments.authcheckdam.pdf

But, just to provide a taste, it’s interesting to note that een the so-called common sense approach is very easy to square with a literal reading of the statute.

If you start with the proposition that, prior to 2004, anyone who relinquished citizenship for nationality purposes also ceased to be a citizen for tax purposes, and add in that the 2004 legislation expressly grandfathered those persons, then you have to start your consideration of the 2008 legislation (including, in particular, IRC section 7701(a)(50), with the understanding that Caroline had ceased being a citizen for tax purposes in 1978.

With this in mind, the question is what do we make of IRC section 7701(a)(50) which says, in pertinent part, that “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)” Well, Caroline didn’t need to cease to be treated as a citizen at any time when this statute was on the books, because she ceased to be a citizen in 1978. Therefore the common sense approach dovetails with the language of the statute once it’s understand that, by saying what’s needed for an individual to cease being a citizen for tax purposes, the statute should have no impact on someone — like Caroline — who has already ceased being a US citizen.

And, above and beyond that, it’s important to understand what the contrary interpretation would mean. Since Carolyn had long since ceased being a citizen for nationality and tax purposes when IRC sec. 7701(a)(50) was enacted, the so-called literal approach would have to affirmatively restore citizenship that had previously terminated in order for this provision to apply — which is clearly absurd. Therefore, since marketing is everything, I would choose to characterize the competing interpretations as the absurd one and the non-absurd one.

Monday, Oct 3, 2016 at 6:54 pm Reply

Virginia La Torre Jeker, J.D.

The “common sense” viewpoint does not ignore the wording of the tax law’s expatriation statute. Instead, 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. The collective view of several distinguished US tax professionals is that the current version of the expatriation provisions as spelled out in Internal Revenue Code Sections 877A and 7701(a)(50) as enacted by the HEART Act must have prospective application only.

I note that no credible legal reason has ever been advanced as to why the law should be interpreted to apply retroactively. The expatriation provisions in the law have developed over time and with different Congresses. Looked at as a whole, one cannot disregard that a specific “grandfather provision” was enacted as part of the 2004 law which first introduced the concept of a “tax citizen” as being distinct from a citizen under the immigration laws. This grandfather provision was a clear indication that the expatriation rules shall embrace the fundamental US legal principal of “due process” ensuring that the well-settled expectations of numerous expatriates who gave up US citizenship prior to enactment of a new rule would not be overturned. If a later Congress had intended the “surprising result” of retroactivity when passing the 2008 expatriation laws, it would no doubt have spelt this out very clearly. At a minimum something would be indicated in the legislative history. An interpretation espousing retroactivity would over-rule the clear grandfather rule enacted in 2004 and would toss aside the notion of “due process”. This, Congress did not do.

Readers with further interest may wish to read my US tax blog which analyzes in detail, this entire matter. It can be accessed here http://blogs.angloinfo.com/us-tax/?p=3130

Virginia La Torre Jeker, J.D.

Monday, Oct 3, 2016 at 2:17 am Reply

John Richardson

Thanks for writing on this interesting and important question. Some thoughts on Caroline’s situation …

1. What you describe as the “literal” approach is based on reading the exact words of Internal Revenue Coce S. 877A. S. 877A(g)(4)in its opening language addresses those who are “citizens”. Not past citizens. It reads: “A citizen shall be treated as relinquishing his United States citizenship on the earliest of—”

What it means to be a U.S. “citizen” is not defined in the Internal Revenue Code. It is defined only in the Immigration and Nationality Act. Internal Revenue Code S. 877A came into force in June of 2008. Therefore, it seems reasonable to assume that if one was not a U.S. “citizen” under the Immigration and Nationality Act in June of 2008, then S. 877A(g)(4) should not apply to that person. To put it another way: the “literal approach” would/should lead to the conclusion that Caroline, who became a Canadian citizen in 1978, was not a U.S. “citizen” for tax purposes in June 2008.

2. Prior to 2004 there was no provision in the Internal Revenue Code that allowed for one to be a “tax citizen”, if one had relinquished U.S. citizenship under the nationality laws. In other words, if NOT a citizen under the nationality laws then NOT a taxpayer. This means that those who relinquished U.S. citizenship prior to 2004 under the nationality laws, were not subject to taxation under the Internal Revenue Code. The 2004 law (that created the “tax citizen”) specifically stated that the creation of the “tax citizen” under the Internal Revenue Code was prospective only. It seems unlikely that the enactment of S. 877A in 2008 would have changed what was clearly a prospective concept to a retroactive application.

Therefore, whether one takes the “literal approach” or the “common sense” approach, the notion that Caroline, who relinquished U.S. citizenship in 1978, owes U.S. taxes, is hard to justify under the law.

Friday, Sep 30, 2016 at 5:05 pm Reply

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