January 16, 2008
Mr. John Buckley
Chief Tax Counsel
House Ways & Means Committee
1102 Longworth House Office Building
Washington, DC20515
Fax: 202-225-2610
Mr. Allen Littman
Legislation Counsel
Joint Committee on Taxation
1015 Longworth House Office Building
Washington, DC20515
Fax: 202-225-0832
Re: AICPA Comments and Recommendations on Revision of Tax Rules on Expatriation
(Section 204) of H.R. 3997, Defenders of Freedom Tax Relief Act of 2007, as passed by the
Senate on December 19, 2007, and (Section 305) of H.R. 3997, Heroes Earnings Assistance
and Tax Relief Act of 2007, as passed by the House on December 18, 2007
Dear Mr. Buckley and Mr. Littman:
On behalf of the American Institute of Certified Public Accountants (AICPA), the national
professional association of more that 350,000 CPAs throughout the country, we would like to
provide you with our comments on possible drafting corrections and policy issues regarding the
expatriation tax provision (Section 204) of H.R. 3997, Defenders of Freedom Tax Relief Act of
2007, as passed by the Senate on December 19, 2007, and (Section 305) of H.R. 3997, Heroes
Earnings Assistance and Tax Relief Act of 2007, and as passed by the House on December 18,
2007.
The AICPA acknowledges that Congress is interested in enacting new rules for individual
expatriates and the members and staff in Congress have been studying this issue and working
with the AICPA and other organizations on this for several years.
We are pleased to see legislation [H.R. 3997 as passed by the Senate on December 19, 2007, and
as passed by the House on December 18, 2007, as well as H.R. 3056, HR. 3996, and S. 2345]
adopting a withholding approach and many other recommendations provided in our March 2002
and March 2007 comments to Congress. In addition, we are pleased to see that both the House
and Senate most recent versions of H.R. 3997: provide a prospective effective date for section
2801, refer to the section 2503(b) applicable annual exclusion for the section 2801(c) exception
for certain gifts, and provide marital and charitable deductions in new Chapter 15. We also
appreciate the opportunities we have had to speak with you on this issue over the past year.
In an effort to make this legislation more effective and administrable, we point out additional
concerns and technical drafting points that we hope will be addressed as this legislation moves
forward. We would be happy to discuss further any of these or other issues.
Specifically, our attached comments address the following:
1. Exception for United States real property interests in proposed section 877A;
2. Modification of proposed section 2801(e)(3)(B) [1] covering gifts by expatriates to
foreign trusts;
3. Coordination of proposed legislation with United States treaties;
4. Equivalency of proposed section 877A(a)(3)(A) exemption amount with section 2010(c)
exemption amount;
5. Threshold amount for the exception under proposed section 2801(e)(2);
6. Repeal of section 877 after enactment of proposed section 877A;
7. Uniformity of exceptions for section 877 and proposed section 877A;
8. Exemption for a covered expatriate’s principal residence in proposed section
877A(a)(2)(A);
9. Clarification of time period in proposed section 877A(h)(1);
10. Clarification of proper “adjustments” in proposed section 877A(a);
11. Guidance regarding election out of step-up on residency begining date;
12. Alleviation of double taxation; and
13. Delay of effective date of proposed section 877A until regulations are issued.
We look forward to continuing to work constructively with Congress and the Administration to
achieve the most effective legislation in this area. We would welcome the opportunity to discuss
the proposed legislation or to answer any questions you may have. Please contact us if you have
any questions or if we can be of assistance to your office. I can be reached at
Jeffrey.Hoops@ey.com; or you may contact Evelyn Capassakis, Chair, AICPA Expatriation Tax
Task Force, at evelyn.capassakis@us.pwc.com; or Eileen Sherr, AICPA Technical Manager, at
esherr@aicpa.org.
Sincerely,
Jeffrey R. Hoops
Chair, Tax Executive Committee
-------------------------------------------------------------------------------[1] Unless otherwise provided, the term “proposed section” refers to additions or modifications
to the Internal Revenue Code as a result of H.R. 3997, as passed by the House of Representatives
on December 18, 2007, and as passed by the Senate on December 19, 2007.
2
AICPA Comments and Recommendations on Revision of Tax Rules on Expatriation1
The AICPA acknowledges that Congress is interested in enacting new rules for individual
expatriates and the members and staff in Congress have been studying this issue and working
with the AICPA and other organizations on this issue for several years.
We are pleased to see legislation [H.R. 3997, Defenders of Freedom Tax Relief Act of 2007, as
passed by the Senate on December 19, 2007, and H.R. 3997, Heroes Earnings Assistance Relief
Tax Act of 2007, as passed by the House on December 18, 2007, as well as H.R. 3056, HR. 3996,
and S. 2345] adopting a withholding approach and many other recommendations provided in our
March 2002 and March 2007 comments to Congress. In addition, we are pleased to see that both
the House and Senate most recent versions of H.R. 3997: provide a prospective effective date
for section 2801, refer to the section 2503(b) applicable annual exclusion for the section 2801(c)
exception for certain gifts, and provide marital and charitable deductions in new Chapter 15. We
also appreciate the opportunities we have had to speak with the staff of the tax-writing
committees on this issue over the past year.
In an effort to make this legislation more effective and administrable, we point out additional
concerns and technical drafting points that we suggest be addressed as this legislation continues
to move forward. We would be happy to discuss further any of these or other issues.
EXECUTIVE SUMMARY
These comments address the following:
1. Exception for United States real property interests in proposed section 877A;
2. Modification of proposed section 2801(e)(3)(B)2 covering gifts by expatriates to foreign
trusts;
3. Coordination of proposed legislation with United States treaties;
4. Equivalency of proposed section 877A(a)(3)(A) exemption amount with section 2010(c)
exemption amount;
5. Threshold amount for the exception under proposed section 2801(e)(2);
6. Repeal of section 877 after enactment of proposed section 877A;
7. Uniformity of exceptions for section 877 and proposed section 877A;
1
(Section 204) of H.R. 3997, Defenders of Freedom Tax Relief Act of 2007 (as passed by the Senate on
December 19, 2007, and (Section 305) of H.R. 3997, Heroes Earnings Assistance and Relief Tax Act of 2007
(as passed by the House on December 18, 2007); (Section 5) of H.R. 3056, Tax Collection Responsibility Act of
2007; (Section 504) of H.R. 3996, Temporary Tax Relief Act of 2007; and (Section 308) of S. 2345, American
Infrastructure Investment and Improvement Act of 2007.
2
Unless otherwise provided, the term “proposed section” refers to additions or modifications to the Internal
Revenue Code as a result of H.R. 3997, as passed by the House of Representatives on December 18, 2007, and
as passed by the Senate on December 19, 2007.
3
8. Exemption for a covered expatriate’s principal residence in proposed section
877A(a)(2)(A);
9. Clarification of time period in proposed section 877A(h)(1);
.
10. Clarification of proper “adjustments” in proposed section 877A(a);
11. Guidance regarding election out of step-up on residency begining date;
12. Alleviation of double taxation; and
13. Delay of effective date of proposed section 877A until regulations are issued.
COMMENTS
1. Proposed Section 877A Should Contain an Exception for United States Real Property
Interests.
H.R. 3997, as passed by the Senate on December 19, 2007, and as passed by the House on
December 18, 2007, provides:
SEC. 877A
****
(c) EXCEPTION FOR CERTAIN PROPERTY. –
Subsection (a) shall not apply to –
(1) any deferred compensation item (as defined in subsection (d)(4)),
(2) any specified tax deferred account (as defined in subsection (e)(2)), and
(3) any interest in a nongrantor trust (as defined in subsection (f)(3)).”
The AICPA recommends adding:
(4) any United States real property interest, as defined in Section 897(c)(1)(A)(1), or any
interest in a United States real property holding corporation, as defined in Section
897(c)(2), except that in applying Section 897(c)(2)(A), “100” shall be substituted for
“50” where it appears therein.
The Joint Committee on Taxation Description of H.R. 3056 (JCX-49-07) under “Description of
the Proposal – In General” second paragraph, referenced such an exception, as follows:
The deemed sale rule of the proposal applies to most types of property interests held by
the individual on the date of relinquishment of citizenship or termination of residency,
with certain exceptions. U.S. real property interests (which remain subject to U.S. tax in
4
the hands of nonresident noncitizens), with the exception of stock of certain former U.S.
real property holding corporations, are exempted from the proposal.
It appears that the exception for United States real property interests was intended to be in the
statute and this may have been a drafting oversight. The AICPA recommends adding the real
property exception to the statute.
2. Proposed Section 2801(e)(3)(B) Should be Modified to Cover Gifts by Expatriates to
Foreign Trusts.
Proposed section 2801(e)(3)(B) provides that gifts by covered expatriates to foreign trusts will be
subject to gift tax when distributed by the trust to a United States person. The proposed section
also provides for a deduction for the amount of tax paid by a United States person with respect to
a distribution by the trust.
The AICPA suggests that only distributions of corpus be subject to this provision. The fiduciary
income tax rules (i.e., sections 641-679) already contain provisions that tax a receipt of income
by a United States person from a foreign trust, together with an interest charge with respect to the
tax on a distribution of accumulated income. Therefore, proposed section 2801(e)(3)(B) should
permit a full deduction of the income and not just a deduction for the income tax to avoid double
taxation.
Alternatively, if the deduction is to be limited to the amount of tax imposed, then the deduction
should also include the amount of any interest charged with respect to that tax under section 668
(relating to the interest charge on accumulation distributions from foreign trusts).
Finally, in either case, the provision should include a cap similar to section 668(b) so the amount
of income taxes and interest charged, when combined with the tax under proposed section 2801,
will not exceed the total amount of the distribution(s) for the year.
3. Proposed Legislation Should be Coordinated with United States Tax Treaties.
The AICPA urges that the committee reports to the proposed legislation state that these new
rules are consistent with the United States tax treaties in force as of the date of enactment.
For example, the United States-Australia income tax treaty and the recent protocol between the
United States and Germany address the exit tax regimes found in Australia and Germany,
respectively. Other current or future treaties may also include language designed to alleviate
unwarranted instances of double taxation that may result from the application of one treaty
partner’s exit tax regime.
The imposition of an exit tax in proposed section 877A will result in significant double taxation
of individuals who expatriate to countries having either an income tax or transfer tax regime.
Although the proposed legislation embraces a withholding tax approach to dealing with the
5
taxation of certain items and does offer some relief from double taxation under some
circumstances, double taxation will nevertheless result. The United States tax treaty system will
be called upon to alleviate this problem. To the extent that certain treaties already have
provisions addressing some of these circumstances, the legislative history should recognize that
these treaty provisions are consistent with the new legislation and may continue to be used as
otherwise permitted under the applicable treaty.
The committee reports that accompanied 1996 amendments to section 877 acknowledged that the
amendments were generally consistent with the underlying principles of income tax treaties.
Nonetheless, the committee reports stated that the amendments to section 877 should override
any conflicting treaty provisions for a period of 10 years. Thereafter, the committee reports
provided that any conflicting treaty provisions remaining in force would take precedence over
the expatriation tax provisions as amended.
The expatriation tax rules of section 877 were amended again in 2004. The committee reports
accompanying the 2004 amendments are silent regarding the interrelationship between the
amendments and existing tax treaties. This silence created a great deal of confusion, especially
in light of the extensive guidance provided in the committee reports accompanying the 1996
amendments.
The AICPA strongly recommends that the committee reports accompanying proposed section
877A (and the related amendments to other provisions) should clearly state the relationship
between tax treaties in force as of the date of enactment and the provisions under proposed
section 877A. We also recommend clarifying the relationship between the amendments made in
2004 and tax treaties in force as of the date of enactment of the 2004 amendments to section 877.
In particular, we recommend treating the 2004 amendments as being consistent with tax treaties
in force as of the date of enactment, and stating that the 2004 amendments were not intended to
override any conflicting treaty provisions.
4. Exemption Amount in Proposed Section 877A(a)(3)(A) Should be Equal to the Section
2010(c) Exemption Amount.
Section 305(a) of H.R. 3997, as passed by the House on December 18, 2007, and Section 204(a)
of H.R. 3997, as passed by the Senate on December 19, 2007, states:
SECTION 877A.
(a) GENERAL RULES- For purposes of this subtitle –
****
(3) EXCLUSION FOR CERTAIN GAIN –
(A) IN GENERAL. – The amount which would (but for this paragraph) be
includible in the gross income of any individual by reason of paragraph (1) shall
be reduced (but not below zero) by $600,000.
6
The AICPA believes that the $600,000 amount should be coordinated with the estate tax
exemption amount in section 2010(c). The report that accompanies the Senate version of this
legislation states that “to the extent possible, an individual’s decision to relinquish citizenship or
terminate residency should be tax-neutral.” The goal of tax neutrality is not served if individuals
are taxed more harshly if they expatriate than they would be if they remained United States
citizens or residents until they die.
Proposed section 877A(a)(3)(A) could be revised as follows:
IN GENERAL. – The amount which would (but for this paragraph) be includible in the
gross income of any individual by reason of paragraph (1) shall be reduced (but not
below zero) by the applicable exclusion amount in section 2010(c).
5. The Threshold Amount for the Exception Under Proposed Section 2801(e)(2) Should be
Equal to the Reporting Threshold for Gifts Reportable on Form 3520 or to the Estate
Tax Exemption Amount in Section 2010(c) for Non-United States Persons.
H.R. 3997, Sec. 305(b)(1), as passed by the House on December 18, 2007, and H.R. 3997,
Sec. 204(b)(1) as passed by the Senate on December 19, 2007, provides:
SEC. 2801
****
(e) COVERED GIFT OR BEQUEST. –
(2) EXCEPTIONS FOR TRANSFERS OTHERWISE SUBJECT TO ESTATE OR
GIFT TAX.
(A) any property shown on a timely filed return of tax imposed by chapter 12
which is a taxable gift by the covered expatriate, and
(B) any property included in the gross estate of the covered expatriate for
purposes of chapter 11 and shown on a timely filed return of tax imposed by
chapter 11 of the estate of the covered expatriate.
The AICPA suggests that the threshold for taxation of covered gifts or bequests be aligned with
the reportable amount of gifts or bequests from a foreign person on Form 3520, Annual Return to
Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, ($100,000). The
Form 3520 could easily be modified to compute the tax due, and the instructions could direct
individuals reporting such gifts and bequests from foreign persons to include the tax on Form
1040.
Alternatively, the AICPA suggests that the above exceptions be modified so that if the amount of
a gift or bequest is below the threshold for filing a gift tax return (the amount provided in section
7
2503(b), currently $12,000) or an estate tax return by a nonresident (the equivalent amount of the
credit provided in section 2102(b) (i.e., $60,000)), such a transfer can also be excluded from the
reporting obligations of the donee.
6. Section 877 Should be Repealed After Enactment of Proposed Section 877A.
Section 305(a) of H.R. 3997, as passed by the House on December 18, 2007, and Section 204(a)
of H.R. 3997, as passed by the Senate on December 19, 2007, provides:
(a) In General. – Subpart A of part II of subchapter N of chapter 1 is amended by
inserting after section 877 the following new section:
Contrary to the many prior proposals for a new section 877A put forth by the Senate Finance
Committee, H.R. 3997 provides that proposed section 877A will operate in conjunction with
section 877. This combination will produce significant complexity and added compliance
burdens.
The AICPA suggests that proposed section 877A replace the current section 877 and that current
section 877 be eliminated. If proposed section 877A is being enacted due to the perception that
current section 877 is not operating effectively, repealing current section 877 upon enactment of
proposed section 877A would be a more efficient solution. Retaining both sections will require
taxpayers and practitioners to understand and apply both the old and new rules, as well as
address complex questions on how the provisions interact, unnecessarily complicating the tax
law.
7.
The Exceptions for Section 877 and Section 877A Should be Identical.
The AICPA suggests for simplification and administrative reasons that the exceptions for
proposed section 877A be the same as, and coordinated with, the exceptions under section 877.
8. An Exemption in Proposed Section 877(a)(2)(A) Should be Available for a Covered
Expatriate’s Principal Residence.
Proposed section 877A(a)(2)(A) provides that gain from the deemed sale must be recognized
“notwithstanding any other provision of this title.” Therefore, individuals who expatriate will be
deemed to recognize gain as if they had sold their homes. Although they would be entitled to
exclude up to $500,000 of gain under section 121 if they had actually sold their homes, they
would not be entitled to this exclusion under the proposed section 877A deemed sale. The
AICPA suggests any deemed sale of a principal residence that would meet the requirements of
section 121, had an actual sale taken place, be eligible for the section 121 exclusion.
8
If an exception for United States real property interests is provided as requested in Item 1 above,
the section 121 exclusion would not be necessary for deemed transfers of United States real
property.
9. The Time Period in Proposed Section 877A(h)(1) Should be Clarified.
H.R. 3997, as passed by the Senate on December 19, 2007, and H.R. 3997, as passed by the
House on December 18, 2007 states:
SEC. 877A.
****
(h) OTHER RULES. (1) TERMINATION OF DEFERRALS, ETC. - In the case of any covered expatriate,
notwithstanding any other provision of this title(A) any time period for acquiring property which would result in the reduction in
the amount of gain recognized with respect to property disposed of by the
taxpayer shall terminate on the day before the expatriation date, and
(B) any extension of time for payment of tax shall cease to apply on the day
before the expatriation date and the unpaid portion of such tax shall be due and
payable at the time and in the manner prescribed by the Secretary.
We request clarification of these subsections (A) and (B). For example, is this meant to include
section 1031, exchange of property held for productive use or investment?
10. “Proper Adjustments” in Proposed Section 877A(a) Should be Clarified.
Proposed section 877A(a) (flush language), indicates that “proper adjustment shall be made in
the amount of any gain or loss subsequently realized for gain or loss taken into account.”
We assume that this “proper adjustment” refers to an adjustment to the basis of assets for which
a gain or loss is recognized. However, this should be clarified in the statutory language.
11. Proposed Legislation Should Provide Guidance Regarding Election Out of Step-Up on
Residency Begin Date.
Proposed section 877A(h)(2) provides that a covered expatriate will receive a step-up in the basis
of property that is subject to the deemed sale rules to fair market value on the first date of
residency. This subsection also provides that an individual may elect not to have the step-up
applied.
9
The AICPA requests guidance on how this rule is intended to apply to an individual who has had
two or more separate periods of United States residency. We also request guidance on how to
make this election, including: (1) the form of the election; (2) the date by which the election
must be made; and (3) whether this election may be made for specific properties or apply to all
property subject to the deemed sale rules.
12. Proposed Legislation Should Alleviate Double Taxation.
Frequently, individuals expatriate for other than tax avoidance reasons. Those who relocate to
high tax jurisdictions likely will encounter double taxation. For those who relocate to such
locations, it seems unfair to force them into confiscatory taxation.
One way to alleviate this is to allow a foreign tax credit for income that is subject to double
taxation, similar to the credit provided for in the flush language found in section 877(b). [For
further discussion, see the October 10, 2007, ACTEC letter and paper on expatriate legislation
sent
to
the
leadership
of
the
tax-writing
committees,
available
at
http://www.actec.org/public/Governmental_Relations/MarksteinComments12_7_07.asp.]
13. The Effective Date of Proposed Section 877A Should be Delayed Until Regulations Are
Issued.
Proposed section 877A(i) authorizes Treasury to prescribe regulations necessary to carry out the
intent of proposed section 877A.
The AICPA urges that the new rules not take effect until the Treasury is able to provide guidance
on administration and application of proposed section 877A. Individuals expatriating shortly
after the law is enacted will have no guidance on how to comply. Various tax forms will need to
be issued and revised, and many provisions will need to be interpreted in order to effectively
apply the new rules. Regulations should be issued prior to the effective date of the new
individual expatriation rules to enable consistent and correct application of the new rules by
taxpayers and practitioners. If proposed section 877A must coexist with current section 877,
many complex questions will arise on how the two provisions interact.
10