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Part 12 – Understanding “Exit Taxes”

“The two kinds of U.S. citizenship: Citizenship for “immigration and nationality” and citizenship for “taxation” – Are we taxed because we are citizens or are we citizens because we are taxed?”

The United States of America – One country two citizenships – Introducing the “Tax Citizen”.  Dual Citizenship – American style – All Americans are both “Citizens” and “Tax Citizens”. One Country – Two Citizenships.

First Citizenship – Citizenship for Nationality Purposes

Americans have always been proud of their U.S. citizenship. Most U.S. citizens regard their U.S. citizenship as the most valuable thing they have. Most Americans will fight for their citizenship. They will die for their citizenship. They believe that their U.S. citizenship gives them rights and privileges that citizens of other nations simply do not have. Whether true or not, this is how U.S. citizenship is regarded. Citizenship for “Nationality” is what gives people the “rights of citizenship”. At present, these rights include: the right to enter the United States (as long as you have a U.S. passport), the right to work and the right to vote (as long as you meet the voting requirements of your State). That’s all. No more and no less (as long as you have a U.S. passport).

Second Citizenship – Citizenship for Tax Purposes

What could be better than U.S. citizenship? Why not a second U.S. citizenship? The United States Congress rewarded U.S. citizens by giving them all a “Second U.S. Citizenship”. On June 3, 2004 the American Jobs Creation Act gave all U.S. citizens a second citizenship. To be specific, on June 3, 2004 all U.S. citizens became U.S. “Tax Citizens”.  Interestingly, the U.S. public never asked for “Tax Citizenship”. The status of “Tax Citizen” was simply conferred on them. “Tax Citizens” have no rights. They have only obligations. The obligation is pay taxes. I recently heard it said that:

“U.S. citizenship is the gift that keeps on taking.”

Purpose of this post: The purpose of this post is two-fold:

1. to explain the two kinds of “U.S. citizenship” (“Citizens” vs. “Tax Citizens”); and

2. to explain how one can cease to be a “citizen” but still be considered to be a “tax citizen” . In other words one can cease to be the first type of “Citizen” but still be the second type of “Tax Citizen”.

Although “Citizenship” can be relinquished, “Tax Citizenship” can linger on! In order to cease being a “Tax Citizen” you must perform specific requirements under the Internal Revenue Code. Yes, this is scary! At present these requirements are imposed by the combined effects of S. 7701(a)(50) and S. 877A(g)(4) of the Internal Revenue Code.

Those who don’t want the “technical analysis” can stop here. Those who do want the “technical analysis” can (if you can stomach it) read on.


The analysis is very technical and 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  will be different from the “Expatriation Date”.

Relevant U.S. Laws:

“Immigration and Nationality Act”

Let’s Begin …

The United States of America – One Country – Two Citizenships

The two kinds of U.S. “citizenship”: “Citizens” and “Tax Citizens”

First: “Citizens” – A “bundle of rights”

U.S. citizenship for “Immigration and Nationality” purposes is determined by a combination of the U.S. Constitution, statues of Congress and U.S. Supreme Court decisions. Although one’s status as a “Citizen” is a function of law, “Citizenship determinations” are made by the U.S. Department of State (State Department). “Citizens” have the right to vote, travel on a U.S. passport, enter the U.S. work in the U.S., etc. “Citizens” enjoy this particular “bundle of rights“.

How does one acquire the status of “Citizen”?

At the risk of oversimplification, the following two presumptions (which can be rebutted by specific facts) are accurate:

1. Those born in the U.S. are U.S. “Citizens” (as per the 14th Amendment) unless they have relinquished U.S. citizenship (as per the Immigration and Nationality Act).

2. Those born outside the U.S. are NOT U.S. “Citizens” without proof of additional facts (bearing on the citizenship and residence of the parent(s) at the time that they were born).

Second: “Tax Citizens” – A lifetime of taxes, reporting, penalties and life restrictions

The U.S. is the only developed country in the world that attempts to levy taxes on:

– non-U.S. residents; and

– and tax those non-U.S. residents on income earned outside the U.S.

Although this is referred to as “citizenship-based taxation”, it includes those who are U.S. “Citizens” and others. In fact, it can include “Citizens” who have performed a “Relinquishment” and are therefore no longer “Citizens”.

Since June 3, 2004 – “Citizens” are not necessarily the same as “Tax Citizens”. (U.S. citizenship for “tax purposes” continues after U.S. citizenship for “immigration and nationality” purposes ceases.)

Furthermore, under the guise of “taxation” the U.S. imposes significant “reporting obligations” and “life controls”. As London Mayor Boris Johnson recently noted: “U.S. citizenship is difficult to give up“. He likely did not mean this in a “nostalgic sense”. He meant this in a costly and logistical sense. Many “middle class Americans” could be subject to a punitive “Exit Tax” and other costly IRS compliance requirements if they attempt to “Relinquish” their status as U.S. “Citizens” and become an “Expatriate”. Such is the cost of being a “Citizen” of the Land of the Free.

The world prior to June 3, 2004:

If you were a U.S. “Citizen” then you were also a “Tax Citizen” (subject to U.S. taxation); and

If you were NOT a U.S. “Citizen” then you were not a “Tax Citizen” (not generally subject to U.S. taxation).

To put it simply: If you were a “Citizen” who had performed a “Relinquishment” with a “Relinquishment Date” prior to June 3, 2004 then you were not a “Tax Citizen”.

The world after June 3, 2004 – The “Brave New World” of “Tax Citizens” – No more benefits, but the “burdens” of U.S. citizenship continue

Until June 3, 2004 the definition of “U.S. citizen” for tax purposes followed the definition of U.S. citizen for “Immigration and Nationality” purposes. In other words “Citizens” were the same as “Tax Citizens”. Since June 3, 2004, the U.S. Congress via two successive pieces of legislation (imposing taxes on “expatriation”) have defined “individuals” as “tax citizens” even though they have ceased to be “Citizens”. (To put it simply: The U.S. does not care that you are no longer a “Citizen”. You are still a “Tax Citizen” and must comply with the tax laws of the United States of America.)

“Expatriation Tax” Legislation 1: The American Jobs Creation Act – Effective Date June 3, 2004

The American Jobs Creation Act specifically states that it applies to those who become an “Expatriate” after June 3, 2014. Pursuant to the American Jobs Creation Act, individuals who performed a “Relinquishment” and ceased to be “Citizens” were considered to be “Tax Citizens” until they followed a prescribed procedure related to notifying the State Department and filing information with the IRS.

“Expatriation Tax” Legislation 2: The Heros Earnings Assistance and Relief Tax The Heart Act (“HEART” Act) – Effective Date – June 17, 2008

The 2008 “HEART” Act replaced the 2004 American Jobs Creation Act. The principal purpose of the HEART Act was to impose an “Exit Tax” on those relinquishing U.S. citizenship. IRS Notice 2009-85 describes the “heart” of the Heart Act as follows:

Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “Act”) added new sections 877A and 2801 to the Internal Revenue Code (“Code”), amended sections 6039G and 7701(a), made conforming amendments to sections 877(e) and 7701(b), and repealed section 7701(n) with respect to individuals who on or after June 17, 2008, relinquish U.S. citizenship or cease to be lawful permanent residents of the United States. This notice provides guidance for individuals who are subject to section 877A. This notice does not provide new guidance regarding section 877, which continues to apply to individuals who relinquished U.S. citizenship or ceased to be lawful permanent residents prior to June 17, 2008. Additionally, this notice does not address new section 2801, which imposes transfer tax on U.S. persons who receive gifts or bequests on or after June 17, 2008, from individuals who are subject to section 877A (but see section 9 of this notice).

To whom does the 2008 “HEART” Act apply?

S. 301 of the Heart Act makes it clear that S. 877A (including S. 877A(g)(4) applies to those who “expatriated” after June 16, 2008. S. 877A(g)(4) continues to distinguish “Citizens” from “Tax Citizens”.

Are the provisions of the “HEART” Act prospective only or retrospective as well?

It is obvious that S. 877A(g)(4) operates prospectively. Those who perform a “Relinquishment” after June 16, 2008 (ceasing to be “Citizens”) continue to be “Tax Citizens” until they meet the requirements of notification prescribed in S. 877A(g)(4).

The question is whether S. 877A(g)(4) operates retrospectively. Does it mean that those “Citizens” who performed a “Relinquishment” prior to June 16, 2008 AND who did NOT notify the state Department of the “Relinquishment” (as required by S. 877A(g)(4)) continue to be “Tax Citizens”.

Relinquishment of U.S. Citizenship prior to June 16, 2008

The answer is complicated by the recognition that those performed a “Relinquishment” prior to June 16, 2008 include two groups:

First, those who performed a relinquishment prior to the invention of the “Tax Citizen” on June 3, 2004 (and who are arguably NOT subject to the S. 877A rules); and

Second, those who performed a relinquishment after the invention of the “Tax Citizen” on June 3, 2004 and were required to meet the requirement of S. 7701(n) of the Internal Revenue Code.

Readers are advised to keep the following facts in mind:

1. The concept of “Tax Citizen” did not exist prior to June 3, 2004.

2. “Relinquishment” is defined in the Immigration and Nationality Act. There is NOTHING in the Immigration and Nationality Act that makes “Relinquishment” dependent on notifying any branch of the U.S. Government about the “Relinquishment”.

3. There is nothing in the “Immigration and Nationality Act” that makes the “Relinquishment” dependent on receiving a “Certificate of Loss of Nationality” (CLN) from the U.S. Government.

Many former U.S. citizens performed a “Relinquishment” of their U.S. citizenship prior to June 3, 2004 with:

– the intention of relinquishing U.S. citizenship;

– with the full understanding that by so doing they would no longer be U.S. “Citizens”;

– with the full understanding that after their “Relinquishment” that they were no longer “Citizens”

This group relinquished their U.S. citizenship pursuant to the laws of the United States of America that applied at the time (the law has been amended over time) that they performed their “relinquishment”. They have subsequently been living their lives as non “Citizens”. A common example of this scenario is a U.S. “Citizen” who moved to Canada and became a Canadian Citizen.

Does S. 877A(g)(4) operate to turn those who relinquished prior to June 3, 2004 into “Tax Citizens”? Should they be subject to the horrors of the Exit Tax?

This issue has attracted the attention of the American Bar Association.

The plain reading of S. 877A suggests that those relinquishing U.S. citizenship prior to June 3, 2004 are NOT subject to the Exit Tax provisions.

Original Post By:  John Richardson

Next:  Part 13 – Understanding “Exit Taxes” – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?


The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.


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