Full Text: Unofficial Transcript Of March 27 W&M Oversight Hearing.

On March 27, one day before the House was expected to designate conferees on a bill that would tax expatriates, the Ways and Means Oversight Subcommittee heard conflicting views on the proposal adopted by the Senate to help fund the extension of the health insurance deduction for the self-employed.

The Oversight Subcommittee hearing raised some of the same issues explored last week by the Finance Committee. Some skeptics raised constitutional and human rights issues, while supporters countered that it is fair and not overly restrictive, according to the unofficial transcript of the hearing.

Subcommittee Chair Nancy L. Johnson, R-Conn., had plenty of questions for Treasury International Tax Counsel Joseph H. Guttentag, who advocated the administration's proposal and the modification by the Senate. Johnson said she was concerned the proposal may unnecessarily target all individuals who renounce citizenship regardless of whether they have a tax-avoidance purpose or whether they return to the U.S. later.

"It is possible that this proposal could be rewritten in a way that would more properly address the concerns raised by the administration, but I am worried that Congress will not have the time to do this in connection with the bill to extend the self-employed health insurance deduction, which we all acknowledge must be enacted very soon," Johnson said in her opening statement.

Johnson also warned the IRS, "I want to emphasize how important it is that this proposal not become another source of potential procedural friction between the Internal Revenue Service and law- abiding taxpayers." She added that the IRS should not take it as license to change the treatment of citizens who have not renounced their citizenship. "This is the gray area in the deep water of the proposal before us."

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P R O C E E D I N G S

Oversight Committee - March 27, 1995

CHAIR JOHNSON: Good midday, everyone. Thank you for taking part in this hearing with us this morning. Today we will examine the administration's proposal to impose a new tax on people who give up their US citizenship.

Before we begin, I want to observe that while this is a serious proposal dealing with an important matter, much of the rhetoric surrounding this proposal has been less than helpful in focusing in on the merits of the issue. People who give up their citizenship are not necessarily economic Benedict Arnolds as proponents would label them, just as millions of immigrants who've created and enriched this nation over 200 years were not traitors to the countries which they left.

Opportunity was and is the goal of those who come to the United States and to its citizens. Nor is the proposal necessarily an economic Berlin Wall, as critics have labelled it. The exemption to the proposal is generous enough to impose tax only on those with significant assets.

Of course, new tax proposals may often seem benign when enacted, but become more onerous with the passage of time and the changing whims of Congress. Take for example the income tax which started at one percent in 1913. And look at the current $600,000 estate tax exemption on which this proposal is modelled, and which has been proposed for an amendment by current House Minority Leader Gephardt to be reduced to a $200,000 exemption.

I'm also concerned that this proposal has a broader reach than may be necessary to address the primary concerns raised by the administration. As I understand the administration's argument, the concern is over US citizens who renounce citizenship for tax avoidance, but who continue to spend significant amounts of time in the United States.

Under this proposal -- however, this proposal targets all individuals who renounce citizenship, whether or not they have a tax avoidance purpose, and whether or not they continue -- they return to the United States afterwards. I also take very seriously the human rights issues that some of our witnesses today are here to discuss.

While this proposal may not violate any current laws, I think the United States should lead by example. Our national interests may not be best served by drawing what some will see as a narrow distinction between this proposal and similar exit taxes that we have criticized when they were imposed by other countries.

It is possible that this proposal could be rewritten in a way that would more properly address the concerns raised by the administration, but I am concerned that Congress will not have the time to do this in connection with the bill to extend the self- employed health insurance deduction, which we all acknowledge must be enacted very soon.

On Friday, the subcommittee held a hearing on the Taxpayers' Bill of Rights. With the testimony from that hearing fresh in my mind, I want to emphasize how important it is that this proposal not become another source of potential procedural friction between the Internal Revenue Service and law-abiding taxpayers.

For example, I would review it as a significant abuse of taxpayers' rights if the IRS were to attempt to use this proposal, if enacted, to change in any way the treatment of US citizens who have not renounced their citizenship, notwithstanding any suspicion that an over-zealous tax collector may have about a citizen's intentions. That is the gray area in the deep water of this proposal for us.

I would like to express my appreciation to the witnesses who have come here on less than short notice. I look forward to their testimony. I also appreciate the commitment of my chairman, Mr. Archer, for not supporting tax changes that haven't undergone public hearing in the House. For that reason, we convened this hearing, even on rather short notice.

I thank you.

I'd like to welcome our first witness today, Joseph Gutentag, the International Tax Counsel for the US Department of Treasury.

Excuse me one moment. Before we proceed, my colleague, Mr. Ramstad -- a new and esteemed member of this committee, and one who's had some important experiences that will be useful to us in our work -- would like to make an opening comment.

MR. RAMSTAD: Thank you, Madam Chair.

Very briefly, I appreciate your leadership in calling today's hearing on the administration's proposal. I also share your concerns relative to the rhetoric around here.

I was interested in the President's radio address over the weekend when he asked that both Republicans and Democrats in the House, in light of last week's debate on the welfare bill, to tone down our rhetoric. I share that concern. I think we need to work more in a bipartisan, pragmatic way on all of these policy issues. But I also think it's important that the White House, that the administration get the message, too, and tone down its rhetoric.

Because, it's one thing to throw out caveats to keep the dialogue from simmering and to be more statesmanlike, but it's another thing when the administration is out there fueling the flames. I think it works both ways. I think both ends of Pennsylvania Avenue would be well served, and certainly the country, more importantly, would be well served, if we all toned down the rhetoric. This bill, I think, is a good place to start fresh on a beautiful Monday morning here in Washington.

It's particularly timely that we review this proposal. As the chair mentioned, it was included in the Senate version of the bill we recently passed to restore and make permanent the 25 percent tax deduction for health care costs of self-employed taxpayers. The inclusion of this particular provision made it possible to raise the deduction to 30 percent beginning with 1995, which is more than appropriate. Some of us would like to see it raised to 100 percent deductibility for self-employed individuals, to put them on a level playing field with their counterparts in the marketplace.

I'm particularly interested, Madam Chair, in the testimony of Les Samuels of the Treasury Department. This provision, while seemingly well intentioned, appears to create an administrative nightmare for the Internal Revenue Service. I know the IRS already struggles to enforce Code Section 877, which allows assessment in United States tax with respect to certain types of income for a period of ten years after relinquishing citizenship.

I'm curious how effective the Treasury Department estimates that the IRS would be in enforcing the proposal under consideration. Also, I'm going to be curious in today's hearing in learning estimates as to the net federal revenue that would be generated from this tax.

In addition, Madam Chair, I share your concerns relative to the issues discussed last week in the Taxpayers Bill of Rights. I certainly look forward to examining all of these issues with our distinguished witnesses today.

Thank you, Madam Chair.

CHAIR JOHNSON: Thank you. Mr. Gutentag, will you proceed; and welcome.

MR. GUTENTAG: Thank you, Madam Chair and subcommittee members.

I appreciate the opportunity to testify in support of the administration proposals and Section 5, HR 831, as approved by the Senate, and designed to prevent a relatively few very wealthy Americans from avoiding US tax on millions of dollars of gains by renouncing their US citizenship.

I would like to submit my complete statement for the record and summarize the administration's position.

CHAIR JOHNSON: Without objection.

MR. GUTENTAG: Next month, millions of Americans will settle up with their government and finalize their tax obligations. Recent reports in Forbes and other media have described how a small number of Americans avoid their US tax obligations by giving up their US citizenship.

We believe that when a citizen changes his status to that of an alien, who is exempt from most US tax, it is appropriate and fair to tax him on those gains on which tax has not previously been paid. These expatriats should not obtain an unfair advantage over those US citizens who continue to meet their tax obligations to our government.

Many other countries such as Canada, Australia and Germany impose similar taxes. Each country crafts this proposal to deal with its own basic tax structure and other fiscal considerations. Opponents of this proposal imply that this tax is designed to prevent free immigration, or deny other important human rights.

The proposal submitted by the administration and as approved by the Senate, does not in any way restrict Americans from entering or leaving the country. As a matter of fact, as noted by the chair, many expatriating former Americans choose to spend a significant amount of their time in the United States, often with family members who have not renounced their citizenship.

My views on the human rights issue are strongly buttressed by others much more learned in this field than I and are set forth in a memorandum prepared by the legal advisor's office of the Department of State, and in a recent letter to Assistant Secretary Samuels from a distinguished international lawyer, Professor D.R. Botts of Harvard Law School. I would like to submit them both for the record at this time.

CHAIR JOHNSON: We will include them in the record.

MR. GUTENTAG: Thank you.

The argument has also been made that the provision is somehow unconstitutional on the ground that no taxable gain has been realized by the former American. This argument is also without merit. There are similar taxing regimes already in the Internal Revenue Code, whose constitutionality has been upheld against similar challenges.

For example, the foreign personal holding company rules, applicable to corporate and individual stockholders, and the controlled foreign corporation regime that also applies to corporate and individual shareholders, have both been upheld by the courts against challenges that they were unconstitutional -- that it was unconstitutional to tax unrealized income.

We must remember that we are not writing on a clean slate. The proposal under discussion is an amplification and improvement of Section 877 of the Code, which was enacted almost 30 years ago. Unfortunately, Section 877 has proven ineffective in addressing the abuses at which it was targeted. Old Section 877 taxed ex-patriotic Americans for ten years, but only on certain gains, and in a manner that raised administrative and extra territoriality problems.

Section 5 of HR 831 is designed to avoid the problems of existing law. With its exemption of up to $1.2 million of gain for a married couple, the provision eliminates from its coverage all but the wealthiest. Although the tax is imposed on gains at the time the citizen renounces citizenship, there are provisions permitting deferral of payment of the tax, if adequate security is provided. We would be happy to review this issue further, either now or in the future. US pension plan benefits are excluded from coverage, as well as up to $500,000 of US -- of foreign pension benefits, US real estate is exempt from this proposal.

Finally, citizenship will generally be deemed lost on the date of renunciation before a US government official, or on the happening of other events, whichever occurs first.

Enactment of this legislation will help assure continued respect for the fairness and equity of our income tax system. With the revenue dedicated to deficit reduction, Section 5 of HR 831 sends an important signal of our continuing intent to reduce our fiscal deficit.

Madam Chair, this concludes my statement. I will be available to answer any questions that the subcommittee may have.

CHAIR JOHNSON: I thank you, Mr. Gutentag.

Is it true that regulations have not been issued for current statutory rules regarding US citizens that renounce their US citizenship?

MR. GUTENTAG: No regulations have ever been issued over the last 30 years under that section.

CHAIR JOHNSON: If expatriation is a major tax avoidance problem, why hasn't the Clinton administration, and why haven't other administrations issued regulations? They would only be implementing current law.

MR. GUTENTAG: Section 877 has not worked since its inception and it was felt that regulations would not provide a means of making an effective provision out of that, because of the defect in it. It has proven ineffective in solving the problem for which it was intended.

CHAIR JOHNSON: You would say that the regulations would not overcome the defects in the law?

MR. GUTENTAG: That's right.

CHAIR JOHNSON: Will you please tell the subcommittee how many US citizens gave up their citizenship in 1994, '93, '92, '91 and '90?

MR. GUTENTAG: The figures as supplied by the Department of State reflect that in 1990 there were 571 citizens giving up their citizenship; in 1991, 619; 1992, 556; 1993, 697; and last year, 1994, 858.

CHAIR JOHNSON: How many of those that gave up their citizenship gave up their citizenship for tax motivated reasons in those years?

MR. GUTENTAG: We don't have any way of knowing, Madam Chair. There have been very few cases brought and actions brought under Section 877. Of course, we don't have any idea what the intention was of these several hundred people.

CHAIR JOHNSON: Mr. Gutentag, how do you get revenue estimates for this if you have no idea what part of the 858 last year would be exempted under your bill, and how many would be caught in that net? I mean, you must have some information about this or you couldn't have made estimates of the revenue impact.

MR. GUTENTAG: Our revenue estimates for the proposed legislation, I believe, made the assumption -- at least the Treasury side -- that the present 877 was ineffective and did not raise any substantial revenue.

CHAIR JOHNSON: So, you do not expect this change in the law to raise any substantial revenue?

MR. GUTENTAG: I'm sorry.

CHAIR JOHNSON: So you do not expect the change you're proposing to raise any substantial revenue?

MR. GUTENTAG: The change in the law will raise substantial revenue.

CHAIR JOHNSON: What I'm asking you is, on what do you base that judgment, that revenue estimate? If you know that the current law is ineffective, you know that last year there were 858 renunciations, but you do not know what percentage of those renunciations were for the purposes of avoiding taxes. Do you know what percentage of those renunciations would have involved assets valued at less than $600,000?

MR. GUTENTAG: No, we do not know, but we are basing our revenue estimate on the proposed legislation which does not require an intent to avoid tax.

CHAIR JOHNSON: Do you know, then, what percentage of the 858 involved estates valued at less than $600,000?

MR. GUTENTAG: No, we do not.

CHAIR JOHNSON: Then how can you estimate what your revenue is going to be since they would all be exempted from this law?

MR. GUTENTAG: We make these estimates based on our revenue estimator's calculations based on various kinds of evidence which they have as to the number of people who may leave the United States on the number of people who are going to stay, who are in the category of paying high taxes, therefore, and have high valued assets, and their continued payment of taxes, plus those who would leave the country and pay tax to arrive at the revenue estimates.

Because it includes people who -- if this legislation is not enacted -- who would leave the United States; and therefore, reduce revenues which would otherwise be collected.

CHAIR JOHNSON: You know, you may remember that a couple of years ago this committee -- it was about 1991 -- this committee entertained a proposal that imagined that we could collect something like $30 billion by taxing the income of foreign companies, the same way we tax currently the income of American companies. We had this extraordinary estimate.

We all, quite frankly, got excited about that. That sounded like an easy way to get a lot of billions of dollars. When the dust settled, there wasn't any new money there. Now, I'm concerned that we might do this and find no new money there. I think you are obliged in proposing a change in the current law to provide us some better information about the 858 cases last year, or the 697 the year before. Because we need to understand what percentage of these people would have been exempted by your proposal, and on what basis you suggest that your proposal is going to bring in $1.4 billion from probably a very small number of cases.

Nothing you have said in response to my questions indicate to me that you have a very concrete grasp of what number of cases are going to pay, how much they're going to pay, or why you think they're going to pay that dimension of dollars.

So, if you would like to enlarge on any aspect of your preceding comments to make it clear to me why you think your revenue estimate should be considered as possible, I'd be happy to hear those comments.

MR. GUTENTAG: Yes, I believe the $1.4 billion estimate was that of the Joint Committee, Madam Chair. I think our -- the Treasury estimate was higher than that. The Joint Committee estimate does not include resident aliens who would be subject to tax under the administration proposal. That accounts for part of the difference between our estimates.

So, while they were different, they are both substantial in amount. But, I would be glad to -- these revenue estimating is quite a science and I do not pretend to be an expert or even knowledgeable in that area. We rely on our revenue estimators. They have made these estimates based on collecting facts from various sources. Most of it involves very few people in very high income categories. If anything, I think they were reasonably conservative.

CHAIR JOHNSON: Thank you.

I'm going to yield at this time to my colleague, Mr. Ramstad.

MR. RAMSTAD: Thank you, Madam Chair.

Mr. Gutentag, let me apologize. I was directing my questions in my opening remarks to Mr. Samuels, not realizing that you were, in fact, pinch hitting. I thought both of you were appearing today. I had a list of witnesses with Mr. Samuels' name on it. But, now, I can ask you the questions.

I share the chair's concerns about the revenue projections generated by this tax. You know, the last thing we need around this place is another enforcement nightmare for the IRS that costs the American taxpayers more than the revenues would bring in.

I think conceptually it's certainly hard to argue that taxing United States citizens who give up their citizenship for tax avoidance is the thing to do. Certainly, I think we all agree with that. It should be the public policy of this country to prevent expatriates tax avoidance, certainly.

Let me just ask you a couple questions from my understanding? With current law -- as your testimony stated -- the government must prove intent, that is, intent of tax avoidance?

MR. GUTENTAG: That's correct.

MR. RAMSTAD: And so we're trying to make it more of an absolute liability standard?

MR. GUTENTAG: Yes, intent would be irrelevant.

MR. RAMSTAD: And also, the second reason for the recommended change here, the proposal from the administration, as I understand, the current law only applies to certain US source income? You're concerned about the abuses there?

MR. GUTENTAG: Yes, the present law applies to US source income and doesn't take into account gains which may be realized from foreign assets. Since US citizens are taxed on a worldwide basis, we believe this proposal should apply on a worldwide basis.

MR. RAMSTAD: Well, I think before we move this legislation you should get those revenues about which the chair probed. I'd like to hear a little bit more to ease my concerns as to the cost of enforcement. Because it just seems to me we could have another enforcement nightmare here that's going to end up costing more than it brings in; and I think that's the last thing we need.

MR. GUTENTAG: Well, we'd be glad to review those and provide you with additional information.

Let me say that it's my understanding that the way the income was calculated was primarily based on the present keeping -- present taxpayers in the United States who might otherwise depart in order to avoid tax.

So that we know, based on evidence in the press and other media that certain individuals have left the US. From that we can extrapolate as to what would happen under this provision, if it would pass, how many of those people would still leave and pay the tax, how many would stay and still be subject to regular US tax as all of us are.

In my discussions with our revenue estimator in Treasury and telling him that I was going to be here this morning, he again confirmed to me that he believes that his estimates are reasonably conservative. I think the Joint Committee's revenue estimators can speak for themselves, but they appear to be even more conservative than ours.

MR. RAMSTAD: Well, thank you, Mr. Gutentag. You're a very capable pinch hitter for Mr. Samuels. I sincerely hope you will take that message back to the White House, since you're the only administration representative here today -- at least the first one that I've seen this week -- that we all need to tone down the rhetoric.

MR. GUTENTAG: I certainly will.

MR. RAMSTAD: Thank you, Madam Chair.

CHAIR JOHNSON: Thank you. Mr. Hancock.

MR. HANCOCK: Thank you very much.

You know this whole thing, people fleeing to avoid paying taxes, that's actually what we're talking about. This has been going on throughout history, when the citizens start feeling that the government is excessive in its taxation. There have been empires that have collapsed as a result. For instance, the Mayan Empire, they collapsed as a result of their citizens just disappearing into the jungles because of excessive taxation.

In fact, I would recommend a book to you and to anybody with the Treasury, if you haven't already read it, called For Good and Evil, the Impact of Taxes on the Force of Civilization. That may be the area that we're into here now.

If in fact we had a reasonable capital gains tax, and a reasonable estate tax, these people wouldn't have any reason to leave the country. Am I correct in that? I mean, if in fact your judgment is right, that they're leaving for the expressed purpose of avoiding taxes?

If in fact we had reasonable taxes on these people, then they wouldn't be able to leave. It wouldn't make any difference. Am I correct? There would be no reason for them to leave.

MR. GUTENTAG: Well, based again on our analysis of those who do leave, it appears that many of them leave, not for the purpose of subjecting themselves to some other tax regime. Most of them leave under circumstances under which they or their estates will not be subject to any meaningful taxes in the future.

So, it does not appear to us that the level of capital gains tax, or the level of taxes here in the US is a major consideration. Our taxes here are generally comparable to those in most of the developed countries of the world; and the expatriating citizens usually subject themselves to the tax regimes --

MR. HANCOCK: Wait a minute. Pardon me, but you're telling me that our estate taxes and our capital gains taxes are comparable to other developed countries? I mean, Japan -- for all practical purposes -- doesn't even have a capital gains tax. I'm not too sure about estate tax, but I think -- did I hear you right?

MR. GUTENTAG: They have -- Japan and the United States, for example, I think -- again, this is not my field -- are generally at about the same level of taxes as a percentage of gross domestic product; and their tax rates are not that dissimilar.

MR. HANCOCK: Well, let me ask you another question? As an American citizen, and let's say I've got a lot on the ball. I guess, a lot of people would question that, but just for example, it looks like I'm going to make a lot of money.

If I gave up my citizenship before I made the money, in other words I could -- two people. One person living in, say -- I heard they moved down here to some island -- one person with his citizenship already in that -- down in the Bahamas or some place -- investing in the United States and becomes a millionaire.

Another one living with a citizenship in the United States becomes a millionaire. They're going to be taxed differently. Correct?

MR. GUTENTAG: That's correct.

MR. HANCOCK: So, what we're saying is that if you're a citizen of the United States, you need to renounce your citizenship before you become wealthy, instead of after.

MR. GUTENTAG: That's correct.

MR. HANCOCK: Doesn't that put an individual in a position if he happens to come from a family, say, that has a lot of money to invest that the best thing to do is to go ahead and become a citizen of another country before he goes ahead and makes his money? Isn't that kind of a disadvantage to the American citizen?

MR. GUTENTAG: Well, I know that -- you don't intend at all to speak lightly about the act of giving up your citizenship. We can see from the relatively few people that do that it is a very treasured thing to most.

MR. HANCOCK: Well, I understand that, but when you start talking about -- you're talking about it being very treasured, there's no question about it. But you're also talking about generating an additional $1.5 billion a year as a result of this expatriate law that we're talking about doing now.

How many people are going to show up to do that? I mean, you're going to run out of billionaires pretty quickly, if in fact they started doing it. In my judgment -- and here again, I need to talk to some experts in this area because this has just recently become -- starting to be suggested by tax advisers and what have you to extremely wealthy people in their estate planning, this approach of giving up your citizenship.

Now, they've been talking for a long time about moving assets out of the United States. In fact, even to the point within the United States that people are changing their state of residence because of the differential between say the state of California and the state of Florida. This has been going on for -- you know, here again, ever since the Babylonians.

I certainly cannot support any tax law that gives a foreign citizen and advantage over an American citizen. That's basically what we'd be talking about doing here.

MR. GUTENTAG: I think that the US citizen has many advantages. First, giving up the citizenship with the hope that you're going to be earning this money in the future, that may, of course, never happen and you've given up your citizenship.

MR. HANCOCK: Well, I was -- that was -- I was being a little facetious when I suggested that. But the fact remaining is, two people equal: one of them being a citizen of Puerto Rico, maybe, I don't know; and one being a citizen of the United States. If they should decide to give up their -- or Bermuda or someplace -- they decide to give up their citizenship in the United States.

As far as dollars are concerned, that individual when his death comes around or he pays his taxes, if he still has his citizenship in the United States, is going to pay a lot more than that individual who made the same amount of money doing the same thing, but does not have a United States citizenship, made his money in the same place, in the United States.

MR. GUTENTAG: Well, the administration's proposal would tax the long-term resident -- immigrant into the United States, the green card holder -- under the administration proposal, if that person was here more than --

MR. HANCOCK: Sir, if you're just investing money in the United States you don't have to have a green card.

MR. GUTENTAG: No.

MR. HANCOCK: And you can make lots of money investing in the United States.

MR. GUTENTAG: We are putting no restrictions on that kind of investment.

MR. HANCOCK: But -- you're making my point. If I'm an American citizen, though, and I invest in the United States and end up with a lot of money I'm going to be taxed -- I'm going to pay much bigger capital gains and estate taxes than I would if I were, say, a citizen of England investing in the United States.

MR. GUTENTAG: And that's the way our tax laws work. They are generally based on two factors, one, the source of your income. We pay tax based on the source. The rest of the tax is based on where you reside. Only in the case of the United States do we also tax based on citizenship and where you reside.

If that person can live in some other country, be a national of that country and be able to make money in the United States, he's free to make that money. He does not have the benefit of US citizenship, which we consider important. He is not allowed to live here permanently in the United States. That's true for people all over the world. There could be a person overseas --

MR. HANCOCK: And the reason we do that is because we want the investment capital coming into the United States.

MR. GUTENTAG: Right.

MR. HANCOCK: Now, why do we tax, then, people to the extent that an accumulated investment capital -- why do we tax them with our capital gains and estate taxes to the extent that they've got to give up their citizenship so we can retain the investment capital in the United States?

I mean, something just doesn't sound quite right to me. We want the investment capital, but if a citizen of the United States makes it, then we want to tax him so heavy that we don't have the investment capital that the government ends up with to throw away.

Thank you. I still think you ought to read this book.

MR. GUTENTAG: All right, I certainly will.

CHAIR JOHNSON: Mr. Gutentag, your response to my colleague's question that you didn't think it would dampen foreign investment strikes me as very interesting. I can't imagine that that would be so, but it was just a matter of judgment.

But, the administration's proposal applies to non-citizens. If I were a non-citizen watching this, I would look -- I would think, what's the big next source of new income? So, I don't think -- at least I want it clear on the record that that is simply a matter of judgment and not a matter of fact.

I think we're going to hear testimony later today that it is a matter of fact that Asian immigrants are choosing Canada over the United States. This kind of action by the United States is certainly going to influence their thinking -- at least in my judgment; and I understand that that also is just a matter of judgment. But we are, for whatever reason, seeing some of our most talented immigrants choosing other nations to immigrate to.

I want to get back to my issue of regulations.

MR. GUTENTAG: Yes.

CHAIR JOHNSON: What is the key difference in the law you are proposing, the key change in the current law, in the law you are proposing, that leads you to believe you will be able to write regulations that will implement this law and gain the revenue that you suggest is there to be gained?

MR. GUTENTAG: The key issue is that this tax that's being proposed would be imposed at the time the US citizen, or the administration proposal, the long-term resident engaged in this expatriating act. That would be the end of the tax regime for income tax purposes.

Under the legislation as it now exists, the US imposes tax over a ten-year period when the former US citizen may be living in various countries of the world creating conflicts with our tax treaty network, assets are outside the United States, there's not even a way to monitor effectively the amount of income earned, as well as being able to convert US source income quite easily to foreign source income and avoiding the tax net under present Section 877.

CHAIR JOHNSON: I see. Because you impose this at the time of termination of citizenship and collect all the taxes at that time, you think this can be more effective?

MR. GUTENTAG: The legislation provides for an ability to defer tax under appropriate -- defer payment of the tax under appropriate circumstances, which we think is important.

CHAIR JOHNSON: Okay. Given that, would you discuss how this law applies to trusts, and particularly to contingent remainder interests?

MR. GUTENTAG: It would apply to trust interest, which would be valued in accordance with standard valuation techniques. It would eliminate de minimis interest in trusts based on such valuation, so as not to get involved where there's remote -- where there are contingencies which are reasonably not to come into play; and would also provide -- are particularly useful in those cases where there's not immediate access to the trust funds a means of deferring the tax.

CHAIR JOHNSON: And so, are you suggesting that it would not require somebody with an interest in a trust to convert that interest into income so that they could pay the tax -- would not require in a sense escape?

MR. GUTENTAG: Well, that would depend on the terms of the trust, whether it could be converted. It would depend on other assets that the citizen had. We, of course, would have to look at all of the assets and all of the gains involved in order to determine how the tax should and would be paid.

CHAIR JOHNSON: All right.

I want to get some examples on the record to be sure that these are also the kinds of cases that would be affected.

MR. GUTENTAG: Okay.

CHAIR JOHNSON: Person "A" fled Cuba in 1959 and became a US citizen. In 1999, Cuba becomes a democracy. "A" returns to Cuba and renounces his US citizenship. "A" would be subject to tax under the administration's expatriation proposal on all assets he had accumulated and all income he had accumulated during his years here. Correct?

MR. GUTENTAG: That's right.

CHAIR JOHNSON: "B" left his native country, "Y" in 1957 because it was ruled by a Communist government and settled in the United States. He never obtained US citizenship, but complied with all immigration laws. After the fall of Communism, "B" returned to "Y" and decided to make "Y" his homeland. In 1998, "B" leaves the United States and returns to "Y." He would be subject to tax under the administration's proposal, would he not?

MR. GUTENTAG: Yes.

CHAIR JOHNSON: So, caught in this net are going to be all those who came here fleeing Communism, all those who may have come here because of the unsettled circumstances in the Middle East, all who came here because of the conflict and war in Ireland, and all those who came here for similar reasons from places all over the world in good faith, worked hard and developed resources.

We are, under this proposal, going to then tax them at a level that we tax no other living citizen or non-citizen. Is that correct?

MR. GUTENTAG: No, we would tax them as we would a US citizen.

You're right, Madam Chair. We opened our doors here to these people. They came here. They took advantage of the US economy. Apparently the earned substantial wealth, otherwise they would not be subject to this tax; and if they decide to go home, all we're asking is that they pay US tax on the gains they've realized while they have enjoyed their hospitality here in the United States.

CHAIR JOHNSON: But, Mr. Gutentag, we are forcing them to treat things as a sale; so, we're forcing them to accumulate cash assets to pay taxes at a time that normally we only do upon death. In that regard, it can reduce the value of hard earned assets in a way that we don't force on any other Americans.

Wouldn't you say that's fair to say?

MR. GUTENTAG: Well, an American, of course, has to prepare also for death and those kinds of taxes; and would of course in the future be able to prepare for this tax. As I said, we do plan to have means available to defer the payment of tax to avoid that kind of hardship.

CHAIR JOHNSON: I guess my point is that this is not necessarily going to fall on those who are motivated by tax avoidance. Many of the people who came here and worked hard were motivated by all of the motivations that has made America a great and strong country. Without question, this proposal is going to lay on them a burden that no other working American will ever experience. Is that not so?

MR. GUTENTAG: What we are -- the working American who is subjected to asset tax by selling his assets and realizing the gains will of course pay tax during his lifetime; but this person who has come to the United States will be allowed to exempt the first $600,000 of gain, which is a substantial amount. That's not assets, that's gains realized during this period of time, $600,000 of gain he will be able to -- he will not have to pay tax on.

Presumably he would have a home in the United States or other real estate in the United States. He would not have to pay any tax on that US real estate. He would have exempt any money that he would have placed in pension funds for his benefit. So, all of those assets would be free and clear of this proposed tax.

CHAIR JOHNSON: My staff person was clarifying for me your exemption for small business assets, which is very important. But if you have saved up and you have your own small business and you invest in the stock, you would be forced to sell them, possibly at a loss, in order to get enough money to pay this exit tax.

MR. GUTENTAG: There are administrative procedures presently in the Internal Revenue Code, Madam Chair, which do permit the deferral of tax collection by the Internal Revenue Service when appropriate security is given and good cause can be shown for the reason for the deferral.

CHAIR JOHNSON: My understanding of the Joint Tax Committee's estimate is that it is based on the assumption that this tax is heavy enough to discourage people from changing their citizenship; and that their increase in revenue estimates is based entirely on the fact that people will not choose to make this decision. Is that the assumption behind Treasury's estimate of the revenue increases?

MR. GUTENTAG: I think Treasury's methodology and that of the Joint Committee are quite similar.

CHAIR JOHNSON: So, actually you're not anticipating that people will pay more taxes, you're anticipating that they will not choose to give up their citizenship?

MR. GUTENTAG: No, we're estimating that if this law is not passed that these people will leave the United States and we will not collect that tax. If this law is passed, we will collect more tax than we would if the law is not passed.

So we're just assuming that these people will leave the United States if the law is not passed -- will give up their citizenship if the law is not passed. Is that -- I'm sorry if I'm not clear.

MR. HANCOCK: Madam Chair, with your permission?

CHAIR JOHNSON: Go ahead.

MR. HANCOCK: Are we making the assumption that if you pass the law that these people will not leave the country? They will not give up their citizenship if the law is passed? Is that what your assumption is?

MR. GUTENTAG: Yes. Based on the information that we have, the people who have left, the wealthy people who have left really have no interest in leaving the United States. They spend a considerable amount of time in the United States after they give up their citizenship. They have family here. They have businesses here. Their real reason for leaving is tax avoidance. That if there's a price to pay for tax avoidance they would stay here.

MR. HANCOCK: Well, let me ask you a question, then? If your assumption is correct, where's this billion and a half going to come from?

MR. GUTENTAG: Those people will remain here. If the law is not passed, those people will give up their citizenship and we will not collect the --

MR. HANCOCK: No, no, now, wait a minute. Let's say we pass the law.

MR. GUTENTAG: Right.

MR. HANCOCK: These people quit leaving the country and giving up their citizenship. Now, where does the billion and a half in increased revenue come from?

MR. GUTENTAG: Well, we have people who are paying millions of dollars a year in tax. Those individuals would continue to pay tax in the United States.

CHAIR JOHNSON: So there'll be no increased revenue. They're paying it now and they're going to keep paying it.

MR. GUTENTAG: Yes, but if the law is not passed there will be a decrease in revenue. That's considered a revenue gainer.

MR. HANCOCK: Now, are you talking about an income tax revenue?

MR. GUTENTAG: Income tax.

MR. HANCOCK: Or are you talking about a state tax revenue?

MR. GUTENTAG: Income tax.

MR. HANCOCK: You're talking about capital gains?

MR. GUTENTAG: Income and estate taxes. Both.

MR. HANCOCK: Well, I still think, Madam Chair, we get back to the question that a foreign citizen has a better break than an American citizen does.

CHAIR JOHNSON: I'm curious as to why the administration didn't focus primarily on those who do return after they've given up their citizenship and continue to do business. It seems to me that wouldn't be too hard to monitor.

MR. GUTENTAG: We have thought about that.

CHAIR JOHNSON: That's the real tax evasion.

MR. GUTENTAG: In some cases, we can't define the situation with respect to all of these people. There are relatively few people who are involved in this situation. Many of them who do return, who have obtained US citizenship, or obtained a green card for many of them to live permanently in the United States.

Those people who have been subject to acts of foreign governments which have caused them to come to the United States, when they do have the opportunity to return, very often they keep their citizenship and green cards because of the uncertainty. They want to make sure that if something were to happen again they would have the United States to return to.

CHAIR JOHNSON: True, but if they do that, they're not affected by this tax.

MR. GUTENTAG: They're not affected by this tax.

CHAIR JOHNSON: If you're really interested in tax avoidance, why don't you go after those who forego their citizenship, but return and continue to do business? That's the tax avoidance group.

The groups that came from Communist dominated countries and decide to go back for other reasons, that's not really the group you're after. The group you're after are the ones who renounced their citizenship specifically to gain tax benefits.

Now, I will say that my colleague, Mr. Ramstad, pointed out that usually this reflects, this happens when something's gone awry with the nation's tax structure. Connecticut loses people every year because our tax structure in ways encompasses -- well, anyway, for seniors. People move when they reach 65 to other states.

We could fix that in Connecticut, and we are trying to fix that. I'm concerned that we're fixing this in a hostile way when maybe we ought to be fixing it in a positive way. That's one thing that concerns me.

But the other thing that concerns me is that by being overly broad, instead of looking at the group that is exploiting our Tax Code, we set up our other people to be gone after by the IRS. When this gets moving, what will the IRS' stance be in regard to transactions by these people in the months before they declare. It's like when we get into Medicare. What happens in the three years before you become Medicaid eligible, or now in the five years before?

So, by writing too over broad a law, you're creating a noose for a lot of innocent folks as well. That's why we have an obligation to focus this law as narrowly as we can on the problem. That's why it concerns me that of the people, that of the numbers of people that renounce their citizenship last year, 858, you don't have any information you can share with me about either what the income of these people were, what their asset value was. I mean, you must know. We have all those records.

So, I would suggest that you get the committee some better information. You run your computers overnight, get us back some better information on those folks, so we can see whether or not there's a way we can focus this law more effectively to go after people who are trying to in a sense take advantage of international differences in tax burden for their own benefit.

But, I do worry about the breadth of this law, particularly the breadth of this law for a nation that has always valued immigration, and who believes that opportunity imposes -- carries with it also certain rights.

But I thank you for your testimony today.

MR. GUTENTAG: Thank you, Madam Chair.

CHAIR JOHNSON: The next panel is Mr. Robert Turner, the Charles Stockton Professor of International Law, US Naval War College, Newport, Rhode Island, on his own behalf; William Norman of Ord & Norman, Los Angeles; and Lawrence Heller of Whitman, Breed, Abbott & Morgan, Los Angeles.

We'll begin with Mr. Turner.

Mr. Turner, if you will proceed. Let me remind this panel as well as the next that your full testimony will be included in the record; and during your time of testimony, would you please summarize your testimony and comment any way you care to.

Thank you. Mr. Turner.

MR. TURNER: Thank you, Madam Chairman. It's a great honor and pleasure to be here this afternoon to discuss the human rights ramification of the so-called Exit Tax in the Tax Compliance Act of 1995. As you suggested, I will submit my prepared statement for the record.

Before going further, I do have three caveats. One you've already mentioned. It's very important to note that I was asked to appear by the committee in my individual capacity, and not on behalf of the Naval War College or any other group. Second, also very important to me, I have absolutely no substantive expertise on tax law. So, to the extent you have questions in that area, I'm going to have to leave those to your judgment as the real experts. Finally, a point you've also mentioned here -- I think we're all here on very short notice -- I would like to have had more time to think about this to research. That's all the more important, because there are a number of very distinguished international lawyers, who take a very different position than the one I will present. All I can say is, consider the arguments I make on the merits and make your own judgments.

The basic human rights issues raised here are not new to me. Ironically, it was my pleasure to serve on the United States Senate staff in 1974 when the Jackson-Vanik Amendment was passed. I worked on that amendment as foreign policy advisor to Senator Bob Griffin of Michigan.

Before I get into a summation of the -- a brief summation -- of the law involved, there's one point of apparent disagreement that perhaps it would be useful for me to focus on briefly. The Office of the Legal Advisor at the Department of State, where I have many very close friends and have great respect for when the Library of Congress Congressional Research Service and others tried to draw a distinction between the right to travel and the act of renouncing one's citizenship.

Underlying this apparently is the view that there is no real legal right of expatriation, that is, no right to renounce citizenship. Since this bill doesn't really stop travel, it only affects citizenship, human rights probably doesn't apply. I simply don't agree with this view.

First of all, having worked closely on the Jackson-Vanik Amendment, I can say that at least for many of us, our concern involves all of the impediments. Certainly we use the word "immigration," but we are talking about the human rights of citizens of the Soviet Union to make a permanent departure from that country and to completely sever the citizen/state relationship as they move to Israel or any other country of choice.

This was not merely a debate about travel in the sense of taking vacations to the Holy Land, but rather about making a permanent change of allegiance. I think most of us had in mind at that time, not only immigration, but also expatriation.

Secondly, those who have said that international law is not concerned with the right to renounce one's citizenship, I think they're mistaking. I'll try to make that point briefly.

And finally, I would note that, in fact, part of the anger of the Congress -- and you may remember the Jackson-Vanik Amendment passed unanimously in the Senate and overwhelmingly in the House -- and one of the things we were complaining about was, in fact, something the Soviets called the citizenship renunciation fee of 500 rubles. The Soviets said, "If you want to go to Israel," among other things, "you have to pay an extra fee for the purpose of renouncing your citizenship."

More importantly, however, there I think certainly is an international right of expatriation. Indeed, the core of the intellectual justification of the American revolution was that such a right existed. The very first sentence of the Declaration of Independence, in fact, asserts such a right.

Since this proposal comes from the Treasury Department, it might be worth noting President Thomas Jefferson's June 18, '06 letter to then-Treasury Secretary Albert Gallatin, when Mr. Jefferson wrote, "I hold the right of expatriation to be inherent in every man by the law of nature" -- I would note as an aside here that Jefferson viewed the law of nature as the first source of international law. He goes on and he says, "and incapable of being rightfully taken from him, even by the united will of every other person in the nation."

Continuing, Mr. Jefferson wrote, "Congress cannot take from a citizen his natural right of divesting himself of the character of a citizen by expatriation." This view was shared by Secretaries of State John Marshall, James Madison, James Monroe and many others. Indeed, also, implicitly by the first Congresses, because when they passed naturalization laws, they required would-be American citizens to renounce their citizenships to other governments, implying in the process, there was a right to do that.

There are those who might argue that the War of 1812 was in no small part fought over this right because the British were impressing former British subjects who had become American citizens, who they found on the high seas, and we thought that was an infringement of their international duty to us and the rights of our citizens.

The Congress in 1868 enacted an act concerning the rights of American citizens in foreign states, which provided in part the right of expatriation is a natural and inherent right of all people, indispensible to the enjoyment of the rights of life, liberty and the pursuit of happiness. Just two years later -- and this act, by the way, was enacted during a dispute we were having -- one of many -- with Great Britain over their principle, "Once an Englishman, always an Englishman." The idea that once you were an English subject, even if you took other citizenship, you still were subject to the crown.

Two years after this enactment, after 1868, Great Britain finally abandoned this claim and recognized that people who accepted other citizenship were aliens, and in so doing, contributed to the development of the customary international law in this area.

Now, let me turn just briefly to the relevant legal documents that give us our legal rules. The international covenant on civil and political rights, which entered into force in March 1976 and was ratified by the United States with the advice and consent of the Senate in 1992, provides in Article XII that everyone should be free to leave any country, including his own.

It then said, "The above-mentioned right shall not be subject to any restrictions except those which are provided by law, and are necessary to protect national security, public order, public health or morals, or the rights and freedoms of others."

Now certainly the right embodied in Article XII, which I believe should be construed to include the right, not only to immigrate, but the right to choose nationality in that process -- the right to renounce citizenship -- this is not an absolute right. It's a fundamental right, but not an absolute right.

For example, citizens who were accused -- were being tried for criminal activity or had been convicted of crimes, serious crimes, or maybe kept behind to serve their punishment or complete the trial; certainly it is also clear that a state may require a citizen to pay any normal tax obligation or other public debt. It strikes me that a key issue here is whether or not this is, in fact, a normal tax obligation that would be applicable to all citizens, irrespective of their wish to immigrate.

If it is instead a special requirement on individuals because of their desire to immigrate -- indeed I was troubled by the Treasury Department testimony just a few moments ago when they seemed to admit that a goal -- a purpose of this law is to keep people from leaving. That is to say, he said their expectation is that people will not go out and pay this tax, but rather they will stay US citizens.

I have to say that troubles me, if this is a special requirement that would not otherwise fall on these people at that time, then it strikes me the government has the burden to establish under the covenant that the law is necessary to protect national security, public order, public health and morals or rights and freedoms of others.

I would note in this connection the Library of Congress Congressional Research Service memorandum on this issue. They tried to get around this by saying the term "public order," is -- and I quote -- "roughly analogous to the concept of public policy, and likely includes such notions as economic order.

However, during the drafting of Article XII, an effort was made to broaden this list to include the terms "general welfare," and "economic and social well being." Those provisions were rejected as being too far reaching. Under the principles of treaty interpretation and the Vienna Convention of all treaties -- this is what they called travaux preparatoire, the preparatory works -- could be considered in the case of ambiguities and I believe it would be very hard to argue that the Convention allows that volume of interpretation given the fact that such language was rejected.

Now let me talk just very briefly about customary international law. Perhaps the most important written document that contributes to the development of customary international law in this area is the 1948 Universal Declaration of Human Rights. To be sure, when the universal declaration was passed as a General Assembly resolution in 1948, it was not intended to be legally binding. But there is a very strong consensus today, I would argue, that the declaration is considered reflective of binding customary international law.

The United States would have no prayer of arguing otherwise, given the fact that we've enacted statutes in this area that embody a very clear rule on this. Article XIII of the Universal Declaration provides that everyone has the right to leave any country, including his own.

Now here, particularly the idea that there is no right to renounce citizenship, I would note that Article XIV says "No one shall be arbitrarily deprived of his nationality, nor" -- and this part is important -- "nor denied the right to change his nationality." It strikes me this is clear language; and it strikes me that particularly, given the strong history of the United States Congress and American Secretaries of State dating back to our very first Secretary of Foreign Affairs, Thomas Jefferson, have taken the view that there is an inherent human right to expatriation. I just don't believe that it is wise to try to pretend we're not violating the law by pretending there is no such right.

Now, before closing, let me just briefly discuss the Jackson- Vanik Amendment of 1974. A very important statute, as I mentioned, unanimously passed in the Senate and overwhelmingly passed in the House.

It resulted from a series of measures the Soviet Union placed primarily in the way of Soviet Jews who wished to immigrate and set up -- change their allegiance to the state of Israel. It was broader than that, but it's real underlying purpose was probably especially aimed at Jews.

Among other things, Moscow announced a diploma tax. The argument was fairly simple. The argument was that these doctors, scientists, technical skilled people received a free education "Because we assumed they would be in this country for many years to come and they would pay us back through their service to the state. Now they're going to take that special benefit they received from the state and move to Israel. Therefore, we're going to require them to pay" depending on -- it was on a sliding scale, depending on the scale and how long they had been practicing, between $5,000 and $25,000. But in addition to that, there was also a 500 ruble citizenship renunciation fee that they also had to pay before they could leave.

As enacted into law, the Jackson-Vanik Amendment would have denied most favored nation trade status to any non-market economy state which, among other things -- and I quote, "imposes more than a nominal tax on immigration for any purpose or cause whatsoever."

Again, certainly when I use the word immigration in those days I was thinking in terms of the process of a Soviet citizen leaving the Soviet Union, moving to Israel and becoming an Israeli citizen and severing all relationships with the Soviet Union. Although I acknowledge there is a technical difference between immigration and expatriation, I think most people who used the word in those days were considering both as part of the process.

Second, and I quote again "imposes more than a nominal tax as a consequence of the desire of such citizen to immigrate to the country of his choice." Now, that strikes me as being very difficult language to reconcile with this language. What we were saying is, when you declare your desire to immigrate, or to expatriate, if you will, we have been imposing a tax. I gather this tax will average out to something like $40 million a person; so, it would be awfully hard to argue that's a nominal tax.

In fact, the Library of Congress Congressional Research Service characterizes this proposed tax as an expatriation tax. I find it just too similar to the Soviet citizenship renunciation fee to be real comfortable with the distinction.

Both -- after all the premise and the idea that the citizen has received a benefit in one state, wishes to leave and take that benefit with him, and that he should pay the state before he goes for the fair value of that benefit.

It is not illegal under international law to require someone who wishes to immigrate or expatriate to pay a normal tax obligation. That's clear. Nor would it be illegal for the United States to tax unrealized capital gains, annually. Just to have a rule that says "Every year we tally up and whatever property you have that might be subject to sale, we would estimate the price and make you pay that."

Similarly, it would not be illegal for the Soviets to charge a fee for providing an education to their citizens. The legal issue arises when this is not done across the board, but rather where people who wish to leave their country and move permanently to another country are treated less favorably than other citizens by virtue of that fact.

Madam Chairman, again I want to emphasize that honorable people can and do disagree on this issue. I've been working on it specifically for -- it will be ten days now -- I may change my own mind as the debate goes on; and you'll hear from other very respected witnesses later today on this issue.

It strikes me that it is not an easy call. I think you've got a difficult task. But, if I could in closing inject a personal element into the debate, I would urge you to move cautiously if you have any significant doubts about this provisions compatibility with international law. Because, candidly, when I balance the importance of upholding international standards of human rights on the one hand against the possibility of coming up with a few billion dollars to help pay off the deficit, my personal values come down on the side of human rights every time.

Madam Chairman, that concludes my prepared statement and I'll be happy to answer any questions at the appropriate time.

CHAIR JOHNSON: Thank you, Mr. Turner. I appreciate your very thoughtful testimony. I think history does matter. I think the effort to be consistent with our own beliefs in these different areas is important. I appreciate your advice to be cautious.

I think it's particularly important in this era when we just passed the GATT agreement that's going to require the nations of the world to respect America's definition of the importance of the individual's property rights, both tangible and intellectual. I think it's very important that we be sure that we act consistently, particularly with regard to uniform values and uniform rights. I appreciate your testimony.

Mr. Norman.

MR. NORMAN: Madam Chairman and members of the subcommittee, I'm here to testify in opposition to the proposal of the administration to impose a new tax on individuals who renounce their citizenship. I'm appearing here on my personal behalf.

I believe the administration, the Department of Treasury and various members of Congress who have been supporting the new proposed expatriation tax have failed to make the necessary public policy case. Only a political case has been made. Not so much here today with Mr. Gutentag, but in the press releases and in the Senate hearings.

As a tax policy lawyer and a tax lawyer working in the field, I think the tax policy implications of the proposed need for this tax need to be examined more closely. Congress should determine why our citizens are considering to expatriate in the first place. It was asked today of this member of Treasury why they never issued regulations. I have to admit it was the first time I ever heard the Treasury or the IRS say they haven't issued regulations because they thought the underlying law couldn't be enforced. We should ask why they haven't issued forms, special forms, to people who expatriate to identify who these 800 people are, for instance, this year.

I think more time, study and hearings are needed to determine if we as a country actually have an expatriation problem. And if so, what's the appropriate response? I think Congress probably has the power to enact a proposed tax or something like this tax. But we need to consider whether we should enact it, not just whether we have the power to just modify it here and there.

Tax motivated expatriation can be discouraged through more positive measures. Lowering the capital gains rate would make a big difference, if not eliminate the motivation for a great many of these people who do expatriate for that reason; more effective estate tax deferral provisions, when you have a death in a closely held business.

Congress should also recognize, as was mentioned here earlier in the Chair's remarks, the dual citizens -- US and foreign country citizens -- often have legitimate, non-tax motivated reasons for renouncing their US citizenship and retaining a foreign country citizenship.

In particular, I suggest that the proposed tax not be adopted for three reasons. They're in my remarks, but just to summarize them: First I think it's bad tax policy with likely detrimental, economic consequences. Some of our most successful individuals who do not yet have a high net worth or appreciation of their assets will now have a new threshold that's going to get them thinking about whether they should expatriate or not, because they've built up too much net worth in the United States, they'll be subject to a limitation on ever leaving the country.

A large number of people, at least in my practice, who are left largely in terms of my own total experience, who've renounced, not for tax motivated reasons principally, but for patriotic, or personal political allegiance or religious reasons. I'm talking about Ireland, Israel and some of the Eastern Block countries.

These possibilities, with the Cold War essentially over; and the Gulf War resolving questions of political and military power in the Middle East, have opened up possibilities for many of our dual citizens, that were not present before or thinkable before.

Second, the proposed tax would discourage foreign resident individuals from becoming long-term residents -- if that's the coverage of the proposal -- or long term residents from becoming naturalized citizens. We're going to have a class of wealthy aliens who are residents who are going to be afraid, just for the protection of their families and economic reasons, not to seek US citizenship; because once they're in the system, they never can leave. They can never make that choice to go back home if circumstances change.

Wealthy foreign individuals who consider countries to which to immigrate -- and there are large numbers of these each year, certainly from the Far East and Asia as we see in California -- they're going to stay away from a country that seems to need an exit tax -- or what is perceived an exit tax, not getting into whether in fact it really is -- the need for such a tax to keep its citizens home. That's just not going to be attractive, it's going to be discussed in international seminars. It's going to be in the China Morning Post -- South China Morning Post -- it's going to be something that's well known to this class of individuals around the world.

The US is going to continue to lose out in competition for economically successful immigrants. It's losing out to Canada, a much smaller country that has many more wealthy immigrants coming to its shores. The relief you have in Canada, even though it has what's called an exit or departure tax, it does have special reliefs for immigrants.

Third, I think this proposal represents a major departure from federal tax policy. We need to think about what this means in terms of our tax duty relationship. Time is needed to renegotiate these treaties. We just finished a long negotiation with Canada where we had to accommodate their capital gains tax, which is a form of exit or departure tax, with our own estate and gift tax section. It's just difficult and takes time if we're going to go this route.

We don't know really what the policy basis is for these various thresholds, and why are foreign assets in the base. They were not essentially in the base in Section 877, the section we're talking about. Why is there no indexing of exemption amounts? Why don't we treat all expatriates the same, instead of only those with appreciation? Maybe the whole threshold should be on net taxable estate.

If we're talking about the super rich leaving, why not use something like $10 million, which is where our highest estate tax rates come in? In the meantime, I think we ought to encourage the IRS to enforce the current law. They should issue regulations. They should develop compliance procedures.

If we must change 877 because it's not enforceable, I have some suggestions which are not in my remarks, but if you'll just bear with me for a moment. We could change the presumption of correctness in the statute, to the IRS as they have in intercompany pricing cases under Section 482. It would be presumed correct and it would be up to taxpayers to show they didn't have a tax motivation.

We could have regulations that define tax avoidance. The Treasury just did this in proposed form with respect to the multi- party financing regulations under Section 7701(l), and define what a tax avoidance plan is. We could have reporting at the time of expatriation. File a balancesheet, a statement supporting why the expatriation is not for tax avoidance purposes.

We have similar statements now with respect to non-aliens who claim to have a close connection with a foreign country. They have to file a statement. We could provide that these individuals will be continued residents of the United States, if they stay -- or have a physical presence in the United States beyond 90 days in the next three years so we know they really have gone and they really are serious about their expatriation.

We could even have changes in our immigration laws so that these people would go to the back of the line so they don't come back in and get green cards and even citizenships in some short period of time. Maybe a five-year period where they couldn't apply for a green card. Why should we expatriate them and then have them come back through our system?

I think, just to close up, there are very few dual citizens who will make the choice to go to a foreign country. But I think we have to respect the fact that for some individuals who do not have tax motivation -- in their own view, it is the right choice -- we should respect it. Our country was founded on people who made such a choice and those who made the wrong choice. If you go back in history, they went to the Bahamas, Bermuda, Turks and Caicos. These very places that were mentioned in the Forbes article that the Treasury representative referred to. But look how many people are there, just a handful, just a handful where the ancestors to these people who made that choice at the time our country was founded.

That concludes my statement.

MR. HANCOCK: Thank you. I'm going to take this opportunity just to underline one item, Madam Chairman, if you will give me the privilege.

CHAIR JOHNSON: Go right ahead.

MR. HANCOCK: This one sentence that you have in your testimony, Mr. Norman, that says, "If the policies of our country are driving our rich citizens to expatriate and encouraging the alien poor to immigrate," I mean, we really have a problem. You should have emphasized that a lot more.

MR. NORMAN: I was trying to tone down the rhetoric in response to the other member.

CHAIR JOHNSON: Mr. Heller.

MR. HELLER: Thank you. Madam Chairman and members of the subcommittee, I'm here today to testify in opposition to the President's budget proposals to impose a tax on United States citizens who renounce their citizenships and long-term resident aliens who give up their resident status.

I am testifying in my personal capacity. I would like to submit my statement for the record and will take this opportunity now to summarize some of my -- some of the key elements of my statement.

I feel that the administration's proposal is deficient and unnecessary for several reasons, many of which we have heard today. I feel the most compelling are, number one, the Treasury has failed to issue regulations or take any serious measures to improve enforcement of Section 877. We've talked about that many times today.

We have an existing statute. The statute has been around for almost 30 years and yet testimony by Treasury and other witnesses has confirmed that nothing has been done about it. Let's use that statute. Let's take a look at it and see how it can be used to put a -- to work with some of the perceived problems.

Number two, the proposal fails to recognize the need for the international coordination of taxes. This is a complex area. It needs further study and analysis. The proposal fails to -- excuse me -- the revenue estimates are based on flawed assumptions and are thus incorrect.

Finally, the proposal fails to recognize and adequately address the various administrative problems that will result from the new tax regime. With regard to Section 877, as I've indicated before -- and this is the current statute -- I find no evidence to support the proposition that the existing rules have been tested and are ineffectual.

These expatriation tax rules were originally enacted over 30 years ago, as I've indicated. What were they designed to accomplish? These rules were designed in Section 877, which is attached as an exhibit to my statement, to impose a tax on US citizens who expatriate. That's what we're talking about today.

Basically, it was designed to impose a tax over a ten-year period in areas that are not otherwise covered by the normal tax regime. Non-US taxpayers are only taxed on their US source income. The 877 went one step further and attempted to impose a tax on US citizens who expatriate by adding a restriction and imposing a tax on their assets that are sold during that ten-year period, assets that may otherwise not be subject to taxation.

This was the purpose of the statute in 1966. It's covered by the regulation -- by the committee reports. Why does the Treasury feel that this section needs to be overhauled? As one of their reasons, they have cited that the burden on the Treasury is too onerous to establish the tax avoidance motive. Let's look at that.

There are several situations where in the past the burden has been shifted. Maybe we ought to take a look at shifting the burden to the taxpayer, or as Mr. Norman indicated, providing guidance so that we know under what situation they burden will be imposed.

The imposition of tax must wait until the property is actually sold requiring the IRS to monitor these transactions. That is another perceived problem with the current Section 877. Well, in the Treasury's own testimony they've indicated that this would be a problem with the new proposed Section 877.

There are many ways to monitor the transaction short of issuing an exit tax. An interim measure is a little bit of an overkill when the current statute hasn't even been utilized. I won't go into the details now, but if you look at my statement, I've indicated ways that the IRS and Department of State can coordinate their efforts to monitor these expatriating citizens and to find out who's paying their taxes and who isn't; who's filing returns and who isn't.

Mr. Norman indicated, and I support, the idea of filing a statement when you expatriate, and providing the IRS with information. After all, this is a voluntary tax system. We do base our entire system on voluntary compliance.

As I've indicated, the proposal fails to recognize the need for international coordination of taxes. Much has been said about this. I'll only state that I feel this requires considerable study. Analysis needs to be made of the various tax treaties. I think there's a serious problem involved with double taxation. If you tax the US citizen now, and then when he sells his assets when he is a resident of another country, he's going to be subject to a second tax without the ability to use any of the credits that are now available. This is going to create a real treaty problem. I think maybe it can be worked out, maybe not; but it's part of the administrative nightmare that we're looking at.

What about the fact that we're trying to tax our citizens on a nonrealization event? Take the hypothetical situation of Mr. A who has an interest in a closely-held corporation. If he expatriates, then he may be forced to pay the tax without having the cash to -- or the cashflow to pay the tax. Where is he going to get the tax? Where is he going to get the funds? Is he going to have to liquidate his business? Is he going to have to borrow from the bank? Is this going to further skew our national economy?

Yes, the Treasury has suggested that maybe under certain circumstances -- specifically Section 6166 of the Internal Revenue Code -- this individual would be able to defer his tax maybe five or ten years. But he's deferring his tax. He's still paying interest on that deferral. If you look at Section 6166, it's not a full deferral, but it's basically an installment payment of the taxes. So it doesn't solve the problem at all.

Somebody mentioned earlier today that death is a nonrealization event. Well, that's true. However, as an estate planner practicing in this area for over 25 years, we learned to plan to pay for the taxes in the event of death. Life insurance is available, and there are other planning techniques that help eliminate this nonrealization event and provide for the liquidity that's necessary in the situation. There's no liquidity provided with this exit tax that's being proposed by the Treasury.

We're very aware of the flawed revenue estimates and the assumptions here. I haven't heard anything today that changes my concerns in this area. I feel that there is nothing that really has convinced me that the $970 million that has been projected by the Treasury they raise in five years from the 24 taxpayers will ever be realized. I think this is a real concern and something that has to be fully analyzed.

Finally, I think we have to look at ways to encourage our citizens to stay here, fix the problems at home, reduce the capital gains rates, as an example; work on our other problems. Let's see why these citizens are leaving. Let's conduct studies in this area.

I think that with the proper analysis and proper study we can work together to solve a problem that can be readily solved without taking these extreme measures.

This concludes my remarks and I'll be glad to answer any questions.

CHAIR JOHNSON: I thank the panel for your thoughtful testimony. I have a number of questions. I'll start with Mr. Turner. At least I think I'll start with Mr. Turner. I think I'll have to come back to Mr. Turner, I can't find my notes.

Let me start with the other two panelists, first, then. Both of you raised the issue of enforcing the current law. Why is it the administration can't tell me what number -- tell me anything more about the numbers of people who have given up their citizenship in the law few years? They can't tell me anything more in terms of their assets or any information that might be relevant to whether this law is important, whether it will work, whether it will produce revenue? Why can't they tell me that?

MR. NORMAN: I don't know for sure, but my educated guess would be that they don't -- at the time people expatriate, they basically do it by going before a US consulate outside the country; and they do it before a consulate officer and not an IRS officer. So there's really no coordination between the renunciation of citizenship -- which is usually done by signing a note outside the country -- and the IRS' filing.

CHAIR JOHNSON: Well, what about these forms that you referred to that they would have the power to develop under the current law?

MR. NORMAN: I'm suggesting that they have such forms. We do it, for instance --

CHAIR JOHNSON: They don't have forms currently. If they had had these forms, couldn't they probably -- if they had those forms -- give me a lot more information about who's renouncing and what their assets were?

MR. NORMAN: What I'm suggesting is that they have a statement. A statement which says "I am renouncing," and set forth the reasons why it's not for tax motivation, just as they do now if you want to establish as an alien that you're not a resident. They also could have a balancesheet, as they do when you say, "I can't pay my tax."

People file returns and say they just don't have the money. There's a special form to set forth here their balancesheet. To use that same concept and add a second page to this form so we would know who's expatriating at the time they're expatriating. You would know why, or at least their statement as to why; you would know what assets they have and you would know whether it's worth while auditing that particular case.

I think now they just don't know until they read the Forbes, or whatever, or The Wall Street Journal. There's not an effective tie between the applicant renouncing --

CHAIR JOHNSON: And they could have the information that we need to make rational policy. We don't have it because there's been no effort -- there's no law. That's the conclusion I'm drawing from the testimony. That they could have adopted regulations. They could have had forms.

If they had done those things, we would have a different --

MR. NORMAN: I think they have the authority and general regulatory power to issue regulations that would require these taxpayers to file a special form. We have a special permit when aliens leave the country where they have to file a tax return under certain circumstances when they leave the country. I don't know why we couldn't have a similar procedure for a citizen to expatriate.

Again, I haven't worked with the IRS or Treasury, so I don't know the specifics on why they don't now.

CHAIR JOHNSON: Mr. Heller, do you have any comment?

MR. HELLER: Well, I think it's significant to note that the IRS has a complete filing of stop filers. These are people who are no longer filing tax returns. Now a lot of these are the result of the death of the taxpayer. But it would be appropriate -- and I think I would suggest that one approach would be for the IRS to do a cross check with the State Department of those stop filers with those US citizens who expatriate.

CHAIR JOHNSON: Thank you. Mr. Heller, in your statement you mentioned that disincentives to move to low tax jurisdictions are understated by the Treasury. Could you enlarge on some of the disincentives to move to low tax jurisdictions?

MR. HELLER: Well, one of the major disincentives is the lack of adequate medical facilities. Many of the individuals that may expatriate and go back to their homeland behind the former Iron Curtain, or go back to Cuba, these are older citizens. They don't want to be living in BVI or Turks and Caicos or the Bahamas. I don't know, you know, how often you've been down there, but I wouldn't want to get sick on one of those islands.

In fact, we have documented cases where some of the wealthier people who did move down there have returned to other jurisdictions because of this real problem.

CHAIR JOHNSON: Also, both of you spoke about the need to look more carefully at how this change would affect other international agreements that we have. Could you give us more specific examples of problems that would be created by passage of this legislation for already negotiated tax treatments? How many would we have to renegotiate? What would be the -- how substantial would the issues be? How complex have those negotiations been in the past?

You know a lot more about this than I do. Give us some insight into what passage of this kind of a provision would do to agreements already in place?

MR. NORMAN: I think our best example is the negotiation we've just concluded with Canada. They have a capital gains tax which is imposed when you give up residency in Canada or when you die. That's really a replacement for their estate tax.

We have Canadians who are in the US who would be subject to their capital gains tax and our estate tax, and there'd be no corresponding credit, because one tax is an income tax, and one tax is estate tax. You don't go out crediting across those kind of taxes.

CHAIR JOHNSON: The negotiations protect people from double taxation?

MR. NORMAN: That's right. The country that would be most important for this -- although there are others that I can think of just from my own practice -- would be the UK, New Zealand, Canada, Australia, France perhaps, Switzerland and Germany. There are a number of these countries -- at least from my practice and from people that I know in the area -- where these issues would arise.

So there's at least -- I think we have over 40 treaties, but not all of them necessarily have a lot of these type of expatriates.

CHAIR JOHNSON: I have some other questions, but I will yield at this time to my colleague, Mr. Hancock.

I also would like to welcome my colleague, Mr. Herger. We don't have votes today and I appreciate the time of my colleagues.

MR. HANCOCK: I'm glad we have two witnesses that are actively practicing -- in fact, all three of you are actively practicing tax law, but Mr. Turner, you are not a tax attorney. Is that correct?

MR. TURNER: That understates the case, sir. I know nothing about tax law.

MR. HANCOCK: Okay, but the other two gentlemen are actively practicing.

Let me ask you this, but you are an expert in international law, Mr. Turner. Do you know of other governments that actually prohibit - - not the taxation, but prohibit the transfer of assets? In other words, they say, "Okay, you can leave the country, but you can't take anything with you."

MR. TURNER: I don't know. My primary area is public international law and what you're talking about is internal foreign law.

MR. HANCOCK: Okay, then let me ask Mr. Heller or Mr. Norman. Isn't this true in some countries, especially the third world countries, where they prohibit removal or the moving of assets in and out of the country, which -- is that not correct? In fact, hasn't that been one of the problems down in Mexico?

MR. NORMAN: That was one of the problems in Mexico. South Africa had exchange controls. The exchange controls are now coming off in many, many countries. Most of the countries where we have trade relationships don't have really significant exchange controls, but many of the lesser developed countries --

MR. HANCOCK: Historically, in your judgment is the restrictions upon the free flow of funds one of the things that has kept those countries in the economic condition they're in, because nobody wants to go in and invest in a country when they can't get their money out of the country?

MR. NORMAN: Well, clearly. When you talk about a US company or US individual investing in a foreign country, that's the very first question we talk about. First the tax treatment and then, "Can we repatriate our property if we make money or even get our money out of the country if we sell it out?"

MR. HANCOCK: Wouldn't this bill that's being introduced by the administration create a little bit of that question in an individual's mind when they talk about investing or coming in or making this money here in the United States, that he's going to have to be taxed ahead of time? Would you agree with that statement?

MR. NORMAN: It's going to be perceived as an exit tax. I think it's mostly on individuals and not -- high net worth individuals are going to look at this tax and say, "I don't want to get into this system, because I can't get out without having this sale, which is going to cause some of the cashflow problems that Mr. Heller's talking about, as well as the tax.

So, there's going to be a barrier. It's going to be talked about in newspapers, business magazines, it's going to be in tax seminars. This is going to become a major topic of discussion when somebody thinks about investing in the United States. It's going to be negative.

MR. HELLER: And I might add, if I may, that when we're sitting down with a client from a foreign country, inevitably, that's one of the questions that come up, "Will there be any restriction on the free flow of funds?" Many of these individuals have had very negative experiences with other countries.

MR. HANCOCK: Since we -- this is just now beginning to get a little publicity -- I heard about it a few years ago when there were certain people who were not only considering moving or expatriating, moving their citizenship; but also moving their assets, their offshore tax shelters and what have you. You know, it's been going on for a long time. We've all heard the stories about the secret bank accounts in Switzerland and what have you.

In the past few years in your practice -- and I know there are a lot of wealthy individuals out there on that golden shoreline over there where you're from, the Los Angeles area -- are you finding inquiries from people? Is the publicity on this issue starting to cause people to call you and say, "Hey" -- I mean, you've got a lot of people living out there with $25 to $50 million, which is a lot of money, but not all that much. Thirty years ago, it was a lot of money.

Are you getting more inquiry in this area?

MR. NORMAN: I think what I'm seeing is we have more what I call multi-national families, families were all the members are not citizens or residents of single countries. We have Taiwanese, Hong Kong, Indonesians, Phillipine people coming to the United States. Their parents may stay back in the home country. The children may not all come to the United States. Some may go to Canada, some may go to the United Kingdom. Those people are concerned about these kinds of measures; and also the measures that are in the broader administration proposal.

In terms of people worried about moving assets off shore, some people are worried about tort liability and using the foreign trusts as asset protection devices. There's no tax advantage for that. It's more protection for future creditors. We do see that.

In terms of people worrying about capital gains taxes, every year in my practice -- we probably have half a dozen people or so on the west coast that have some reputation and advise in this area -- every year or so, we get a half dozen or so people who are either worried about capital gains or worried about estate tax. Very few of them, once you get the whole picture out in front of them, are interested in expatriation.

It requires a major change in lifestyle. I had a 90-year old woman, whose children thought it was crazy she was even thinking about it, and she never did it. It's just not practical for an estate tax avoidance device for most people.

Capital gains taxes, people were concerned when tax rates started creeping up after the '86 Act and there is interest in that area. There are a few -- I think in the Treasury's words, there are 24 people. There are a few and there are some on the west coast who are concerned about that capital gains tax. If that rate were reduced, I don't think the interest would be there.

MR. HANCOCK: I'd just like to make one comment. Almost ever since I've been an observer of what's been going on in this country, also especially since I've been here in the United State Congress and the rhetoric that I've been hearing up here, especially right now. You've got to be in favor of taxing the rich if you're going to be politically correct.

That theory of tax the rich started, what, a hundred or so years ago with the socialist concept and redistribution of wealth. It would appear to me -- and I'm just going to make a statement, I'm not asking you to make a comment -- it would appear to me that this is another move on the part of certain people to get back to that period where "They're not entitled to accumulate all this big money. They had to be dishonest or something."

Anyway, with that, thank you, Madam Chair.

CHAIR JOHNSON: Mr. Herger.

MR. HERGER: Thank you very much, Madam Chair. Just to follow up on that line of questioning.

We'd like to think that here in America the idea is that people could work hard, be entrepreneurs, work hard in their business profession and do well, and hopefully not be taxed of everything that they have if they happen to reach that point. But I'd like to, again, in this same line of questioning thinking back to several years ago, when members of that other party were controlling both the House and the Senate, we had in the same vein the luxury tax.

We were really going to sock it to those people who acquired anything that was close to a luxury. See what we did to the yacht business? We basically destroyed the yacht business. People did not continue buying yachts with the high taxes. We saw an industry, basically, go out of business over a couple years before we finally repealed that. People just didn't buy. We had people on welfare then, who were paying taxes prior to that.

I guess, in this line -- I'm just interested -- Mr. Heller, getting down to the reality of what your advice would be to your clients who would be in this, perhaps, situation of renouncing their citizenship. What would be your advice to someone who is currently a citizen who would be considering renouncing their citizenship to go to maybe the land where they originally immigrated from, for example, if this tax bill were to go through?

MR. HELLER: Well, if this tax bill were to go through and I was advising an individual who was considering expatriating and moving back to their foreign homeland of Czechoslovakia or Hungary, I would have to advise them what the tax consequences would be. We would have to sit down and actually evaluate their assets, do something that we wouldn't have to do now because the problem is they may want to leave the country or give up their citizenship, but they may want to continue owning the business. If they continue owning the closely- held business, then we will, as US -- the government will continue to collect taxes from this business.

If on the other hand they're required to liquidate the business in order to pay the taxes, then everybody's a loser. They're a loser and we're a loser. The question really is, does this discourage or encourage somebody to do this by imposing this exit tax? I suggest that it isn't the proper approach. The proper approach is to work within the current system, within the current statute, and allow these people to pay their taxes when there is a realization event, when they sell those properties.

We can put in the necessary checks and balances and do some of the administrative things, working with the existing statute.

MR. HERGER: Let's say if they were to do that -- if these individuals were paying the same amount of taxes -- well, they are currently citizens, so therefore, they're paying the same tax as anyone else.

Let's maybe look on the other side of the coin somewhat. Let's say there's an immigrate that's considering coming to this country, considering it's someone with business skills, someone who's a professional, for instance; someone who, theoretically, is going to be adding to our society here, like so many of the immigrants.

My grandparents, two of my four grandparents were immigrants to this country. My father didn't know any English when he started school. That was common in those days. It's not an uncommon thing today, nor was it then, nor was it since our country was founded.

But let's say those immigrants who are considering coming here, what would be your -- would you have recommendations for them that would be any different were this legislation to go through than what it would be now? Maybe Mr. Norman or either one of you would care to comment.

MR. NORMAN: Clearly, what you'd have to say if it were a high net worth individual, "You've got to think twice about getting into our system." You know, if the scope of the proposal covers only citizens, then you're only worried about those individuals who convert or become US citizens, because that's -- only those taxpayers would be subject to taxes later if they returned to their own country.

If you're talking about the scope of the provisions to cover long-term residents, we're going to advise against long-term residency, if taxes mean anything to them.

At this point, when somebody's just considering immigrating to the United States, they're in a decisionmaking mode. They have a choice of coming to the United States and being stuck in a tax system that doesn't let them make a second choice, so to speak, to reevaluate whether they really want to be long-term residents or not for other reasons which may or may not be tax motivated; then they have Canada, which is very friendly toward new immigrants.

It gives them a new tax basis the date they become a resident. It allows them to set up trusts, pre-immigration trusts that will not end up being subject to tax for five years if they change their mind, as many Hong Kong people have. They come to Canada, they stay there three years. They get their citizenship -- which is what they want, because they're uncertain about the status of Hong Kong. Now they have Canadian citizenship and they can give up their residency, and Canada has not imposed a tax.

Those are the places they're going to go. They're going to Australia. Even if they have exit taxes in Australia, as Treasury pointed out. They're very friendly toward immigrants.

This provision, at least the original version of it, is not going to long-term immigrants -- Long-term residents remain aliens -- and it clearly is not going to those who become citizens. Often people retain dual citizenship and at some later date -- retirement, change of circumstance at home, change in opportunities at home, political changes at home -- it doesn't have to go as radical as Communism to non-Communism, but political changes -- they'll go back home.

It's certainly more convenient for them to just be a citizen of one country; and they often do that. It's not because they're traitors to our country, it's really they have dual loyalty from the beginning and they're just making a choice. I think you're going to have a lot of these people not want to come here, and clearly not stay here a long time; and certainly not convert to becoming a citizen.

That's going to be on every immigration lawyer's checklist, the tax consequences of becoming a citizen. If you're in the system, you can never make a second choice. You can't go back to Switzerland. You can't go back to Israel. You can't go back to Hong Kong or wherever it is. You're in it.

That could be a big thing, because these people are not only concerned about their own wealth, but passing things on to their children, giving their children a start in life. If they have a big family, the $600,000 depreciation doesn't go a long way if you've got a really big family as some of them do.

MR. HERGER: Well, thank you very much.

Again, as I reflect back on my heritage, I think the greatness of this country is really on the freedoms, the freedoms of choice. What I'm concerned about in this type of legislation is that we are taking away many of the freedoms because of what penalties that are being inflicted on those who could contribute to our society; and I think we should all not make this action lightly. We should consider the dynamics.

I thank you for your testimony here today. Thank you.

CHAIR JOHNSON: I have just two more questions that I want to ask.

Is it possible for two people who have similar histories of earnings and assets to be taxed differently under this law?

MR. NORMAN: This law taxes two things, it taxes people who make a choice, practically as dual citizens, because nobody's going to give us US citizen that has no other citizenship.

It taxes that and also taxes -- only taxes if you have appreciation that rises to some threshold level. So you could have persons who have high income potential and are making a lot of money, but they've been spending it or have not been investing it in ways where it created appreciation. Those people slip right through the system, if you will.

CHAIR JOHNSON: This doesn't treat all people the same, according to income. This isn't a tax on their net worth, it's only a tax on their gain?

MR. HELLER: It's a tax on their built-in gain. Somebody inherited --

CHAIR JOHNSON: So, two people can have exactly the same asset profile and not be subject to the same taxes?

MR. HELLER: if you inherited, say, $5 million and get a new stepped up basis, if that person wanted to expatriate, under this provision they wouldn't be taxed. But if the same person had $5 million in assets, and it represented a build-up in a business over time, then that appreciation would be taxed.

CHAIR JOHNSON: I think that's very important to recognize. This isn't about just rich/poor. This is really -- actually not even about equity. This is about looking at a very specific type of gain and going after that specific type of gain.

This will not prevent people who have high value assets in this country or high income from not escaping if they care to, as long as they don't have a net gain.

MR. NORMAN: I've had situations where people, because of the recession in the real estate market, or because the stock market changes, or they might have a very huge total net worth, they have no net appreciation or very little.

CHAIR JOHNSON: So, what you might advise a client is, when you have a big loss impending in some part of your portfolio and want to offset it, then you can change your citizenship or denounce your citizenship without any tax consequences. But if your portfolio does well, don't renounce.

MR. HELLER: What's going to happen is you're going to have a new planning technique. If you're going to make a lot of money in the future, get out now; of if you have, as you suggested, losses that offset gains, now is the time to expatriate. I don't think we want those kinds of incentives in the law.

CHAIR JOHNSON: One last question to Mr. Turner.

Mr. Turner, you really pointed out some very powerful phrases in legislation and in international agreements to which we are a party, that make it very, very clear that we have taken the position that people have a right to citizenship and have a right to change their citizenship.

I thought the portion that you pointed out from the Section 2432 that says that "No country shall have the right to impose more than a nominal tax on immigration, or on the visas or other documents required for immigration for any purpose or cause whatsoever." Or, it goes on to say, "impose more than a nominal tax, levy fine, fee or other charge on any citizen as a consequence of a desire of such citizen to immigrate to the country of his choice," was very powerful.

When you put that up against the assumptions behind both Joint Tax's estimates and the Treasury's estimates -- because we just had testimony from Treasury that they thought their assumptions were the same as Joint Tax's assumptions.

Joint Tax's assumptions are that this levy will be significant enough that people will decide not to change their citizenship, not to relinquish their citizenship. We get the money because they continue to pay what they are currently paying.

Now, a fee that is so powerful that it would lead you to not relinquish when you had desires to relinquish seems to me in very direct contradiction of the laws and agreements that you have called to our attention. Do you think the assumptions behind their estimates do call into question our commitment under these treaties?

MR. TURNER: Madam Chairman, I think it raises a real serious problem. I think the United States has led the world in some respects in this area, in the right of citizens not just to travel, not just to spend a weekend in the Holy Land, but to actually pick up and renounce their citizenship in one state, move to another state, settle there permanently and pledge allegiance to that state.

I think one can argue technically that perhaps you can get around the covenant. I think the convenant is arguable one way or the other. Having spent an awful lot of time working on the Jackson-Vanik Amendment, I really have a lot of trouble trying to get around that. It's very strong language for any purpose or cause whatsoever.

Again, I can say from my own recollection having worked on it 21 years ago, my strong sense is that Scoop Jackson and the other people involved in this were talking about affirming the right, especially of Soviet Jews, but of anyone in the Soviet Union to renounce that citizenship relationship, move free of molestation to another state and set up a new life there and be totally free of any further control by the Soviet Union.

If we say, "Well, yes, they have the right to travel, but they didn't have a right to give up their citizenship." In theory, the Soviets can require them to come back for military service, for taxes or for a variety of other things in the years that followed.

One of the problems we had in this country that so upset Jefferson and led Congress to pass the statute I quoted back in the 1860s, is if someone comes to the United States and establishes American citizenship and then travels back to Ireland and they deny this right to renounce citizenship, this right of expatriation, then they start seizing that person and saying, "You owe us taxes," or "You owe us military service," or, "You owe us some obligation." The United States government has historically said it's simply not within their rights under international law come here.

Again, you're going to hear from Paul Stephan, who's a very able scholar, a very bright man. He's going to disagree strongly with me, but he may well be right. Professor Botts has submitted a letter. I talked to Professor Lou Hinkin, a very distinguished scholar at Columbia University. Lou told me he didn't see a problem here.

So, it may be that I've only had a few days to look at this that I've been misled, but it strikes me the stakes are so important; and relatively speaking, what we're talking about here is trivial. I know a billion dollars is a lot of money. But in terms of human rights values that this country has stood for since the days of Thomas Jefferson, a billion dollars or two toward the deficit is not worth sacrificing one iota of human rights, in my view.

CHAIR JOHNSON: I very much appreciate your being able to testify, and as you pointed out, on very short notice; but these are big enough issues. Underlying this proposal are some very big issues, both in terms of our historic commitment to human rights, of our international obligations, of the concept of equitable treatment of taxpayers in similar circumstances, and of what kinds of incentives are we going to create for investors in our economy that, even on short notice, this is worth the kind of attention that we are giving it today, and I hope that you will give it in the months ahead.

I would conclude this panel with one of the things that you have brought out that has been very useful to us: this would create new and perverse incentives for people to relinquish their citizenship before they hit the threshold, if they were likely to hit it, so it would precipitate that decision early, which means we wouldn't get the money nor the penalty, either one. In not many years, that will all come to pass.

Unless the panel has -- the members have more questions of the panel, we'll move to the next one. Thank you very much for your testimony.

The next panel consists of Stephen Shay of Boston, Massachusetts; Paul Stephan, Professor at the University of Virginia Law School; Carlyn McCaffrey, New York; and Rabbi Jack Moline, vice president, Washington Board of Rabbis.

We'll start with Stephen Shay.

MR. SHAY: Thank you, Madam Chair. Thank you and other members of the subcommittee for inviting me to testify today regarding the administration's proposal. I'd like to submit my statement for the record.

I am a partner in the law firm of Wilks & Gray in Boston, where I practice international tax law on behalf of US and non-US corporate and individual clients. Prior to joining Wilks & Gray in 1987, I served as international tax counsel for the US Treasury during the Reagan Administration.

I am testifying today in an individual capacity. My comments are not made as a representative of either my law firm, its clients or of any bar or professional association of which I'm a member. I have submitted really quite detailed comments, which I propose to summarize here, subject to some technical modifications in those comments, I strongly support the administration proposal.

I think it's helpful to keep this simple. The United States taxes citizens and residents on their worldwide income. We tax non- residents only on source income. I think it's appropriate for the United States to tax appreciated assets at the time that a citizen or resident is moving from full taxing jurisdiction to partial taxing jurisdiction, for reasons I'll describe very briefly.

This is a vast improvement over the current law. Because it accurately measures and poses US tax upon the appreciation that has accrued during the time the taxpayer is subject to full US taxation jurisdiction. I express this view without any regard to the issue of tax motivation. I think you can think of it most simply in terms of you and your neighbor. We'll assume that both of you work very hard and at a certain point in time, you were each fortunate enough to have assets that have appreciated over $600,000.

One leaves the country and renounces citizenship; or if that person is a long-term resident, for whatever reason he took up residence in the United States, but after having been here in excess of ten years under the administration's proposal, he's fortunate by the end of his hard work, like my hard work, to leave in a situation where after leaving he would perhaps sell that asset and recognize the gain of that US tax.

In my view, the gain has accrued up to the point of departure is an appropriate gain to be subject to US taxing jurisdiction. Moreover, I as a person who is here, or perhaps it's you or your colleague, cannot sell that asset without being subject to full capital gains tax at whatever rate it happens to be.

I've made all my remarks in my testimony on the basis of current law, without expressing perhaps a hoped-for view that the law might change in one direction or another. I think in that regard, Madam Chair, this is an issue of equity. The fact is that under Section 877 today, it is avoidable.

A well-advised expatriate should not pay US tax whether he's renouncing citizenship, or if a long-term resident ceasing to be a resident, on assets they have not disposed of before they leave.

The other -- there are a series of technical problems with Section 877 under today's law, two of which I'll mention. Because that section applies in those rare cases where a principal purpose to avoid tax is found -- and I say that's rare because of the case law under that section, which I've cited in my testimony.

In the case where Section 877 is found, it will tax appreciation after the person has left. In my view, the section taxes too much in that case, that's why I favor the administration's proposal as taxing the right amount when taxes are due.

I think I would like to make one last personal comment, which is not in my testimony. I am no expert on human rights. But I've evaluated my views on this provision by a very simple test. My wife and my eight-year-old son, and four-year-old daughter are Jewish. I've asked myself, should they decide to want to expatriate to go to Israel later in our lives, would I feel it appropriate to pay tax on the gains that I've been fortunate to realize as a citizen of the United States up until the time we leave?

My unquestioned answer, Madam Chair, is yes.

CHAIR JOHNSON: Thank you, Mr. Shay.

Mr. Stephan.

MR. STEPHAN: It's Paul Stephan. I've prepared my remarks for the record and I will submit them as they stand. I do want to very briefly make a couple of key points with regard to the international law issues that may be raised by this legislation. I'd like to emphasize two distinctions, one of which I think is significant; the other which might seem insignificant.

I think it's very significant to distinguish immigration from expatriation. Immigration might include expatriation, it doesn't have to. Expatriation means the denunciation of one's citizenship.

If one focuses on, particularly, the human rights conflicts of the '60s, '70s and '80s, I think it's absolutely clear that our focus was on immigration and that questions of renunciation of one's citizenship were tertiary at best. There's been some discussion of the Jackson-Vanik Amendment. One of the witnesses in his prepared testimony suggested that my recollection of those events might be faulty because I was only entering law school.

I'm always happy to have my youth used against me, but I would point out that in 1974, that was the year I left the Central Intelligence Agency to start law school, that my responsibilities at the CIA included political analysis with respect to the Soviet Union, and in particular with respect to human rights and immigration issues. That was essentially my account.

So, I do feel I know some things about the events that inspired the Jackson-Vanik legislation. I am fairly firm in my recollection that one of the articulated concerns of Congress at the time was that the Soviet Union arbitrarily insisted that those who wished to immigrate also expatriated. They were not given a choice as to expatriation.

The concern that they also charged for the expatriation was part of that, but it clearly was the concern that Congress understood at the time that immigration was distinct from expatriation.

Now this is not, I think, a merely technical lawyers' point, immigration means a physical security. Expatriation means an ongoing bond with a country which only can be forced if you come, once again, within their territory. I don't mean to suggest that expatriation is insignificant. It is not. We have had cases where people have expatriated themselves from the Soviet Union, come back as tourists, because they expatriated themselves in the context of World War II and the Soviet Union did not recognize their expatriation and proceeded to prosecute them for what were allegedly war crimes. I think that was improper.

But, that is not at all what this legislation involves. This is an expatriation triggered tax. It has nothing to do with immigration. If it were otherwise, I would have deep concerns about it.

As a tax on expatriation, this gets into another distinction that may seem more like the distinction between international law and consistent US policy. As a lawyer, I look at international law as an obligation that is enforceable by at least some means, if even by the consensus of the community.

I do not find in any of the instruments that deal, expressly, with the right to travel with the right to leave one's country, as an obligation having to do with expatriation. Neither in customary international law do I find a clearly established right placing any constraints on this. On the other hand, it's been consistent US policy that the right to expatriate exists. Whether or not it's recognized by other nations, it has been our policy and I think it ought to be respected.

I do not think it is inconsistent with that policy to impose reasonable restrictions that are not discriminatory. Now, this of course depends on how you characterize this tax. Here I would affiliate myself with Mr. Shay's remarks. I think if you in the abstract could say, "Well, the only people who pay tax on unrealized gains are people who changed their citizenship," but that's discrimination.

But I can flip that and say that the only people who are US citizens, who accumulate unappreciate wealth, who do not have to face either an income tax or an estate tax -- one or the other, not necessarily both -- are those people who change their citizenship. In that sense I think this law, with its imperfections, does simply prevent the expatriating from being treated more favorably than people who remain behind.

Indeed, it's still reasonably favorable compared to the estate tax, because 39.6 percent on the net is a lot better than 55 percent on the gross, which is what the estate is. There are, I think, some technical problems here. I touched upon one, the effective date, in my remarks.

I'll be happy to answer any questions.

CHAIR JOHNSON: Thank you, Mr. Stephan.

Rabbi Moline.

RABBI MOLINE: Madam Chairperson, members of the subcommittee, thank you for inviting me to testify today regarding the proposed expatriation tax.

I serve as the rabbi of Agudas Achim Congregation in Alexandria, Virginia. I've held leadership positions in the Washington Board of Rabbis and the Rabbinical Assembly of the Conservative Judaism. I mention those credentials, not because I represent those organizations in my testimony, I do not. But simply to indicate that my perspective and my concerns are not unusual among the leadership of the Jewish community of the United States and abroad.

I respectfully ask you to reject this tax.

I've spent many years struggling with foreign governments on behalf of Jews wishing to leave oppressive societies for the freedom afforded by our country and others. I traveled to the Soviet Union in 1978 for the purpose of meeting Jews who wanted to immigrate, but were denied that opportunity on the basis of legal technicalities and the most onerous, excess taxes placed on their request to immigrate.

Their stories were heartbreaking. Indeed many members of Congress remember well their own advocacy on behalf of these "refuseniks."

I also have the privilege of serving a congregation whose membership includes Jews from many countries. Among the families is a large extended family from Iran. Restrictions placed on their immigration were so severe, the young and old alike, they had to endure tortuous overland trips and be smuggled out of Iran leaving behind all their possessions.

I might add, this family was well to do in Iran, but they were unable to afford the taxes that were placed upon immigrants. In order to reach freedom, they had to abandon all their property. The few members of their family remaining in Iran live in fear of the seizure of their property and possessions as payment for the immigration of others.

Our government responded to such tactics by taking the moral high ground. The Jackson-Vanik Amendment successfully enacted 20 years ago, used the human rights issue as the wedge for the most accessible crack in Soviet culture. By making clear our willingness to sacrifice gains in trade and influence for the cause of human rights, the United States established itself as the champion of its own principles: life, liberty and the pursuit of happiness.

Now that moral high ground is threatened. A small group of wealthy Americans seeking to avoid the responsibilities of citizenship seem to be a lucrative and popular target for much needed revenue in a time of fiscal crisis. Nobody, including me, has much sympathy for the greed which motivates their actions.

But the abuse of our freedom by a few does not call for legal remedies which lay the groundwork for threatening the freedom of the many. For while we Americans may understand fine lines we draw regarding income, assets, capital gains and tax liabilities, foreign dictators will find them irrelevant. The arguments are the same, we simply draw the line in a different place.

Any number of times I've sat face-to-face with representatives of the Soviet government and heard them defend exit taxes on the basis of repaying a debt to society. The claim was that there had been an investment in the Jews who wished to immigrate. They were educated in the USSR, that they had enjoyed health care, guaranteed employment, housing and security, they served in the military and knew secrets. If they wished to take the fruits of their life away from the tree which bore them, then it was reasonable to reimburse the workers who must remain behind to pick up the slack.

Such ingrates were to be punished for rejecting the blessing of Soviet society. They would repay their benefactors for the decision not to endorse the particular social contract and political agenda of that country.

I've heard the same arguments articulated by a staff member of a congressional committee just last week and I was horrified. This tactic has been used not only by the Soviets and the Iranians, but by the Iraqis and previous government of South Africa, pre-Zimbabwe, Rhodesia, and to add to this rogues' gallery, Adolf Hitler's Germany.

The victims have been the disenfranchised of every ilk, not just Jews, but Baha'is, Christians and Moslems, Black majorities and white minorities. This provision would begin the construction of a wall around this country. The wall would not defend us against hostile invaders, but imprison those who wish to leave. Mr. Gutentag, himself, offered that opinion in his testimony.

The limited application and target population of this provision may look safe in the short term, but the precedent it would set is frightening in its potential to undermine our basic commitment to human rights, and it eviscerates Jackson-Vanik.

I make no representation as to whether this provision passes muster under the Constitution or international law. I also make no representation about whether this is good tax policy. Discussions on those matters will focus on technicalities and twists of language on graphs and on growth theories.

I raise only the over-arching moral question: do we wish to trade a short-term economic gain for the standing we have as the exemplars of human rights, even for those who exercise them in an unpopular way?

I assure you, I wish no peace to those who abandon this great country for material gain. I can live with my resentment of the success of their greed and manipulation. I would be humiliated, however, if I spoke up on behalf of an oppressed minority anywhere, and I will. I had to respond to some smug tyrant who waved a copy of this provision in my face.

I appreciate your willingness to hear my testimony. This concludes my remarks and I'm available for any questions.

CHAIR JOHNSON: Thank you very much, Rabbi Moline.

Ms. McCaffrey.

MS. McCAFFREY: Madam Chair, members of the subcommittee. I welcome the opportunity to share with you the concerns I have with Treasury's proposal to impose a tax on citizens who give up their citizenship.

I'm a tax partner at the law firm of Weil, Gotshal & Manges, a member of the adjunct faculty of law at the New York University School of Law, and have practiced and taught tax and trust and estates law for more than 25 years. I appear today in my individual capacity, and I'm going to talk about tax and trust law.

The proposed legislation would replace the provisions of current law that subject former citizens to tax on US source income for ten years, if the principal purpose of expatriation was to avoid US tax.

The problems with the current expatriation rules are well know. The requirement of the tax avoidance motive provides a reason for not reporting and creates an obstacle to enforcement. The ten years may be insufficient to capture all gain that should be caught; and as Mr. Shay told us earlier this afternoon, tax practitioners have created various techniques over the years that make it quite easy to avoid its reach. These factors have all combined to enable individuals to avoid tax on income and unrealized gain that accrue during period of US citizenship.

I agree that the Code should be strengthened to insure the income and gain that accrued while an individual was enjoying the advantages of US citizenship do not escape US taxation. Treasury's proposal, however, extends far beyond that legitimate objective.

My concerns with the bill relate both to its substance and to a number of technical flaws. As to substance, I'm concerned that expatriation is not an appropriate tax event and with the proposed scope of the tax as well.

The bill treaties relinquishment of US citizenship as a tax recognition event. The event of expatriation, it seems to me, is not an appropriate recognition event, since it produces neither the cash to pay the tax, nor a way of accurately measuring an individual's gain or loss in her assets.

As Mr. Gutentag testified, the bill attempts to deal with the liquidity problem by extending the estate tax deferral provisions of the expatriation tax. These provisions permit the Internal Revenue Service, for reasonable cause, to extend the time for the payment of the estate tax for ten years.

At current rates, deferral requires the payment of interest at nine percent, compounded daily. A taxpayer who defers using this provision will risk incurring an interest obligation to the US that ultimately exceeds her profits from her retained assets. In most cases, this will not be viable or a sensible option.

Although expatriation should not be a recognition event, this doesn't mean that an expatriate should escape US income tax. There are reasonable alternatives that should be explored that are consistent with our general policy of deferring tax on income until collection and on gains until recognition.

One alternative is to require an expatriate to identify the assets she holds at the time of expatriation and to require her to pay US income tax on those assets when they are actually sold or transferred by gift, or at death, to the extent that they're not subject to the US gift or estate tax.

In terms of timing and measurement, the expatriate would then remain in the same position as a US citizen. I think this should be the objective. Collection of the tax could be assured by requiring a bond, or the deposit of assets in the US trust. A similar technique is now required by the US estate tax law in connection with the allowance of the marital deduction for a bequest to non-citizen spouses.

An easier and perhaps better alternative, as several witnesses have suggested earlier this afternoon, is simply to strengthen the provisions in existing law that impose an income tax on an expatriate's US source income for ten years.

The exception for non-tax motivated expatriations could be eliminated, and most importantly, the sections that impose a tax on the transfer of appreciated property to foreign corporations, partnerships and trusts could be amended to apply to transfers by expatriates during the ten-year period. In fact, most of the abuse that centers around Section 877 probably stems from an inadvertant change to Section 367 as part of the 1976 Reform Act.

Before that date, Section 367 would have caught any expatriate who transferred assets to a foreign corporation, but that was changed. Since then, it's been fairly simply to avoid 877 by making transfers of that sort. If these steps are taken, it is likely that the US would tax most of the income and gain that should be taxed, and would do so without creating a new layer of complex Code provisions that would require a long process of technical corrections and regulations be workable.

As to the scope of the tax, the bill treats the expatriating citizen as owning those assets that would have been included in her gross estate if she had died on the date of expatriation or certain interests in trust, including discretionary trusts, and any other interest in property specified by the Secretary.

These categories are too broad, because they reach assets which the individual doesn't own and to which he has no access. Additionally, it reaches property that probably would never have been subject to any US tax at all, if the individual had retained her citizenship.

The bill's application of the tax to a beneficiary's interest in a discretionary trust created by another, reflect the disregard for the reality of those rules of trust law that stand between a beneficiary and the assets of a trust. When a beneficiary is subject to tax on account of her interest in a trust, she won't be able to compel the trustee to distribute assets, nor will she be able to sell her interest in the trust. Unless she has sufficient other assets to pay the tax, this new expatriation tax will make it economically impossible for her to relinquish her citizenship.

In addition to my concerns with the substance of the bill, I have a number of technical concerns that are explained on pages four through nine of my written statement, but I'd like to summarize just a few of them now.

The first four problems that are described on pages four and five can combine to result in a US income tax, a foreign income tax, and a US estate or gift tax on the same amount of gain, all without any adjustment to avoid what could amount to a tax in excess of 100 percent.

As described on page five of my written statement, the bill appears to reach all rights to receive future income, including the alimony rights an expatriating husband or wife takes when he or she returns to his or her native land and expatriates after a divorce. The consequence of this provision is not only to tax the expatriate on the present value of rights to future alimony, but also to deny an alimony deduction to the paying spouse who remains behind.

Finally, as described starting on page seven, no attempt has been made in the bill to deal with the very difficult problem of creating a rational system for the future taxation of the trust and its beneficiaries, after one of its beneficiaries has expatriated, causing a portion of the trust assets to be subject to tax.

Last week Mr. Samuels concluded his testimony on this bill before the Senate Finance Committee by stating that "Americans who avoid their tax responsibilities by expatriating should not be rewarded. Instead they should be asked to pay tax that US citizens will pay sooner or later."

I agree, they should be asked to pay, but a tax paid sooner is obviously more burdensome than one paid later, and a tax paid on assets that may never be received, creates what appears to be an unconscionable burden. To ask an expatriate to assume a greater burden than a similarly situated citizen creates an unseemly exit tax. It punishes a politically unpopular group of US citizens for choosing to exercise their right to give up their citizenship.

This concludes my prepared remarks and I'll be happy to answer any questions.

CHAIR JOHNSON: I thank you very much.

Mr. Stephan and Mr. Shay, you know, that you testified that this fair. You know, we've had a lot of testimony that this isn't going to fall fairly upon people.

I will put two questions to you. One is, why don't we write right regulations about the current law? Why didn't we write forms? Why don't we know of all the people who decided to relinquish their citizenship last year, what the value of their assets is? And, who might be affected by this? Do you think it's good public policy, to change a law in a way that will have both domestic and international ramifications, with literally no information that's reportable about the 686 -- or whatever number of people -- in this category, as reported by the Treasury?

MR. SHAY: Maybe I'll start with a response on the regulations.

As I'm sure you're aware, the resources of the Treasury Department and the IRS aren't unlimited. I can advise you from my perspective that the resources to write regulations for a statute that is currently not effectively enforceable, no matter what regulation you write, it's a waste of time.

CHAIR JOHNSON: Let me pursue that for just a minute. This law's been on the books 30 years. Don't you think it's not hard to write at least a regulation about forms to get the information from anyone who makes a separation to at least know? We've done that in other laws. This is not unique. This is not difficult. We've asked for this kind of declaration in other circumstances.

You know, really to defend the Treasury on the basis that they can't write the regulations because the law's not enforceable, they do that all the time. They could have at least written the regulations that asked for a declaration that says what the assets of these people are, so on and so forth, so we would have the information.

MR. SHAY: Madam Chair, I think earlier in the day there was a lot of comment regarding cost benefit analysis. I think the only point I was making was applying a cost benefit analysis to seek to write regulations that even fully enforced, it would not yield the tax because of the deficiency in the law, but perhaps to impose a recordkeeping requirement that again would not have any effect on the current law in terms of increased revenue.

I could understand the Treasury's perspective of that would be a waste of time.

CHAIR JOHNSON: Would you suggest, then, that Treasury might come to the same conclusion about the new law, because of what the way new law is written and the regulations are written? That anyone in their right mind who's going to expatriate is going to expatriate before they hit the threshold, because it's not going to affect anything anyway?

MR. SHAY: Well, I agree that the new law would not apply unless there was gain in excess of $600,000 and therefore, if -- certainly some planning would revolve around whatever point you place that threshold. I also agree that the new law would have some significant effect, even without regulations, because I think it does have some technical infirmities that I've described in my testimony that would certainly have an immediate prophylactic effect starting from the proposed effective date of February 6.

If I may turn to another question you asked, which was the relationship of the proposal to treaties. Speaking only of income tax treaties, the administration proposal is less intrusive on the taxing rights of foreign governments than is current law.

Under current law, the tax would be deferred until there is a disposition event. Typically -- I mean, as the law is structured, that disposition event will always be at a time when the person selling it is a resident of another country. Now, two things can occur. First, some of our older treaties would prevent the US from collecting any tax on that in the case of long-term residents who move to another country that has a treaty.

Second, some of our older treaties do not preserve the US right to tax, or if they -- I'm sorry -- do not preserve the US right to tax under existing Section 877, because they've not been amended recently enough to pick up that rule.

Notwithstanding -- I described in my testimony that notwithstanding, IRS has tried to impose that tax when someone's gone to such a treaty country and the Tax Court has ruled against them and I think that Tax Court decision is correct and would be upheld by other courts. So, under current law, Section 877 would not be applied effectively with respect to people who change their residency to certain other treaty countries.

There's also been, I think, a very correct reference to the possibility of their being a double tax. I address that in my testimony. First, if after the time a person has expatriated, there is a tax in the administration's proposal. A foreign country taxes that gain again.

Every income tax treaty that the United States has, except one, has an effective mutual agreement procedure that allows the two countries to settle issues of double taxation. In my statement, I have strongly urged the committee to urge the Treasury that if this proposal passes in something like it's present form, that they reach mutual agreements with treaty partners to allow and be sure that expatriate gets full basis for the taxes paid on the gain that was accrued while in the United States, so that moving into the new country, that other country would not double tax that income.

There is no guarantee that this would occur, let me say, but that is an issue. But I would also urge that you combine that with a recommendation to the Treasury that in negotiating all future treaties that they try and include such a provision in the treaty itself, so that there is not the issue of a possible disagreement under the mutual agreement procedure.

CHAIR JOHNSON: May I clarify that point, Mr. Shay? Because you didn't go through your testimony in detail.

Are you saying that with all but one country, our tax treaties are such that they would allow a clarification of this point, though with some further negotiation?

MR. SHAY: What these tax treaties have is an arrangement with the two tax authorities. When the same income has been taxed by both countries, they sit down and they can discuss what the appropriate tax is in order to avoid double taxation. That's the purpose of the treaty and I am saying, yes.

If a taxpayer paid the tax upon exit, moved to a country with whom the United States does have an income tax treaty and were taxed again on the same gain, it would be entirely appropriate -- and indeed I think we should encourage that taxpayer to go to the tax authority and initiate a procedure under that treaty.

The one problem with this is those two tax systems, or administrators don't have to agree. This is not binding, although two of our newer treaties have binding arbitration clauses that would make it binding, but they're not implemented yet.

But, the objective of the tax authority is to avoid double taxation and they should be able to resolve which country is appropriately taxing.

CHAIR JOHNSON: In other words, all but one of our current treaties addresses this issue, though, not in a binding way. You would recommend that we renegotiate all of those treaties so that it is binding, that we make it binding in all our future treaties?

MR. SHAY: I agree, but if I may clarify just one point.

I would recommend that we take as a negotiating position that this be binding in future treaties, but treaties include a lot of benefits and tradeoffs, and I'm not sure I'd recommend that the United States have to have that, because you always have this procedure there. That procedure has been criticized in the past for being slow, but I do think the IRS has worked very hard at improving that procedure and I think that is a relief valve. It's not perfect, but it is an appropriate relief valve for the potential double taxation that could arise.

CHAIR JOHNSON: But it is at the discretion of the other country?

MR. SHAY: It's at the discretion of both countries, yes.

CHAIR JOHNSON: Mrs. McCaffrey, you have a comment on that?

MS. McCAFFREY: Well, I'm not familiar with how those provisions have actually been used and I wonder if they've ever been used in a similar situation where the United States taxes income in one year and the other country isn't going to tax it until ten years into the future.

I had thought the preferable way of dealing with this problem, and my remarks talk about this, is that our foreign credit, tax credit provision should be amended so as to allow the expatriate a refund in a year of later sales to the extent that she would have been permitted a foreign tax credit if she hadn't given up her citizenship.

Because what this provision is now doing is subjecting somebody to a greater tax who's in exactly the same position with one exception. If A and B both leave the United States with the same amount of appreciated assets and move to country X. A gives up her citizenship and B doesn't, A is going to wind up paying a tax when she leaves, B won't. Now when they later sell the asset in the new country, A will pay a tax all over again and B will only pay one tax, because the foreign tax credit provisions now in force will allow her a credit for her US tax against the tax paid to the foreign jurisdiction.

MR. SHAY: Just one -- I think, though, that the tax credit would allow foreign tax credit.

MS. McCAFFREY: That's the point I'm making. But in its current form, that won't work. So, before we implement the expatriation tax, one of the kind of corresponding, technical changes that ought to be made is a change to our foreign tax credit provisions to allow a refund later on equal to the credit that would have been allowed if citizenship hadn't been relinquished.

MR. SHAY: And I respectfully disagree, and I think this is a useful discussion.

Precisely because under the foreign tax credit mechanism with US law, the United States gives a credit for foreign tax imposed on the same gain as tax by the United States when it is considered foreign source income.

So, in other words, we are seeding our taxing right -- the senior taxing rights, so to speak -- of the other country. Frankly, when the tax is imposed, at the time that that person is resident in the other country, that isn't an unreasonable position. But I do think it ends up with the wrong result in cases where that other country's tax is gain that has accrued up to the point of departure. I think the United States should have the primary right to tax that gain.

Indeed, under the mutual agreement procedure we just discussed, I think the right answer for the US negotiators in that procedure is to say to the other country, we respect your right to tax us, but we think you should give a credit for the US tax. That way the US tax base is not eroded, and I think you get to, internationally, the correct answer.

CHAIR JOHNSON: Is there any precedent for that?

MR. SHAY: Yes, not -- well, one, I don't know all the competent authority cases because they're confidential, but I do know one confidential -- I'm sorry, competent authority case that deals with a very analogous point. That has been made public. It's part of the record of the ratification of the US treaty with Canada.

In that arrangement, the United States obtained a Canadian agreement to allow greater depreciation deductions to US drillers, off shore drillers, who brought their rigs into the Canadian waters and then were taxed upon departure. In essence, by recapturing the depreciation in Canada -- denying them while they're in Canada a full depreciation deduction.

The mechanics are very different than what we're talking about today in the context of individuals, but the principle is precisely the same. The mutual agreement procedure was used under the US- Canadian treaty, vis-a-vis their departure tax imposed on businesses, not individuals, to achieve a fair resolution of the taxing rights of the two countries.

CHAIR JOHNSON: Mrs. McCaffrey, has this approach been used generally in the taxation of foreign source income?

MS. McCAFFREY: I'm not aware of many instances where this kind of complex procedure is used for individuals who move from one country to the other, but I think this dialogue is useful in that it points out that I think both of us agree -- and most tax lawyers agree -- that this legislation is creating a problem, a problem of double tax that ought to be cured, perhaps in the way Mr. Shay suggests in treaties, perhaps the way I suggest with the modification of our foreign tax credit provisions.

But, until it's clear that the system is going to avoid the double tax provision, I think the expatriation tax ought not to be passed. This is a problem that needs to be worked out in advance. I don't think we should leave it up to the individuals in the future to negotiate their own tax breaks with the foreign governments in the foreign countries in which they move.

CHAIR JOHNSON: Isn't one of your points that this not only creates a double tax problem, but it creates it over time? In other words, it might create it over 10-year, 15- or 20-year span of time.

MS. McCAFFREY: Part of the problem, of course, is the timing. In the normal course of events, the person who moves to country X and doesn't give up her citizenship doesn't have to pay this tax until an actual sale. But the person who moves to country X at exactly the same time has to pay the tax at the moment --

CHAIR JOHNSON: Then we have a choice. We create a better law that's more enforceable so that we can tax at time of realization whether you're here or there. Or we -- I doubt this kind of situation where we have to solve the double taxation problem over time, and I would suggest that I am drawing the conclusion from this dialogue between you that solving this double taxation problem will be administratively very complex.

MR. SHAY: I think two points should be observed, though. One is, as I point out in my testimony, the current law provides no foreign tax credit whatsoever. It is completely deficit in that regard. So this is an issue that should be addressed.

Secondly, addressing it by waiting until realization, weakens the claim of the United States to tax what I strongly urge the committee to view as its fair share of the income, as opposed to allowing France, Germany or the other country to tax it. Now, frankly, when the other country is the Bahamas, as it is in the case of at least one expatriate, I don't think we should worry too much.

CHAIR JOHNSON: All right. Would you consider quarantining of US assets an appropriate response? Quarantining at the time of expatriation? Then you impose the tax at the time of realization. So you would hold the asset.

MR. SHAY: The advantage of quarantine, as I understand it, is that you're in essence creating a collection mechanism. But it doesn't surmount the problem that I've identified with respect to waiting for realization. Because at that time, they're waiting until the person has already entered the tax jurisdiction of another country. That creates the issue of double taxation.

Take this test, if I may suggest --

CHAIR JOHNSON: But, wouldn't it be easier to solve the problem of double taxation if you're dealing with it at time of realization than if you're dealing with it at two different points? One at, sort of in a sense, proclaimed realization and one actual realization?

MR. SHAY: Not necessarily. One isn't -- for this reason: what the IRS has urged taxpayers to do in the transfer pricing world has at the time that a foreign country, another country, is claiming that the taxpayer has paid too little income to that country because, let's say, it's charged too large a royalty. So, there's a deduction in that country and the US is getting all the income.

The US lags significantly in enforcing -- in doing audits compared to some other countries. The IRS has said, when that country asserts a transfer pricing allocation, you tell us as soon as possible. By the same token, under this regime, a taxpayer could notify the foreign government, at the time of moving there in the first instance -- the treaty competent authority -- and try and set that procedure in place before selling the asset so this issue is something that's dealt with with certainty.

Secondly, I think we are overlooking here the fact that we're dealing with well-advised taxpayers, most taxpayers who have gains in excess of $600,000, and I'd be delighted to advise any of you or others as to how to take some self-help measures to avoid the double tax problem.

To put it crudely -- and I wouldn't advise a client to do this, but just for example for illustration -- if you were that concerned about the double taxation and you really did like the Bahamas as a place to sojourn for a few years, you might stay there for a period of time, sell you asset without tax, get current basis then move to the country where you want to live. This is not recommended.

What's recommended is to let people -- hopefully people don't guide their lives by taxes such as described in here, but I do think there's significant potential for self help here that creative tax lawyers can come up with. The question is --

CHAIR JOHNSON: Wait a minute, Mr. Shay. Did I understand you to say that even if you changed the law there would be ways to advise clients so that they could circumvent?

MR. SHAY: Not so they could circumvent the US tax, but so they could circumvent or avoid the double tax that could occur if they moved to another country.

I mean, this what -- two countries tax laws often don't work properly. There's a great deal of --

CHAIR JOHNSON: Is there anyway we could focus on those whose purpose was a tax avoidance, particularly those whose purpose it was was tax avoidance and who actually came back then and are participating in our economic life quite extensively? Wouldn't it be possible to deal with that issue, specifically, rather than in a sense spreading such a broad net?

MR. SHAY: It is possible, but I think the question has to be asked as follows: this tax only applies when the individual takes a strong, affirmative step, either to relinquish citizenship, which requires that you have to march in and file something with the State Department, or to give up your green card, give up your right to legal, permanent residence status in the United States.

The simplest tax planning of all here, to avoid these problems, is to hold onto your citizenship and to hold onto your green card if you're going to come back. That way you're not going to have double taxation that isn't already relieved by our domestic law, foreign tax credit mechanism, that isn't already relieved by treaties.

The point I think I'm trying to make, Madam Chairman, is quite simple and that is there is -- we're dealing in a world where the tax is potentially so significant that I think individuals will take account of them. I think the equities are in favor of adopting the administration's proposal, recognizing there are some technical changes that have to be made, but I don't think the problems -- I think the problems are in many respects more theoretical than real to a well-advised taxpayer, and I do add that caveat.

But that caveat, I think, is appropriate when you restrict the gain to an excess of $600,000.

CHAIR JOHNSON: Well, I'm going to yield to my colleague, Mr. Hancock.

MR. HANCOCK: I think, Mr. Shay, in one of the comments that you made you mentioned the words "fair share." Quite frankly, I think that's part of the problem that we have with our whole tax law now is that there are an awful lot of people who feel like -- especially the investors, the ones who have made personal sacrifices to invest money and have accumulated assets, now all of a sudden they feel like they are paying more than their "fair share," because of the way our tax law operates.

Ms. McCaffrey, you mentioned in your testimony that you have been practicing tax law for approximately 25 years. Twenty-five years ago -- let's say, 20 years ago, how often did you have anybody even talk to you about giving up their citizenship as a method to avoid or to postpone or change their tax liability?

MS. McCAFFREY: Twenty years ago I wasn't having many people come to me to discuss that.

MR. HANCOCK: What about ten years ago?

MS. McCAFFREY: I'd say it's been within the last five to ten years.

MR. HANCOCK: All right, quite frankly since 1986, would you say?

MS. McCAFFREY: Over that period of time.

MR. HANCOCK: When we got rid of the capital gains tax and when we also went to the 38 percent tax and started getting rid of deductions.

Now we say, well, our tax rate is actually less now. Even though it's at 38 percent, it's less than it was at one time when it was up to 40 percent, yet at that time you had deductions. Now you don't have any deductions except the interest on a residence. That's about it.

MS. McCAFFREY: Those few clients of mine who've expressed an interest in perhaps expatriating for tax reasons -- and I do emphasize that there have been very few -- have been at least equally, if not more concerned, with the estate tax burden than the income tax, although the income is a concern.

But many of them when they think about moving think about moving to jurisdictions that have an income tax, and in some cases, even higher than ours. Estate tax, that's the problem.

MR. HANCOCK: But Mr. Shay has indicated -- and I would respectfully disagree -- that wealthy people, anybody who has assets of over $600,000 is wealthy. I guess if it's a husband and wife, that $1.2 million.

You know, $1.2 million wouldn't last very long in this day and age now, especially if you live 25 years, you may have trouble getting by if you should have an estate of say -- a widow inherited $1.2 million, if she happens to live to the age of 90, she's liable to become dependent upon the government if she's 65 now.

Thirty years from now I don't know what it's going to cost and nobody else does, except I think you can just move your decimal point one place to the right and that will give you the cost of living 30 years from now. I'm talking about for an average family or average person will have to have to stay in retirement on paper. The current process is just to move one decimal point.

But, it would appear to me that this statement that was made by the earlier panelist, Mr. Norman, and I'd like to get a response on this from each one of you: If the policies of our country are driving our rich citizens to expatriate and encourage the alien poor to immigrate, we have a problem. That was the statement made.

If this exists -- well, let me ask the question. Does that exist? Is that what we're doing? Are we encouraging people with our tax law to give up their citizenship and encouraging the alien poor to immigrate?

MR. SHAY: If you're asking whether current law, which creates the opportunity to renounce citizenship for the citizen and to expatriate for the long-term resident alien, if that creates the incentive, I think that most of us that shared the experience -- I share the comments from the earlier panel -- as professionals we have to advise clients of that opportunity. Not everyone takes it because many view the value of being a resident or a citizen of the United States to exceed the issue of taxes, but some do and more will, I think, unless the issue is addressed.

The question is, do you want to let that continue or do you want to address the problem?

MR. HANCOCK: But -- in other words, I think everybody then is pretty much in agreement with what Mr. Shay said, however, should we address the problem by penalizing those people who have been successful; or should we change the tax law itself to where -- I'm talking as they're accumulate it.

Rather than make it beneficial for them to give up their citizenship, or to change the tax law or where it's beneficial to retain their citizenship, because they're the type of people we need in this country.

MR. STEPHAN: Congressman, my statement makes the argument that a radical revision of our tax system -- I myself am in favor of replacing the income and estate tax would be attractive. Part of my good Republican credentials are to make that assertion.

I do think that the pressure for significant tax reform is afforded by the continuation of loopholes in the law. I think given existing law, Section 877 announced a loophole that 877(a) would plug. In other words, in making the argument that it might be easier to move toward significant tax reform by taking away the opportunity to spurn a system that may be fundamentally flawed.

MR. SHAY: I also would point out that while the tax lawyers at the two ends of the panel may be prescribing potentially different approaches, I think I'm hearing us essentially agree that the current situation is unfortunate.

MS. McCAFFREY: I think that's right. I share your concern with the many problems in the tax system as a whole, but I'm not sure that we should wait to cure this particular problem until we have a more rational overall tax system. This problem ought to be solved one way or the other. Mr. Shay and I simply disagree on the method to be used to solve it.

MR. HANCOCK: But is this an opportunity to take a look at a more rational, overall tax system?

MS. McCAFFREY: I agree.

MR. HANCOCK: For instance, the Hoover Institute says a flat tax will reduce this. They're suggesting it's time we addressed that. You all are tax practitioners. Can we continue to, what I call, compound the felony by writing more regulations here?

MS. McCAFFREY: No, I think it's time to take a hard look at the system. Its complexity has grown to the extreme that we have problems of this sort; and when we try to cure a particular problem with a Bandaid in one area we find that we're creating two or three other problems in another area.

MR. HANCOCK: Well, as a personal note, I met with my CPA yesterday afternoon at one o'clock. He had his computer. I had my computer. Along about four, five o'clock we finally figured out that maybe we were close to getting my income tax ready for, you know, to file for 1995. I mean, something's wrong. Something's wrong when it takes that amount of time and two computers.

You know, when you've got to carry your own portable over to your CPA and look up information and still not even know for sure whether you're right or wrong.

Thank you, Madam Chair.

CHAIR JOHNSON: Ms. McCaffrey, am I correct in concluding from your testimony that we believe we can strengthen the current law and correct the problems with the current law to deal with this problem more effectively than by adopting the administration's proposal?

MS. McCAFFREY: That's my testimony. That's what I believe. I believe 877 can be strengthened to solve most of the problems. You're not going to wind up with a perfect system, but I don't think what the administration is proposing is going to be a perfect system either.

I think over a ten-year period if we are taxing US source income that the US will wind up taxing most of what is appropriate for it to tax.

CHAIR JOHNSON: Mr. Shay, will you agree that one of the problems in the current proposal is that while you can defer payment you must make it and you accrue interest to the rate it currently would go and you're paying more than the value of the asset in taxes?

MR. SHAY: I guess I don't view that as much of a problem as others do because I think in part it's the price for taxing the correct amount and for insuring that the United States rather than another country gets to tax its fair share of the gain.

CHAIR JOHNSON: Of course there is a very significant difference here. We're forcing taxation on an asset that must either be sold at times when it's unfavorable, and therefore, you're going to get an undervaluing of it.

I mean, in the trust area, aren't we forcing a cash obligation that there may not be any way to gain the cash to make good on. Isn't that true? Isn't that one of the possibilities under this law?

You would have no choice but to ask for deferral, have no choice but to pay interest, and have no choice in the end but to be liable for something greater than the asset's worth? Now, correct me if I'm wrong.

MS. McCAFFREY: I'm glad you're turning your attention to the trust aspects of this proposal because I think those aspects are the most seriously flawed of all of the proposals, because what the proposal does is impose a tax on assets that a beneficiary has no right to have, and in the normal course of events, may never receive.

There's an example in my prepared remarks that illustrates it, yet in order to give up an individual's citizenship, she's going to have to pay a tax on her deemed share of assets inside a trust. That seems to me to be very bad tax policy.

MR. SHAY: It seems to me, though -- and I don't want to comment on the trust aspects of this. I specifically reserve technical comment on that in my testimony. I do think that --

CHAIR JOHNSON: You think there are problems in the trust aspects?

MR. SHAY: I have not formed a strong enough view to express a view, one way or the other, which is what I said in the testimony. I think it's a complex area and actually I defer to my colleague on my right, who is far more expert in that area than I am.

But, in response to your question, I want to again remind ourselves that the act that we're talking about of renouncing citizenship or of passing in your green card is one that an individual himself or herself will undertake.

So, taxes will come into planning for that act. If you think that you are better off by waiting, then you may pay another year's United States income tax to wait.

CHAIR JOHNSON: Of course, then, you do get back to Rabbi Moline's comment.

MR. SHAY: But that doesn't affect your ability to leave, A); and B) --

CHAIR JOHNSON: If you have to pay the taxes, Mr. Shay, it surely does affect your ability to leave. At least be honest about what we are talking about.

I don't disagree. You've made some excellent points, but we are going to impose a tax. That for some will mean that you cannot exit, period. We ought to be honest about that.

MR. SHAY: I'm having trouble --

CHAIR JOHNSON: Ms. McCaffrey can give you examples from her experience in the trust area of taxes that can be imposed so that there will be no way that anyone can sell anything or do anything to realize the cash to pay. So you cannot by definition leave.

I mean, that's what we're doing here. That's not all of what we're doing here; and there is the problem that we all agree is there that we do not want people to be able to renounce their citizenship for the purpose of evading taxes. That we are in agreement about.

But not to recognize that there is a downside here that is so significant that we are going to actually deny our own citizens the right to do something that in many other instances we have declared a sort of fundamental human right. But the implications of that are very significant.

MR. STEPHAN: Congresswoman, if I could jump in there, we are not addressing leaving in this bill.

CHAIR JOHNSON: Well, we're making leaving impossible or possible.

MR. STEPHAN: No ma'am. Someone can become a permanent resident overseas and not be affected by this at all. This law only applies to expatriation.

MR. SHAY: Madam Chairman, I would agree that if we cannot address -- I do think it is incumbent on us if this proposal is going to move forward to address a trust issue in a manner that would not have the outcome you're describing.

I'm, frankly, skeptical it's beyond the realm of our imagination, either in the bar or elsewhere, to come up with an approach that would avoid that result.

CHAIR JOHNSON: We will certainly relay that information to the Conference Committee as there are problems in this bill that really have to be addressed before they bring it out of Conference Committee, or it will have some very negative impacts. My understanding is that it will be out of the Conference Committee in a very few days.

I would ask you, do you think the problems in this bill can be corrected in the next three or four days? I offer that to all the panel.

MS. McCAFFREY: I think it's going to take much more than two or three days. I think that the people who are drafting the legislation and the corrective legislation need to draw on the resources of the lawyers and the various bar groups across the country in order to help deal with this problem.

I'm a member of the committee of the New York State Bar Association Tax Section that's begun to study this, a week or so ago. We expect that we're going to have a report that will make some suggestions as to how the bill can be improved within the next several weeks.

Other bar associations are conducting similar studies. I think the information in the reports that come out as a result of that can be helpful to you to come up with a good proposal, one that can be passed maybe later this year, but not within the next several days.

CHAIR JOHNSON: Thank you. We will be interested in those reports and I do thank you all for your comments, as I say, on very short notice. I think perhaps with your help we may be able to correct some of these problems.

Thank you very much.

(Whereupon at 3:15 p.m., the proceedings were adjourned.)