Firm Requests FATCA Guidance on 'Curing' U.S. Place of Birth

We have analyzed this issue in a paper that we presented at the Canadian Tax Foundation's 66^th annual conference held in Vancouver, British Columbia, Canada in December 2014. The paper is entitled FATCA in Canada: The "Cure" for a U.S. Place of Birth, a copy of which is attached to this correspondence.¹

Guidance on this topic is important for several reasons: first, the relevancy and importance of the CLN involves technical and overlapping areas of U.S. tax and nationality law, which are typically well beyond the understanding of most affected individuals who reside abroad. Therefore it will be a challenge for these individuals to provide an explanation that addresses the relevant factors from which reasonability could be deduced.

Second, once an individual has provided an explanation the individual's financial institution will be in the unenviable position of having to determine its reasonableness. While foreign financial institutions generally have more resources than the affected individuals, requiring them to be arbiters of this obtuse area of U.S. law places them in an inequitable position. Lack of guidance on this issue could result in over-reporting, under-reporting, and arbitrary-reporting of account information, which would frustrate the purpose of FATCA and the IGAs.

Third, and most importantly, without guidance, foreign financial institutions could simply conclude that no reasonable explanation is possible, and therefore require all individuals with an unambiguous place of U.S. birth to produce a CLN or have their account reported. This result would be incongruous with the intent of the FATCA regulations and IGAs. Further, an individual who never received a CLN despite having lost U.S. citizenship in the past (under the Immigration and Nationality Act) or and attempted to acquire a CLN currently, would face the real prospect of current U.S. taxation and other financial detriment.

The reason such individual would face current U.S. taxation and other financial detriment is found in the definition of "expatriation date" codified in § 877A(g)(3) and (4) of the Code. Literally interpreted, that section has the effect of turning any present effort to obtain a CLN (if had not been issued in the past) into a current expatriation for U.S. tax purposes. The result could be the imposition of the expatriation tax, penalties for failure to file tax returns, current income tax, and the application of the inheritance tax of § 2801.

Thus, for the reasons stated above, which are analyzed in greater detail in the attached paper, we respectfully request the Department of Treasury and the Internal Revenue Service to issue guidance, in any form they deem appropriate, on both what would constitute a "reasonable explanation" and also the "effective date" of loss of U.S. citizenship under § 877A(g)(3) and (4).

We would welcome the opportunity to discuss the issues raised in this correspondence as well as those in the attached paper.

Thank you for your consideration of this matter.

cc:

                                Contents

This paper provides analysis of one of the foundational elements of the Foreign Account Tax Compliance Act (FATCA) and various intergovernmental agreements (IGAs): an unambiguous place of U.S. birth and the ability to cure (Cure) this element, thereby rendering the account non-reportable. The IGAs generally allow the individual to Cure his unambiguous place of U.S. birth by producing a Certificate of Loss of Nationality (CLN) or by providing a "reasonable explanation" of why he does not have one despite having relinquished U.S. citizenship.

Unfortunately, however, none of the IGAs, FATCA, or legislative history provide guidance as to what might constitute a "reasonable explanation." Analysis of this issue is deceptively difficult because (beginning in 2004) U.S. law differentiated the loss of U.S. citizenship for nationality purposes from the loss of U.S. citizenship for tax purposes. Further, FATCA and the IGAs use the tax definition of U.S. citizenship (and loss thereof), which incorporates elements of the nationality definition of U.S. citizenship.

This paper provides an analytical framework for determining the reasonableness of the explanation and provides a template that, the author hopes, will be useful in providing guidance on this issue. The paper also addresses the importance of clear guidance and harm that may result if an individual attempts to Cure his U.S. place of birth by seeking to obtain a CLN from the U.S. Department of State.

The harm that may result is based on the fact that a literal reading of current U.S. law deems the individual to lose his U.S. citizenship for tax purposes after, inter alia, giving notice to the Department of State which results in the issuance of a CLN, even though the issuance of a CLN is not required (and has never been required) to terminate U.S. citizenship for nationality purposes. Thus the individual who currently applies for a CLN may inadvertently find himself subject to income tax obligations and also the expatriation tax regime, even though he may have lost his U.S. citizenship for nationality purposes years (or decades) earlier.

Specifically the paper analyzes: (1) loss of U.S. citizenship for tax purposes and nationality purposes; (2) unambiguous place of U.S. birth; (3) cure for unambiguous place of U.S. birth; (4) what might constitute a "reasonable explanation" under the Treasury regulations and the IGA; (5) whether Canada has the authority to issue guidance on "reasonable explanation" under the IGA; (6) whether Canada should modify its Guidance Notes to clarify "reasonable explanation;" and (7) U.S. expatriation tax and the consequences of Curing a U.S. place of birth by obtaining a CLN.

1. Introduction²

Fire-breathing leviathans are nothing new to tax practitioners. For example, Canada's Foreign Accrual Property Income (FAPI) rules have been blamed for the thinning hair, expanding waistlines, and antacid consumption of scores of Canadian tax practitioners. However practitioners in Canada and world-wide (including the U.S.) have been slow to approach this leviathan. There are many perfectly logical reasons for the professional community's slow approach, however the days of fiscal transparency are upon us and it is incumbent upon all tax practitioners to be able to identify the issues and advise their clients accordingly. Nobody said practicing tax was going to be easy, and since FATCA is only the start of global fiscal transparency, it is time to grab a sword and shield and approach the leviathan.

When stripped of its soul-crushing complexity, FATCA -- including the Canada-U.S. intergovernmental agreement (the IGA) and the Canadian implementing legislation found in Part XVIII of the Canadian Income Tax Act (the Act) -- is designed to identify U.S. citizens, U.S. residents, and U.S. entities and encourage them to become compliant with U.S. tax and filing obligations by reporting them either directly or indirectly to the IRS. With the exception of children born of certain diplomats, all persons born in the U.S. become U.S. citizens at birth.⁷ Thus, the clearest indicator of U.S. citizenship status is a place of U.S. birth. Once an individual has been identified as having an unambiguous place of U.S. birth, his account becomes reportable unless he "cures" (Cure) this indication of U.S. citizenship. By virtue of the IGA, an individual resident in Canada may Cure his U.S. place of birth by providing certain documentation, including a certificate of loss of nationality (CLN)⁸ or, if he does not possess a CLN, a reasonable explanation for not having one despite having relinquished his U.S. citizenship. To date, no guidance has been issued as to what constitutes a reasonable explanation for not having a CLN.

This paper analyzes a razor-thin slice of the FATCA leviathan predicated upon an individual having an unambiguous place of U.S. birth, and the problems that will likely arise if clear guidance is not provided that would allow financial institutions to efficiently evaluate the reasonableness of the individual's explanation for not possessing a CLN. To that end, the paper addresses: (1) loss of U.S. citizenship for tax purposes and nationality purposes; (2) unambiguous place of U.S. birth; (3) cure for unambiguous place of U.S. birth; (4) what might constitute a "reasonable explanation" under the Treasury regulations and the IGA?; (5) whether Canada has the authority to issue guidance on "reasonable explanation" under the IGA; (6) whether Canada should modify its Guidance Notes to clarify "reasonable explanation;" and (7) U.S. expatriation tax and the consequences of curing a U.S. place of birth by obtaining a CLN.

The harm that may result to individuals who attempt to Cure their U.S. place of birth by obtaining a CLN is based in the dissonant concepts of loss of U.S. citizenship for nationality purposes and loss of U.S. citizenship for tax purposes. Under current U.S. law, an individual may have lost his citizenship for nationality purposes years ago, however he loses his tax-citizenship only after giving notice to the Department of State and the subsequent issuance of a CLN.⁹ Thus individuals who may have lost their U.S. citizenship for nationality purposes years, or decades, ago may find themselves subject to current income tax obligations or the expatriation tax regime because they failed to properly terminate their citizenship for tax purposes.

Importantly, FATCA and the IGA use the tax definition of U.S. citizen and not the definition that is used for nationality purposes. Specifically subparagraph 1(1)(ee) of the IGA provides that the term U.S. Person means a U.S. citizen "interpreted in accordance with the U.S. Internal Revenue Code." Thus appreciation of the manner in which citizenship is lost for tax purposes is critical to understanding not only the Cure provision but FATCA in general.

While the topic of this paper is narrow, it addresses a foundational compliance problem currently faced by not only individuals who have a U.S. place of birth, but also the reporting Canadian financial institutions with which they interact.¹⁰

In order to adequately analyze this topic it is necessary to have an understanding of two technical and complex areas of U.S. law: loss of U.S. citizenship for nationality purposes, and loss of U.S. citizenship for tax purposes. The paper addresses these areas only insofar as they are relevant to FATCA, the IGAs, and the Cure of a place of U.S. birth. It does not provide a global review of either. However, there are numerous references to other resources for the reader to obtain more complete and nuanced understanding of these complex areas.

FATCA is designed to deter and detect offshore tax evasion by persons subject to U.S. taxation.¹⁴ FATCA accomplishes its purpose by imposing reporting, withholding, and due diligence requirements on certain entities regarding those entities' U.S. account holders and owners.

To understand the harm FATCA was designed to curtail, a brief overview of the U.S. income tax regime is in order. The United States is unique in that it taxes "United States person[s]" on their worldwide income.¹⁵ The Internal Revenue Code is written broadly to tax every person in the world. Specifically, the United States taxes "every individual" and "every corporation" on their income "from whatever source derived."¹⁶ This means that they will be subject to U.S. income tax on any item of income they earn, regardless of where they live. Yet other provisions of the Code generally limit worldwide income taxation to United States persons.¹⁷ A United States person is generally a U.S. citizen or resident, a domestic corporation or partnership, or a U.S. resident estate or trust.¹⁸

Notably, U.S. citizenship for tax purposes is determined by reference to U.S. immigration law,¹⁹ which provides that individuals born in the United States are U.S. citizens.²⁰ However an individual is deemed to lose his U.S. citizenship for tax purposes only after he completes specific notification requirements after losing his citizenship for nationality purposes, which result in the issuance of a CLN. This is important to remember while trundling through FATCA's specific rules because FATCA was largely designed to identify U.S. citizens to fulfill its purpose of detecting and deterring tax evasion.

2. Loss of U.S. Citizenship for Tax Purposes and Nationality Purposes

However, these terms also have independent legal significance when used in the nationality context (U.S. Immigration and Nationality Act (the INA))²¹ and an even different meaning when used in the tax context (U.S. Internal Revenue Code (the IRC))²². To make matters even more confounding, it is not always clear whether the terms have their vernacular meaning or their defined meaning under the IRC or INA.

Second, in 2008 the notification provisions enacted in 2004 were repealed and the current notification requirements were adopted. The notification requirements under current law do not apply to individuals whose "expatriation date" is on or before June 17, 2008. "Expatriation date" now refers to the current notification provisions found in section 877A(g)(4).²⁹

Third, in 2004 the IRC was changed to provide that an individual's U.S. citizenship for tax purposes did not cease until he notified both the Department of State and the IRS. This new notification provision was effective only for individuals who "expatriated" after June 3, 2004. The term "expatriated" was not defined and, presumably, carried its vernacular meaning.

Specifically the statute provided:

Thus an individual who lost citizenship for nationality purposes after June 3, 2004 would lose his tax-citizenship only after providing the appropriate notice to the Department of State and IRS. Conversely, an individual who lost citizenship for nationality purposes prior to June 3, 2004 would cease to be taxed as a U.S. citizen coincident with his nationality status.

First, tax-citizenship is not terminated unless a CLN has been issued. The flush language of section 877A(g)(4) provides that either renouncing U.S. citizenship before a diplomatic or Consular officer, or furnishing a statement confirming the voluntary commitment of one of four expatriating acts³⁴ is ineffective to terminate tax-citizenship unless approved by the Department of State's issuance of a CLN.³⁵

Second, HEART repealed the obligation to give notice to the IRS in order to terminate tax-citizenship status.³⁶

Third, HEART refined the "effective date" for loss of tax-citizenship. Under section 7701(n) tax-citizenship was lost upon giving notice to both the Department of State and the IRS. Since the notice provisions were conjunctive, the later of the two notice provisions established the loss of tax-citizenship. Under HEART, however, tax-citizenship is lost on the earlier of renouncing before a diplomatic or consular officer (provided such results in the issuance of a CLN), delivering a statement confirming a prior expatriating act (provided such results in the issuance of a CLN), or the issuance of a CLN.³⁷

At first blush the new rules for termination of tax-citizenship under HEART appear to apply prospectively. However, a close (and admittedly literal) reading of the statute reveals that, for practical purposes, it applies retroactively as well. Under HEART the new rules for termination of tax-citizenship are effective for individuals whose "expatriation date" is after June 17, 2008.³⁸ The individual's "expatriation date" (877A(g)(3)) is determined by the date on which the individual "relinquishes" U.S. citizenship (877A(g)(4)), and the individual "relinquishes" citizenship on the earlier of giving notice to the Department of State (either by renouncing before a diplomatic or consular official, or submitting a statement confirming an expatriating act) or the issuance of a CLN.

Thus, the only individuals who are not subject to the new rules for loss of tax-citizenship are those who, before June 17, 2008: 1) received a CLN; or 2) who renounced before a diplomatic or consular officer; or 3) submitted a statement confirming a prior expatriating act; provided such statement or renunciation results in the issuance of a CLN. For example:

For a limited group of individuals who were dual citizens at birth, however, there is a glimmer of hope. On February 2, 2015 the Obama Administration released its budget proposal for 2016 that contained a proposal that would allow certain dual citizens to renounce their U.S. citizenship without the fear of the consequences of delinquent tax returns, penalties, and the U.S. expatriation tax regime. The proposal could be given the force of law by being either: 1) issued as a regulation pursuant to IRC section 7701(a)(50)(B); or 2) accepted by both houses of Congress and signed by the president. To date, however, there is no indication that the proposal will be given the force of law by either method.⁴¹

As is frequently the case, simplicity in presentation belies complexity in operation: U.S. law regarding the loss of citizenship for nationality purposes has evolved greatly and all of the expatriating acts listed above have been modified by jurisprudence and administrative interpretation and are not as straight forward as they appear.⁴⁸

For example, since 1990 the Department of State has held an administrative presumption that, despite the language of the INA, U.S. nationals actually intend to retain citizenship when they naturalize in a foreign state, perform a routine oath of allegiance in a foreign state, serve in the armed forces of a foreign state not engaged in hostilities with the U.S., or accept non-policy level employment with a foreign government. Unless a person explicitly asserts that one of these acts was performed with the intent to relinquish U.S. nationality or engages in other conduct inconsistent with retention of U.S. citizenship, he or she will retain U.S. nationality.⁴⁹

Many older statutes have been declared unconstitutional by the Supreme Court of the United States, some have been repealed by Congress, and sometimes the changes to the law are given retroactive effect and sometimes not. Notably, if a person was determined to have lost U.S. citizenship under a prior expatriating statute, their citizenship is not restored by subsequent legislative amendments if the loss was consistent with the constitutional requirement that the act must have been performed with the intention to relinquish citizenship.⁵⁰

In addition to the above, citizenship was unintentionally lost by some as a consequence of residency requirements formerly imposed on children born abroad to one U.S. citizen and one alien parent. Beginning in 1934, such individuals automatically lost U.S. citizenship if they failed to reside in the U.S. for a set period of time (which varied depending on the circumstances) between the ages 14 and 28.⁵¹ These requirements were repealed prospectively in 1978 and the INA now provides that individuals having lost citizenship under these provisions may re-obtain it by taking an oath of allegiance.⁵²

It also use to be the case that citizenship could be lost by dual citizens born in the U.S. who voluntarily sought and claimed the benefit of foreign citizenship and resided in that foreign country for at least three years after their 22^nd birthday. This provision was enacted on December 24, 1952 and was repealed on October 10, 1978. It applied to individuals born on or after the date of enactment who resided in the foreign country for at least three years prior to the date of repeal.⁵³

3. Unambiguous Place of U.S. birth

Annex I of the IGA sets forth the due diligence procedures that reporting Canadian financial institutions must undertake in order to identify U.S. reportable accounts. Specifically, if an account holder has an unambiguous place of U.S. birth, the account is a reportable account.⁵⁴ The Guidance Notes⁵⁵ take a bifurcated approach to what constitutes an unambiguous place of U.S. birth depending on the due diligence required under the circumstances.

For preexisting individual accounts that are subject to a digital records search, an individual has an unambiguous place of U.S. birth only if the country of birth is shown. If the country of birth is not shown then the place of birth is not unambiguous.⁵⁶ For example, if the digital records search shows a place of birth to be New York, New York, then the place of birth is not unambiguous (because it does not indicate "USA") and the account will not be a reportable account. Conversely, if the digital records search shows a place of birth to be New York, New York, USA, then the place of birth is unambiguous and will be a reportable account unless Cured.⁵⁷

For existing high-dollar accounts or where a paper search is required, a U.S. place of birth is unambiguous only if the United States would be the only place of birth "without formal review."⁵⁸ For example, if "Georgia" is identified as a person's place of birth, without reference to the United States, the place of birth is ambiguous and not reportable. The Guidance Notes do not yet explain either: 1) what is contemplated by the phrase "without formal review" or 2) whether including a city within Georgia (Atlanta, for example) would cause the place of birth to become unambiguous.

For accounts opened after June 30, 2014 and not otherwise exempt from FATCA's due diligence requirements, the individual account holder will be required to self-certify his U.S. citizenship status. If the individual certifies that he is not a U.S. person, however account opening information reveals an unambiguous place of U.S. birth then the account is reportable unless it is Cured.⁵⁹ The relevant standards for determining unambiguity include, among others, the account balance and whether the individual is an existing customer.⁶⁰

4. Cure for an Unambiguous Place of U.S. birth

Importantly, while the relevant provisions of the IGA and Act implicitly limit the Cure provision, the Guidance Notes do specifically allow the financial institution to apply the Cure provision to new individual accounts,⁶³ though new or existing entity accounts in which a U.S. citizen is a controlling person do not specifically incorporate (or preclude) the Cure provision.

While the ability to Cure an unambiguous place of U.S. birth is implicitly limited under FATCA, the IGA, and the Act, the Guidance Notes take a reasonable and practical approach by broadening its applicability. It would be even more reasonable and practical to explicitly amend the Guidance Notes to expand the ability use the Cure provision in any relevant context.

                                         "Cure" under the IGA and the Guidance

The Cure provision in the Treasury regulations requires the individual to explain his "renunciation" of citizenship. An individual renounces his citizenship when he formally expresses his present and voluntary intent to lose his citizenship before a U.S. Consular official.⁶⁸

In contrast, the Cure provision in the IGA requires the individual to explain his reason for not possessing a CLN despite having "relinquished" citizenship. In the nationality context, an individual relinquishes his citizenship when he informs the Department of State that he performed an expatriating act (with the proper intent) at some time in the past.⁶⁹

As discussed above , "relinquish" has a unique meaning for tax purposes. Under current U.S. tax law an individual is not treated as having lost his citizenship for tax purposes until he "relinquishes" his U.S. citizenship and satisfies the various notice provisions of 877A(g)(4).⁷⁰ Further, subparagraph 1(1)(ee) of the IGA provides that the term U.S. Person includes a U.S. citizen "interpreted in accordance with the U.S. Internal Revenue Code."⁷¹ Consequently, an argument could be made that U.S. citizenship, including the termination thereof, should be determined by using tax principles.

However, there is little in the public record that indicates Treasury intended to assign different meanings to "renounce" and "relinquish." To the contrary, it appears that the terms are used in the vernacular context to mean simply "loss of U.S. citizenship." If Treasury had intended different meanings for the terms, a reasonable person would think that the distinction would be noted clearly in the Treasury regulations, IGA, or someplace in the legislative history. Since there is none, and since the terms are frequently used interchangeably it would be reasonable to conclude that in this context they both simply mean "loss of U.S. citizenship."

The term "relinquish" is not included in the definitional section of the IGA, however paragraph 1(2) provides:

This is not the first time Canada has used domestic law to depart from the rigid strictures of FATCA to arrive at a workable solution. Canada's domestic definition of financial institution essentially ignores the definitions set forth in the IGA and the Treasury regulations in favor of its own definition. While Canada's definition in this regard is inconsistent with the letter of the IGA, it is certainly consistent with the spirit of the agreement and, most importantly, accomplishes the intended result in a more efficient, elegant fashion.⁷²

A CLN is the U.S. Department of State's final determination that an individual has lost his U.S. citizenship for nationality purposes.⁷⁶ The U.S. Department of State makes this determination after an individual either formally renounces his U.S. citizenship before a consular official or relinquishes it by confirming in writing a prior expatriating act.⁷⁷ Once the consular official is satisfied that the renunciation or relinquishment was legally sufficient to lose U.S. citizenship, he prepares a CLN that is then forwarded to the Department of State for approval.⁷⁸

Once the CLN has been approved, IRC section 6039G requires the Secretary of State to provide the Secretary of Treasury with a copy. Treasury then manually reviews the information on the CLN and publishes the names of the renouncers in the federal register.⁷⁹

While the CLN is conclusive evidence that the Department of State has determined that an individual has lost U.S. citizenship (for nationality and not tax purposes), neither the CLN itself nor providing notice to the Department of State terminates nationality citizenship. As noted earlier, U.S. nationality citizenship is lost by voluntarily performing an expatriating act with the intent to lose citizenship.⁸⁰ Moreover currently a CLN is not required under the INA; it is merely confirmation that an individual has lost U.S. citizenship as of a certain date.

U.S. legislative history is replete with commentary that confirms this analysis. In 2003, the Joint Committee on Taxation prepared a comprehensive report that reviewed the state of the law relating to tax and relinquishment of U.S. citizenship. The report provides:

The complexity of U.S. nationality and tax law (not to mention their meandering evolution) make it unlikely that the average individual would be capable of either preparing the explanation or reviewing it for reasonableness without direction from a professional who has extensive experience in these matters. The difficulty of explaining the renunciation of U.S. citizenship and reviewing it for reasonableness is made even more difficult because the explanation appears to be strict standard, and not subject to the individual's understanding, best efforts, or the best of his knowledge.

The obvious answer could simply be: "I do not have a CLN because I never received one and neither the issuance nor receipt is necessary to effectuate my loss of U.S. citizenship." However this answer strikes a flat note. It is unlikely that the Department of Treasury, which drafted and the IGAs (while IRS drafted the Treasury regulations), intended the IGA's Cure provision to be so easily satisfied.

Is there another answer that would constitute a reasonable explanation? Note that, like the Cure provision under the Treasury regulations, the language of the IGA and the Guidance Notes appears to be a strict standard and not limited by the individual's understanding, best efforts, belief, or good faith.

A logical place to begin the analysis is to consider whether the Cure provision in the IGA assumes that individual had received (or had been issued) a CLN at some time in the past. If that were the case, the reasonable explanation would require to individual to establish both: 1) the CLN had been issued at some time in the past; and 2) an explanation as to why the individual does not currently possess it. Consider the following example:

However, the IGA doesn't require the individual to obtain a replacement (or prove that a CLN had been issued); it allows the individual to provide an explanation as a proxy for proof of the issuance of a CLN. Thus, it is unlikely that Canada and the United States intended the issuance of a CLN to be an implied condition precedent to the reasonableness explanation of not possessing a CLN.

If the IGA does not imply that a CLN had been issued at some point in the past, then a multitude of explanations could be reasonable for an individual's failure to produce it: I lost it, I cannot find it, I never received it, the dog ate it, etc. It is unlikely that Canada and the United States intended to relegate the "reasonable explanation" standard to be so easily satisfied.

Notwithstanding Canada's omission of the phrase "despite relinquishing citizenship" in its Guidance Notes, all IGAs contain a similar provision. Therefore it is likely that any "reasonable explanation" is predicated upon loss of U.S. citizenship for either tax or nationality purposes, or both.

Since the Cure provision under the IGA assumes that citizenship has already been lost and does not require an actual explanation of the loss, the explanation should not need to address the particular law or the specific facts surrounding loss of citizenship, however it should address: (1) that in the past the individual committed one of the seven expatriating acts contained in 8 U.S.C. section 1481(a) and (2) that the expatriating act was performed voluntarily and with the intent to lose U.S. citizenship.

A template that incorporates the foregoing is attached as "Exhibit 1."

The author does mean to suggest that the foregoing recommendation and template embody an accurate summary and application of U.S. tax and nationality law in the context of the relevant Cure provisions. To the contrary, an analysis of the relevant bodies of law should leave the reader with only one clear conclusion, which is that there is no clear conclusion. Of course this is little consolation to both the individual who wishes to provide a reasonable explanation, and also the financial institutions that must evaluate it. Thus, the recommendation and template offer a practical solution under Canadian law and Canada's IGA.

6. Canada has the Authority to Issue Guidance on "Reasonable Explanation" Under the IGA

Of course, Canada is unable to change U.S. law; however it does have the authority under the IGA to enact domestic legislation (including Guidance Notes) to clarify what would constitute a reasonable explanation. First, the IGA provides that any term not defined in it will, unless modified by the competent authorities, be determined under local law.⁸⁴ Second, the IGA also provides that, notwithstanding the definitions provided therein, Canada may elect to use the definitions found in the Treasury regulations provided this use does not frustrate the purposes of the IGA.⁸⁵ Since neither the IGA nor the Treasury regulations address what constitutes a "reasonable explanation," Canada should have the latitude to provide this clarity.

Further, while the IGA and Canada's implementing legislation provide guidance to the use of defined and undefined terms, those terms remain subject to Canadian rules of treaty and statutory interpretation. Canada did not cede its legislative and jurisprudential rules of construction upon signing the IGA or enacting Part XVIII of the Act.

To date, no other IGA partner country has issued legislation or guidance on this issue. However, at least one non-U.S. financial institution has recognized the problem of not defining a "reasonable explanation," and it has crafted an innovative solution. Dah Sing Bank of Hong Kong has simply posted a blank CLN on its website (and apparently has physical copies available at their branches), which account holders may complete in order to Cure their U.S. place of birth. The bank's self-certification reads as follows:

7. Canada Should Modify its Guidance Notes to Clarify "Reasonable Explanation"

Unlike the IGA, subsection 265(5) of the Act mandates that reporting Canadian financial institutions attempt to Cure accounts where the holder has an unambiguous place of U.S. birth.⁸⁸ In light of this mandate it would be reasonable to expect that Canada would provide clarification. By providing guidance, Canada could provide comfort to financial institutions by indicating that they are applying the appropriate review of the relevant factors, which would result in consistent standards and consistent results for affected individuals. Further, by providing guidance the CRA would be able to ensure that any forms or templates developed by the financial institutions would include the tax notification contained in Exhibit "1."

Without formal guidance, reporting Canadian financial institutions may simply ask the individual to provide his own free-flowing narration of why he does not have the CLN. In providing this narrative the individual may inadvertently misstate facts or assumptions that would, under U.S. law, call into doubt the efficacy of his loss of U.S. citizenship or compliance with U.S. tax law. As such, the individual may innocently and inadvertently admit to facts that complicate his nationality or tax status.

Finally, without formal guidance the reporting Canadian financial institution may arbitrarily conclude that the individual's explanation is not reasonable, which could cause the account to be unnecessarily labeled as reportable and thereby result in an unnecessary compliance burden. Further, the affected individual might seek to obtain a CLN without fully understanding the U.S. tax consequences of doing so. As discussed below, under the current U.S. expatriation tax regime, the individual's mere application for a CLN could trigger substantial U.S. income tax liability.

8. U.S. Expatriation Tax: Danger of Curing a U.S. Place of Birth with a CLN

An individual who attempts to Cure his unambiguous place of U.S. birth by obtaining a CLN would do so by either officially renouncing his U.S. citizenship before a diplomatic or consular office,⁸⁹ or by requesting a determination from the U.S. Department of State that in the past he lost his citizenship by performing an expatriating act with the requisite mental state.⁹⁰ In doing so, the individual has just stepped into one of the most ambiguous, complex, misunderstood, and high-stakes areas of U.S. international individual tax law.

There are two reasons the U.S. expatriation tax regime is a Serbonian bog of legal and tax issues. First, U.S. immigration law has evolved over time: some acts (or omissions) that caused an individual to lose his citizenship at one point in time have been held by the Supreme Court of the United States to be unconstitutional, the legal effect of which is retroactive repeal of the offending legislation and resulting retroactive restoration of U.S. citizenship.⁹¹

Second, in 2004 Congress enacted law that bifurcated the loss of citizenship for nationality purposes and loss of citizenship for tax purposes.⁹² This bifurcation has resulted in two fundamentally different regimes applicable to former-U.S. citizens. In 2008, Congress took this bifurcation even further by defining the effective date of an individual's loss of U.S. citizenship for tax purposes as the date the individual notifies the U.S. government of his or her loss of citizenship, which effectively gives the government an opportunity to apply the expatriation tax that contained this new notification requirement.⁹³ The importance of this bifurcation cannot be over-emphasized. The timing of the individual's loss of citizenship (for both nationality and tax purposes) will determine the individual's U.S. tax and filing obligations.

The question thus arose: since the U.S. taxes its citizens on their worldwide income, is the taxpayer liable for U.S. taxes during the period beginning on the date he lost his U.S. citizenship (under the law at the time) and ending on the date the pertinent law was declared unconstitutional? The IRS's initial position was that because the law was declared unconstitutional ab initio, the individual was always a U.S. citizen and therefore subject to tax on his worldwide income during that entire period.⁹⁴

However, the Federal Court of Appeals for the First Circuit later held that the IRS cannot tax an individual for a period when he had been stripped of U.S. citizenship by an invalid act of the U.S. government.⁹⁵ Using colorful language, the court held that "[the taxpayer] cannot be dunned for taxes to support the United States Government during the years in which she was denied its protection."⁹⁶

Currently, the taxability of these individuals is a complex bramble bush that depends on who had asserted the loss of U.S. citizenship, when it was lost, when it was restored, and the particular facts during the intervening period.⁹⁷ However, there are two common factors in the administrative and judicial guidance regarding the tax and filing obligations for these individuals: First, the individual's tax and filing obligations would be suspended only if both the individual and the Department of State concurrently believe that the individual had lost his U.S. citizenship for nationality purposes. This concurrence factor is not separately analyzed in the applicable sources, so it could be merely correlative in nature and not determinative. Second, the individual's tax and filing obligations continue once U.S. citizenship has been restored by a judicial decision even though the individuals sincerely believed they were no longer a U.S. citizen and were unaware of the restoration of citizenship.⁹⁸

Not all former U.S. citizens were subject to the alternate tax regime. Only those who lost their citizenship with a principal purpose of avoiding tax were subject to section 877's expatriation tax regime, and only if the loss was after March 8, 1965.¹⁰² The date on which citizenship was lost for nationality purposes determined whether the loss was before or after March 8, 1965.

HIPAA also changed the alternate tax regime in two important aspects. First, it expanded the categories of income drawn into the alternate tax regime. Second, Congress made clear that the alternate tax regime was intended to override existing tax treaties for ten years following enactment.¹⁰⁵ But the architecture of the expatriation tax regime was left mostly intact.

Importantly, HIPAA did not distinguish loss of U.S. citizenship for nationality purposes from loss of U.S. citizenship for tax purposes.

The AJCA embodied the concept of U.S. citizenship for tax purposes in IRC section 7701(n) (repealed in 2008) the salient portions of which are as follows:¹⁰⁸

Critically important for purposes of understanding the next (and final) iteration of the U.S. expatriation regime is the effective date of the notice provisions of 7701(n). The new notification provisions applied only to individuals who "expatriated" after June 3, 2004.¹⁰⁹ In other words, an individual would be considered to lose their citizenship for both nationality and tax purposes (regardless of whether they provided notice to the Department of State or IRS) if the individual "expatriated" before June 3, 2004. Conversely if the individual "expatriated" after that date, his U.S. citizenship for tax purposes ended only after giving the notice required under section 7701(n).

It is important to note that the AJCA introduced a new term: "expatriate." The notice provisions of section 7701(n) applied only to individuals who "expatriated" after June 3, 2004. Unfortunately neither the AJCA nor the INA define the term "expatriate," In context, the term makes sense only as a vernacular term for "loss of citizenship" by either renouncing or relinquishing U.S. citizenship. As addressed below, the next iteration of the expatriation tax regime increased the difficulty of comprehension by introducing the defined term "expatriation date."¹¹⁰

Other changes included removal of the subjective tax avoidance intent to trigger the alternate tax regime, monetary adjustments to the net worth and tax liability tests, and a new certification test that triggered the alternate tax regime.¹¹¹ In addition, full U.S. tax and filing obligations were restored to individuals who were physically present in the United States for more than 30 days during the 10 years following expatriation.¹¹²

The major facet of prior law left unchanged was the alternate tax regime. The mark-to-market regime (what is commonly referred to as the "exit tax") would not come until 2008.

First, the alternative tax regime, which re-sourced otherwise non-U.S. source income as U.S. source for certain expatriates, was replaced with a mark-to-market regime. Under this regime, the affected individual (a "covered expatriate") is deemed to have sold all of his property (with some exceptions) at fair market value on the day preceding the "expatriation date."¹¹⁴ Hence the current "exit tax" entered into current law.

Second, the notification requirements enacted under the AJCA in section 7701(n) were repealed.¹¹⁵

Third, new section 7701(a)(50)(A) made clear that an individual's U.S. citizenship for tax purposes is terminates only upon relinquishment in accordance with 877A(g)(4). The statute provides:

New section 877A(g)(3) provides that an individual's "expatriation date" is the date the individual "relinquishes" U.S. citizenship.¹¹⁷

9. Example of the application of the U.S. Expatriation Tax Regime to Individuals Who Cure Their U.S. Place of Birth by Obtaining a CLN

Moreover, Mr. Maple Leaf will be subject to section 877A's exit tax if any of the following are true:

While a literal interpretation of the statute clearly produces the foregoing result there are several arguments that could justify departure from the literal interpretation.

Admittedly, retroactive tax legislation is occasionally enacted in the U.S. and there is no explicit preclusion of such in the U.S. Constitution.¹³⁰ The Congressional Research Service produced an excellent report on this topic aptly titled "Constitutionality of Retroactive Tax Legislation"¹³¹ that analyzes the issue in depth.

10. Conclusion

Identification of the financial accounts held by U.S. citizens lies at the core of FATCA because U.S. citizens are subject to taxation on their worldwide income. It's not always easy to identify a U.S. citizen, however if an individual was born in the United States he became a U.S. citizen at that time. Whether the individual is currently a U.S. citizen is more difficult to determine because the loss of citizenship has a different meaning for tax purposes than it does for nationality purposes. Under FATCA the relevant citizenship determination is made under tax law and not nationality law. Place of birth is an easily identifiable and readily available factor, and these accounts become reportable under FATCA unless the holder of the account can refute the presumption of his status as a U.S. person by producing a CLN, or has a reasonable explanation for not having one despite having lost his citizenship. The divergence between citizenship for nationality law purposes and tax purposes precipitates three central problems.

First, neither the issuance of a CLN nor notification to the U.S. Department of State is required to lose U.S. citizenship (for nationality purposes). Thus many residents of Canada may not be U.S. citizens for nationality purposes, but do not possess a CLN.

Second, while these individuals may Cure the lack of a CLN with a reasonable explanation for not having one, there is a dearth of direct guidance on what constitutes a "reasonable explanation." The author is hopeful that this paper has provided the analytical framework for Canada and other IGA partners to issue clear guidance in this regard.

Third, under the current U.S. expatriation tax regime, the date on which an individual is deemed to lose his U.S. citizenship for tax purposes is determined under a different set of rules than those that determine loss of U.S. citizenship for nationality purposes. Thus, an individual who seeks to Cure his inability to produce a CLN by simply applying for one may find himself subject to one of the two expatriation tax regimes discussed at length in this paper.

When FATCA became U.S. law in 2010 the world took a significant step into the new era of global financial transparency, and in 2014 the world took another significant step with the OECD agreement on its Standard for Automatic Exchange of Financial Account Information which incorporates much of the architecture established under FATCA. The rules under both regimes are intimidating, ambitious and voluminous however it is incumbent upon the professional community to become familiar with them in order to properly identify the issues and advise their clients accordingly.

The fire-breathing leviathan can be tamed however only with time and effort. Tax practitioners must make the investment soon because the leviathan has newly-hatched siblings that are equally as intimidating. Only after FATCA has been tamed will the practitioner be equipped to approach the Common Reporting Standard and the other fiscal transparency hatchlings.

² For an in-depth analysis of Canada's experience with the Foreign Account Tax Compliance Act, the Intergovernmental Agreement, and Canada's implementing legislation, see Roy A. Berg and Paul M. Barba, "FATCA in Canada: Analyzing the Canadian Implementing Legislation's Restriction on the Class of Entities Subject to FATCA," 62:3 Canadian Tax Journal 587 (2014), available at http://www.ctf.ca/CTFWEB/EN/Publications/CTJ_Contents/2014CTJ3.aspx.

³ Hiring Incentives to Restore Employment Act, Pub. L. no. 111-147, section 501 (Mar. 18, 2010), codified in sections 1471-1474 of the Internal Revenue Code of 1986, as amended (herein referred to as "the Code" or "IRC").

⁴ TD 9610, 2013-15 IRB 765 (Apr. 8, 2013); TD 9657, 2014-13 IRB 884 (Mar. 24, 2014); TD 9658, 2014-13 IRB 895 (Mar. 24, 2014).

⁵ At 6 ft. 8 inches (203 cm) and 514 lb. (233 kg), Akebono was one of the tallest and heaviest sumo wrestlers of all time. He was the first non-Japanese-born sumo wrestler to reach Yokozuna, the highest rank in the sport. And he is a U.S. citizen, born Chad Rowan in Waimanalo, Hawai'i.

⁶ Peter A. Cotorceanu, "FATCA and Offshore Trusts: The First Nibble," 139 Tax Notes 409, at 417 (Apr. 22, 2013). In addition to the First Nibble, Mr. Cotorceanu has undertaken the Herculean task of battling the leviathan in two other excellent expository articles. See Peter A. Cotorceanu, "FATCA and Offshore Trusts: a Second Bite of the Elephant," 140 Tax Notes 1007 (Sept. 2, 2013); Peter A. Cotorceanu, "FATCA and Underlying Companies: Pin the Tail on the Elephant," 142 Tax Notes 957 (Mar. 3, 2014).

⁷ U.S. U.S. CONST. amend XIV, § 1 ("All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States."). See also 8 U.S.C. section 1401(a). Only children born of foreign diplomats with full diplomatic immunity are exempt from this rule. See INS Interpretation 301.1(a)(4)(i).

⁸ "Certificate of Loss of Nationality of the United States" is found on U.S. Department of State Form DS-4083.

⁹ Note, CLN is not required if a court in the United States cancels a citizen's certificated of naturalization. IRC section 877A(g)(4)(D). In that case, citizenship for tax purposes is lost on the date of the court order. Since this is a narrow exception to the requirement for a CLN, and does not affect the analysis herein, it will not be addressed further.

¹⁰ The term "reporting Canadian financial institution" is defined in subsection 263(2) of the Income Tax Act (Canada), RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as "the Act"). See also Agreement Between the Government of the United States of America and the Government of Canada to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, Feb. 5, 2014, at article 1(1)(l), available at http://www.fin.gc.ca/treaties-conventions/pdf/FATCA-eng.pdf (herein referred to as "Canadian IGA"). The Canadian IGA defines terms by using capital letters; which will be altered in this paper for the sake of clarity.

¹¹ Canadian IGA, supra note 10.

¹² Bill C-31, An Act To Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures, first reading March 28, 2014 (herein referred to as either the "Canadian implementing legislation" or "the implementing legislation").

¹³ Canadian Implementing Legislation, supra note 12.

¹⁴ See United States, Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, 110th Cong., 2d sess., Tax Haven Banks and U.S. Tax Compliance: Staff Report (Washington, DC: United States Senate, July 17, 2008), at 2 (www.hsgac.senate.gov//imo/media/doc/071708PSIReport.pdf?attempt=2); and statements of Senator Max Baucus, Chair, Senate Committee on Finance, regarding a prior version of FATCA, Congressional Record, October 27, 2009, at S10785.

¹⁵ IRC sections 1, 11, 641, 701, and 7701(b)(1); Treasury regulation section 1.1-1(b).

¹⁶ IRC sections 1(a), 11(a), 61(a), 63.

¹⁷ IRC sections 2(d), 11(d), 7701(a)(5), (b)(1), and (a)(30).

¹⁸ IRC section 7701(a)(30).

¹⁹ Treasury regulation section 1.1-1(c), which provides: "Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see chapters 1 and 2 of title III of the Immigration and Nationality Act (8 U.S.C. 1401-1459). For rules governing loss of citizenship, see sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk, (1964) 377 U.S. 163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to persons who are nationals but not citizens at birth, e.g., a person born in American Samoa, see section 308 of such Act (8 U.S.C. 1408). For special rules applicable to certain expatriates who have lost citizenship with a principal purpose of avoiding certain taxes, see section 877. A foreigner who has filed his declaration of intention of becoming a citizen but who has not yet been admitted to citizenship by a final order of a naturalization court is an alien."

²⁰ 8 U.S.C. section 1401(a).

²¹ Title 8 of the United States Code (8 U.S.C.)

²² Title 26 of the United States Code (26 U.S.C.)

²³ 8 U.S.C. section 1481(a)(5); see also 7 Foreign Affairs Manual 1200 (Loss and Restoration of U.S. Citizenship).

²⁴ IRC section 877A(g)(4)(a). Note that one of the defined acts is a formal renunciation before a Consular official.

²⁵ 8 U.S.C. section 1481(a). The seven acts that can result in the loss of U.S. citizenship for nationality purposes are listed in section 2(d) of this paper.

²⁶7 Foreign Affairs Manual 1211, at 3 (Loss and Restoration of U.S. Citizenship: Summary).

²⁷ IRC sections 7701(a)(50)(A) and 877A(g)(4).

²⁸ Note that the "expatriate" definition also includes the term "relinquish."

²⁹ The defined term "Covered expatriate" is also defined in IRC section 877A(g)(1)(A).

³⁰ American Jobs Creation Act of 2004, Pub. L. no. 108-357, section 804 (herein referred to as "AJCA").

³¹ Heroes Earnings Assistance and Relief Tax Act of 2008, Pub. L. no. 110-245, section 501(a) (herein referred to as "HEART").

³² IRC section 7701(n) (repealed in 2008).

³³ Supra note 30 at section 804(f).

³⁴ IRC section 877A(g)(4)(B), referring to the expatriating acts listed in 8 U.S.C. 1481(a)(1) , (2), (3), or (4). Those acts are (1) becoming naturalized in a foreign country, (2) formally declaring allegiance to a foreign country, (3) serving in a foreign army, and (4) serving in certain types of foreign government employment if the individual is a national of the foreign country or takes an oath of allegiance to that foreign country. See infra, section 2(d) of this paper.

³⁵ The only exception to the requirement of a CLN would be when a U.S. court cancels a naturalized citizen's certificate of naturalization. IRC section 877A(g)(4)(D). While an important section for those who obtained U.S. citizenship by naturalization, I will not discuss it further in this paper.

³⁶ However, per IRC section 877(a)(2)(c) the individual must provide a certification to the IRS in order to avoid status as a "covered expatriate" and therefore the expatriation tax, however this requirement does not affect the termination of his tax-citizenship status.

³⁷ IRC sections 7701(a)(50); 877A(g)(4).

³⁸ IRC section 877(h).

³⁹ Supra, note 30.

⁴⁰ See section 9(b) of this paper for criticism of this result.

⁴¹ United States, Department of the Treasury, General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals, (February 2015), at 283, http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf. Andrew Velarde, "Budget Proposal May Offer Escape from U.S. Tax for Dual Citizens," 146 Tax Notes 709 (Feb. 9, 2015). See also Roy Berg, "U.S. Proposes Relief for Some who Renounce U.S. Citizenship: is FATCA a Motivating Factor?," Moodys Gartner Tax Law Blog, Feb. 11, 2015, http://www.moodysgartner.com/us-proposes-relief-for-some-who-renounce-us-citizenship-is-FATCA-a-motivating-factor/.

⁴² An excellent, and entertaining, summary of the evolution of U.S. Supreme Court decisions on the loss of nationality can be found in 7 Foreign Affairs Manual 1200, Appendix B.

⁴³ For example, under the Expatriation Act of 1907, a U.S. citizen woman who married a foreigner would automatically lose her U.S. citizenship if she took the nationality of her husband. 8 U.S.C. 1484, declared unconstitutional in Schneider v. Rusk, 377 U.S. 163 (1964); repealed retroactively Pub. L. No. 95-432 on October 10, 1978. Further, a naturalized U.S. citizen would automatically lose his U.S. citizenship if he left the U.S. and became a resident of his country of origin for a period three years. Ibid.

⁴⁴Afroyim v. Rusk, 387 U.S. 253 (1967).

⁴⁵ 8 U.S.C. section 1481(a).

⁴⁶ 8 U.S.C. section 1481(b).

⁴⁷ Ibid.

⁴⁸ Two excellent resources that analyze the detail and nuance surrounding loss of U.S. citizenship for nationality purposes are Steve Trow, U.S. Immigration and Citizenship Planning for High Net Worth Clients, International Trust and Estate Planning, American Law Institute (October 20, 2014, San Francisco); and 7 Foreign Affairs Manual 1200 (Loss and Restoration of U.S. Citizenship).

⁴⁹ 7 Foreign Affairs Manual 1222 (Loss and Restoration of U.S. Citizenship: Administrative Presumption)

⁵⁰ INA section 405(c), 8 U.S.C. section 1101.

⁵¹ Revised Statutes (RS) 797; repealed prospectively December 24, 1952, Pub. L. 95-432. See also 7 Foreign Affairs Manual 1200, Appendix C (Loss and Restoration of U.S. Citizenship; Taking up Residence abroad, Loss of Nationality, Dual Nationals, and Naturalized Citizens).

⁵² INA section 324(d)

⁵³ Revised Statutes (RS) 797; repealed prospectively December 24, 1952, Pub. L. 95-432. See also 7 Foreign Affairs Manual 1200, Appendix C (Loss and Restoration of U.S. Citizenship; Taking up Residence abroad, Loss of Nationality, Dual Nationals, and Naturalized Citizens).

⁵⁴ Canadian IGA, supra note 10, annex I (II)(B)(1)(b).

⁵⁵ CRA, Guidance on Enhanced Financial Account Information Reporting -- Part XVIII of the Income Tax Act (June 20, 2014), available at http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/gdnc-eng.pdf (herein referred to as "Guidance Notes").

⁵⁶ CRA Guidance Notes, supra note 55, at 8.28.

⁵⁷ Of course "not unambiguous" does not necessarily have the same meaning as "ambiguous," however for this discussion the distinction lacks a difference. While the term "not unambiguous" is more precise than the term "ambiguous" abandoning the double negative doesn't not enhance the clarity the prose (raise your hand if you get the joke).

⁵⁸ CRA Guidance Notes, supra note 55, at 8.47.

⁵⁹ Ibid, Guidance Notes at 9.13.

⁶⁰ Ibid.

⁶¹ Canadian IGA, supra note 10 Annex I (III) (New Individual Accounts), Annex I (IV) (Preexisting Entity Accounts), Annex I (V) (New Entity Accounts).

⁶² Ibid annex I(IV)(C)(4)(d). "If any Controlling Person of a Passive NFFE is a U.S. citizen or resident, the account shall be treated as a U.S. Reportable Account."

⁶³ CRA Guidance Notes, supra note 55 at 9.13.

⁶⁴ Treasury regulation section 1.1471-4(c)(5)(iv)(B)(2)(ii).

⁶⁵ IRC section 1471; Treasury regulation sections 1.1471-3(e)(4)(ii)(C) (accounts opened before January 1, 2014); 1.1471-3(e)(4)(iv)(C)(1) (accounts opened on or after January 1, 2014); and 1.1471-4(c)(5)(iv)(B)(2)(ii) (unambiguous indication of a U.S. place of birth).

⁶⁶ Canadian IGA, supra note 10, annex I (II)(B)(4)(a); CRA Guidance Notes, supra note 55, 8.27.

⁶⁷West's Encyclopedia of American Law, 2d (2008), retrieved February 22 2015 from http://legal-dictionary.thefreedictionary.com/excuse ("An excuse is essentially a defense for an individual's conduct that is intended to mitigate the individual's blame worthiness for a particular act or to explain why the individual acted in a specific manner").

⁶⁸ 8 U.S.C. section 1481(5); see also 7 Foreign Affairs Manual 1200 (Loss and Restoration of U.S. Citizenship).

⁶⁹ 8 U.S.C. section 1481.

⁷⁰ IRC section 7701(a)(50)(A).

⁷¹ Canadian IGA, supra note 10 at article 1(1)(ee).

⁷² See, Roy A. Berg and Paul M. Barba, "FATCA in Canada: Analyzing the Canadian Implementing Legislation's Restriction on the Class of Entities Subject to FATCA," 62:3 Canadian Tax Journal 587 (2014), available at http://www.ctf.ca/CTFWEB/EN/Publications/CTJ_Contents/2014CTJ3.aspx.

⁷³ The IGAs that use the term "renounce" are: United Kingdom (September 12, 2012); Denmark (November 15, 2012); Ireland (December 21, 2012); Switzerland (February 14, 2013); Norway (April 15, 2013); Spain (May 14, 2013); and Germany (May 31, 2013). The IGA with France was executed on June 11, 2013 (eleven days after Germany) and uses the term "relinquish".

⁷⁴ Canadian IGA, supra note 10, at Article 7(1).

⁷⁵ IRC section 877A(g)(4).

⁷⁶ 8 U.S.C. section 1501.

⁷⁷ 8 U.S.C. section 1481(a)(1), (2), (3), (5)-(7). To confirm a prior expatriating act, an individual would file the Department of State Form DS-4079, Request for Determination of Possible Loss of United States Citizenship.

⁷⁸ 7 Foreign Affairs Manual 1220.

⁷⁹ IRC section 6039G(d).

⁸⁰ 8 U.S.C. section 1401(a); but see notes 52 and 53 supra for the two remaining ways an individual could have lost his U.S. citizenship by operation of law, outside of 8 U.S.C. 1401(a).

⁸¹ Joint Committee on Taxation, Review of the Present-Law and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-Term Residency, (JCS-2-03), February 2003, at 51 (emphasis added).

⁸² H.R. Rep. No. 104-736 at 330 (Conf. Rep.) (1996). See also Department of Treasury, Income Tax Compliance by U.S. Citizens and U.S. Lawful Permanent Residents Residing Outside the United States and Related Issues, at 30, May 1998 ("any loss of citizenship is considered effective on the date the act is committed, even though the loss may not be documented by DOS until a later date.").

⁸³ To its credit, CRA frequently includes notifications and links to the IRS website when addressing U.S. tax issues relevant to Canadian residents. See, e.g., http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/fq-eng.html.

⁸⁴ Canadian IGA, supra note 10, article 1(2).

⁸⁵ Ibid, article 4(7).

⁸⁶http://www.dahsing.com/en/pdf/common/form/cc_self_certificate_for_FATCA.pdf; and http://www.dahsing.com/en/pdf/common/form/cc_cerficate_loss_of_nationality_us.pdf.

⁸⁷ On November 11, 2014 Hong Kong signed a Model 2 IGA, which incorporated its existing tax information exchange agreement with the United States.

⁸⁸ See also CRA Guidance Notes, supra note 55, 8.18 (which states "[w]hen a financial institution identifies one or more U.S. indicia, the financial institution must attempt to cure the indicia by applying the appropriate steps set out in subparagraph B(4) of section II of Annex I of the Agreement. This is mandated by subsection 265(5) of the ITA.").

⁸⁹ 8 U.S.C. section 1401(a)(5); IRC section 877A(g)(4)(A).

⁹⁰ 8 U.S.C. section 1401(a); IRC section 877A(g)(4)(B).

⁹¹ But see notes 52 and 53, supra, for the two remaining statutes under which an individual may automatically lose U.S. citizenship for nationality purposes.

⁹² American Jobs Creation Act of 2004, Pub. L. no. 108-357, section 804 (herein referred to as "AJCA").

⁹³ HEART supra note 31; IRC section 877A(g)(4).

⁹⁴ Revenue Ruling 70-506, 1970-2 CB 1. (holding: "any Certificate of Loss of Nationality of the United States issued by reason of section 352(a) of the Immigration and Nationality Act of 1952 is considered null and void and the individual affected thereby is a citizen of the United States and taxable . . . on income received from sources within and without the United States."); see also Revenue Ruling 75-357, 1975-2 CB 5.

⁹⁵D'Hotelle de Benitez Rexach v. United States, 558 F.2d 37 at 39 (1st Cir. 1977). The case illustrates the complexity involved with restoration of U.S. citizenship. In 1949 the taxpayer committed an expatriating act and was unaware of her loss of citizenship until 1952 when she was issued a CLN. In 1965 the statute under which her citizenship was revoked was held by the U.S. Supreme Court (Schneider v. Rusk, 377 U.S. 163 (1965)) to be unconstitutional and given retroactive effect. The court held that the taxpayer was responsible for U.S. tax from the period beginning in 1949 (the date of the expatriating act) and ending in 1952 (when she received the CLN). However she was not responsible for U.S. tax from the period beginning in 1952 and ending in 1965.

⁹⁶Ibid.

⁹⁷ See, Revenue Ruling 92-109, 1992-2 CB 3. The ruling discusses several different factual situations regarding the retroactive reinstatement of U.S. citizenship, the common theme of which is that the individual will not be subject to U.S. tax only when the individual and the Department of State concurrently believe that the individual's citizenship has been terminated. Without this concurrent belief the individual is subject to U.S. tax. This result is consistent with the holding in D'Hotelle de Benitez Rexach Ibid.

⁹⁸ Ibid.

⁹⁹ Michael Pfeifer, The Current State of Expatriation, International Trust and Estate Planning, American Law Institute (October 20, 2014, San Francisco); Michael J. Miller and Ellen Seiler Brody, "Expats Live In Fear of Malevolent Time Machine," 12 International Tax Journal 213 (March 5, 2013); Michael J. Miller "Comments on the Tax Status of Certain Expatriates" American Bar Association Section of Taxation, Letter to Hon. John Koskinen, Commissioner of Internal Revenue (March 2, 2015), 2015 World Tax Daily 41-34 (March 2, 2015).

¹⁰⁰ See Patrick Martin, "Accidental Americans" Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web," 38:6 International Tax Journal , (Nov./Dec. 2012). Mr. Martin is a lawyer with the law firm of Procopio, Cory, Hargreaves & Savitch LLP, and his article includes an excellent graphic depiction of the various laws that have changed the U.S. expatriation regime.

¹⁰¹ Pub. L. No. 89-809, section 102(f) (1966) (herein referred to as "FITA").

¹⁰² IRC section 877(a).

¹⁰³ Pub. L. No. 104-191 (1996) (herein referred to as "HIPAA").

¹⁰⁴ HIPAA, supra note 103, at section 511 (amending section 877(a)(2)). Both figures were indexed for inflation. For the first time, HIPAA also drew into the alternate tax regime long-term green card holders by adding section 877(e). This is a critical event for determining the tax consequences of abandoning green cards. Important as it is, however, it lies outside the scope of this paper.

¹⁰⁵ H. Rep. 145, 104th Cong., 1st Sess. 30 (1995).

¹⁰⁶ AJCA supra note 30.

¹⁰⁷ United States, Department of the Treasury, Income Tax Compliance by U.S. Citizens and U.S. Lawful Permanent Residents Residing Outside the United States and Related Issues, at 33 (May 1998). Interestingly, this report quotes a popular book in a footnote on the tax benefits of renouncing U.S. citizenship: "'if there is any possibility that you might want to become a tax exile from the U.S. at any time in the future you should get another nationality and second passport now.' Langer, The Tax Exile Report (2d ed. 1993-1994) at 67."

¹⁰⁸ IRC section 7701(n) also contained similar requirements for determining the date on which a green card holder is deemed to abandon that status. While critically important in that context, it is outside the scope of this paper.

¹⁰⁹ AJCA, supra note 92, section 804(f).

¹¹⁰ IRC section 877A(g)(3).

¹¹¹ The net worth threshold was increased from $500,000 to $2,000,000 (not indexed for inflation), and the average tax liability threshold was increased $124,000 (indexed for inflation). IRC section 877(a)(2)(A), (a)(2)(B).

¹¹² IRC section 877(g).

¹¹³ HEART, supra note 31.

¹¹⁴ IRC section 877A(a)(1).

¹¹⁵ HEART, supra note 31, section 301(a), (c)(2)(C).

¹¹⁶ Supra note 41.

¹¹⁷ Further, the term "expatriation date" also applies to green card holders who have held a green card for eight of the last fifteen years. IRC section 877A(g)(3)(B)

¹¹⁸ 8 U.S.C. section 1401(a).

¹¹⁹ 8 U.S.C. 1481(a)(1), (2).

¹²⁰ Ibid; IRC section 877A(g)(4)(A).

¹²¹ IRC section 877A(g)(4)(D).

¹²² Surpa notes 95 and 97. Note, the concurrence factor is not separately analyzed in the administrative and judicial interpretations. Therefore its relevance could be merely correlative in nature and not determinative of the outcome.

¹²³ Ibid, 877A(g)(1)(A); 877(a)(2)(A).

¹²⁴ Ibid, 877(a)(2)(A).

¹²⁵ Ibid, 877(a)(2)(C).

¹²⁶ Pfiefer, supra note 99; Miller, supra note 99.

¹²⁷ United States, Joint Committee on Taxation, 104th Cong., 1st Sess., Issues Presented by Proposals to Modify the Tax Treatment of Expatriation, (Washington, DC: Joint Committee on Taxation, June 1, 1995), at 50-53.

¹²⁸ Ibid at footnote 95.

¹²⁹ See, e.g., Supra note 109.

¹³⁰ See United States v. Carlton, 512 U.S. 26 (1994).

¹³¹ U.S. Library of Congress, Congressional Research Service. 2012. Constitutionality of Retroactive Tax Legislation, by Erika K. Lunder, Robert Meltz, and Kenneth R. Thomas. CRS Report R42791. Washington, DC: Office of Congressional Information and Publishing, October 25, 2012.

¹³²United States v. American Trucking Associations, Inc., 310 U.S. 534, 543 (1940).

¹³³United Sates v. Carlton, 512 U.S. 26, 30 (1994).

 

END OF FOOTNOTES

 

 

* * * * *

 

 

"Exhibit 1"

 

 

Explanation of Reason Account Holder Does Not Possess a

 

Certificate of Loss of Nationality Despite Having

 

Relinquished U.S. Citizenship

 

 

[ Editor's Note: To view Exhibit,

 

see Doc 2015-10678 , page 39.]