My blog post reproduced below was originally posted on AngloInfo “Let’s Talk About US Tax” on December 30, 2013 by Virginia La Torre Jeker J.D.,
Today’s blog post is yet another interview that provides valuable insight from Willard (Bill) Yates, who recently retired from the Office of Associate Chief Counsel (International) (ACCI), Internal Revenue Service after 31 years of service. During his tenure as a Chief Counsel Attorney, Bill was the recipient of 10 awards, including the Albert Gallatin Award, Treasury’s highest career service award. The Gallatin is awarded only to select federal employees who served twenty or more years in the Department and whose record reflects fidelity to duty. Bill received the Gallatin award for his work throughout his IRS career, including his work on implementation of some of the compliance requirements of the Foreign Account Tax Compliance Act (FATCA).
Most of Bill’s career at IRS focused on offshore compliance, including his participation in a massive overhaul of outdated foreign trust reporting requirements Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner). Bill was the principal drafter of the regulations under section 679, Foreign trusts having one or more United States beneficiaries, Notice 2003-75, RRSP and RRIF Information Reporting and Notice 2009-85, Guidance for Expatriates Under Section 877A.
Our focus today will be on Bill’s comments on past and present efforts to punish those who renounce U.S. Citizenship by treating them as “inadmissible” under immigration law if they try to re-enter the United States following expatriation.
Virginia La Torre Jeker: This interview was your idea. What is on your mind?
Yates: It’s the holidays-time for good cheer and a few good laughs!
Virginia La Torre Jeker: Right. Well . . .?
Yates: Let’s start with the so-called Reed Amendment, which refers to a bill introduced by Senator Jack Reed to amend part of the Immigration and Nationality Act of 1965 by adding to the list of “Classes of aliens ineligible for visas or admissions” the following paragraph which became law in 1996:
(E) Former citizens who renounced citizenship to avoid taxation.
Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.
Virginia La Torre Jeker: What’s funny about that? Everyone who practices in the area of individual international taxation knows about the Reed Amendment. I don’t know of anyone who thought it was funny then, or now for that matter.
Yates: It wasn’t funny to us at the Office of Chief Counsel (International) (ACCI), either. That is, until we started drafting regulations to implement the law.
Virginia La Torre Jeker: Go on.
Yates: The Reed Amendment gives the Attorney General the power to exclude former citizens who have been determined to have renounced their U.S. citizenship for the purpose of avoiding U.S. taxes. What that meant was that what was then INS (Immigration and Naturalization Service) would have to make the determination of whether someone’s expatriation was tax motivated.
Virginia La Torre Jeker: How was INS going to do that?
Yates: They weren’t. It was going to be ACCI, which meant me and a few other folks.
Virginia La Torre Jeker: How did that happen?
Yates: Somebody in ACCI somehow got in touch with the INS individual who was assigned the regulation project and volunteered ACCI’s assistance.
Virginia La Torre Jeker: That was nice.
Yates: Actually, the individual’s charitable intent was not well received at the time. We already had plenty to do what with the drafting of Notice 97-19 (Guidance for Expatriates Under Sections 877, 2501, 2107 and 6039F), as well as trying to figure out how in the World a National Office attorney was going to handle private letter ruling requests involving the determination of whether someone’s reason for expatriation “had for one of its principal purposes the avoidance of U.S. tax” within the meaning of section 877. But, in the end we had to help INS.
Virginia La Torre Jeker: So, you were on the drafting team?
Yates: Yes. There was a little problem from the outset. It’s called section 6103 of the Internal Revenue Code. Section 6103 prohibits the disclosure of “return information,” by the IRS, subject to criminal prosecution under Title 18 of the U.S. Code.
Virginia La Torre Jeker: I’m still not seeing the humor in all of this.
Yates: Oh, you will. Please answer this question. How is the IRS going to tell INS that a taxpayer’s expatriation was tax motivated, i.e. the taxpayer came in for a private letter ruling and was informed that his or her expatriation was tax motivated?
Virginia La Torre Jeker: You just told us that IRS couldn’t do that because of section 6103.
Yates: Right. So here’s what the proposed regulation provided. The best way to explain it is to give an example. We’ll assume this takes place under old tax law regarding expatriation when former citizens could get a ruling from the IRS that their expatriation was not tax motivated if their income tax and net worth exceeded certain thresholds prior to the date of expatriation. This all changed in 2004 when the ruling procedure was eliminated.
Virginia La Torre Jeker: Yes, please, we’re all waiting.
Yates: Ok, “AC” is a UK investment banker. He travels back and forth to New York all of the time. No surprise there. Although AC is a UK citizen, he also just happened to be born in New York while he parents were vacationing and visiting friends. AC has no idea that because he was born in the United States, he is a U.S. citizen.
Virginia La Torre Jeker: He’s an accidental citizen.
Yates: Bingo! AC = accidental citizen! Pretty good, huh?
Virginia La Torre Jeker: You’re crazy!
Yates: What took you so long? Anyway, then, once upon a birthday party, AC and his parents are talking and laughing about his unexpected birth in the USA. Upon hearing this someone at the party gleefully shouts out above the crowd, “he’s not only one year older, he’s a U.S. citizen, too!”
Virginia La Torre Jeker: What was AC’s reaction to that
Yates: AC didn’t have any reaction. Lucky for AC, or maybe not so lucky for AC, his accountant/tax return preparer, TP, was at the party.
Virginia La Torre Jeker: Uh, oh.
Yates: Uh, oh is right. The next day, AC is happily working away at his desk at his office on Canary Warf in London making gazillions of dollars when TP calls.
“Hi AC,” TP says, “have you got a minute?”
“Hey TP,” AC replies, “great party, thanks for coming! You know what I always say. ‘Always have your tax-man, close at hand.’ I always get a laugh when I say it to people.”
“Very funny,” TP replies. “AC, did you know you were a U.S. citizen because of your premature birth in the states?”
“No. So what?”
“It means you should have been filing U.S. tax returns all of these years.”
“You’re kidding?” AC replies.
“I wish I was. Do you want to come here to discuss this, or do you want me to come over there?”
“How much is this going to cost me?”
“Well,” TP begins, “we’re going to have to go back and file for the last three to six years, depending on whether you would have owed any U.S. tax after the foreign earned income exclusion, the foreign tax credit and the U.S.-U.K. Treaty. And, there will be interest, and possibly penalties, as well. And, then my fees.”
Dumbfounded, AC drops the phone, which clatters onto his desk.
“AC, are you still there?” TP asks. “Are you alright?”
AC finally picks up the phone.
“What treaty?” he asks. “Was this because of the War of 1812?”
“Why don’t I just come over there,” AC says. “You better just sit where you are.”
Virginia La Torre Jeker (laughing): This would be funny if it wasn’t an example of what happens when people find out about the perils of U.S. citizenship.
Yates: Oh, don’t worry. There’s a happy ending. So, anyway, TP goes over to AC’s office and explains all of the bad news to AC.
“Does this mean I have to file U.S. returns going forward?” AC asks, despondently.
“Yes,” TP replies. “But, we can get you out of that responsibility.”
AC’s eyes brighten.
“How?” he asks.
“You can expatriate, renounce your U.S. citizenship.”
“How do I do that?” AC asks.
“That’s easy,” TP says. “We’ll just march on down to the U.S. Embassy and have you fill out some papers.”
“That’s all?” AC asks. “Then it’s over?”
“Well, not exactly,” TP says. “You’ll still want to get a ruling from the IRS that your expatriation is not tax motivated. What I mean is that you’re not giving up U.S. citizenship to avoid paying U.S. tax.”
“But, I didn’t even know I was a U.S. citizen!” AC shouts.
“Yes,” TP says, “but you do now don’t you?”
“What kind of a game is the U.S. playing, ‘Gotcha’?” AC shouts. “Oh, forget it. How much is getting a ruling from IRS going to cost?
“Well,” TP begins, “given the rather complex nature of your finances . . . at least $25,000, just to get started.”
Virginia La Torre Jeker: Is this a true story?
Yates: Partly. Anyway, AC goes to the U.S. Embassy fills out the form and eventually gets a CLN, a Certificate of Loss of Nationality from U.S. State Department. Then, TP sends in a request for an 877 PLR, our very first one, and it lands on my desk. AC was represented by a London practitioner who is now a friend of mine. I read the request and became incensed. How could anyone not know they were a U.S. citizen?!!!
Virginia La Torre Jeker: You’re kidding me? You had never heard of the term “accidental citizen?”
Yates: Nope. When TP explained that AC was an accidental citizen, I thought he was just giving me a line. After awhile, after working a bunch of 877 PLRs, I realized we didn’t know anything about anything when it came to U.S. citizens working overseas, accidental or otherwise.
Virginia La Torre Jeker: You certainly didn’t. Please go on. What position did the Service take with respect to AC’s 877 PLR?
Yates: Adverse! I was going to crucify the guy. How could someone not know they were a U.S. citizen? Boy, I was going to show AC a thing or two! I TP asked for an adverse conference and we set one up for him.
Virginia La Torre Jeker: This is hilarious!
Yates: Oh, it gets better. On the date of the adverse conference call, my reviewer and I restate that we are adverse. The practitioner made his accidental citizen argument. He also pointed out that AC had never lived in the U.S., had no ties to the U.S. other than his business, felt great loyalty to the UK and didn’t want to have to file U.S. tax returns for the rest of his life.
Virginia La Torre Jeker: What was your reaction?
Yates: We didn’t buy it. We told the practitioner we were still adverse, but that he could withdraw the request for a ruling if he didn’t want an adverse ruling. Then, he said, “we’ll take an adverse ruling and go to court.”So, we issued an adverse. At least I think we did. It was so long ago I don’t remember. It doesn’t’ matter. We’ll assume AC got an adverse so we can talk about what would have happened if the Reed Amendment had actually been implemented with the proposed regulations.
Virginia La Torre Jeker: Yes, please do.
Yates: Like I said in the beginning, AC travels regularly to New York on business. After he expatriates, his name will appear on a list of former citizens required to be published in the Federal Register pursuant to section 6039G of the Health Insurance Portability and Accountability Act (HIPAA) of 1996. So, one day AC flys into La Guardia and goes to Customs. Notice I didn’t say “through Customs.”
Virginia La Torre Jeker: Why doesn’t he go “through” Customs?
Yates: Because when it comes time to be interviewed by the Customs Inspector, the inspector will check to see if his name appears on the list of former U.S. citizens.
Virginia La Torre Jeker: Are you telling me that Customs was going to check the names of every person entering the U.S. in every port of entry to see if they are on the list of former U.S. citizens? That’s ridiculous.
Yates: It is ridiculous, but that would have happened if the proposed regs to implement the Reed Amendment had ever been finalized.
Virginia La Torre Jeker: What happens now?
Virginia La Torre Jeker: The Customs Inspector sees AC’s name on the list of former citizens and asks AC to sign a form waiving his rights under section 6103 to have his tax information protected.
Virginia La Torre Jeker: Why is AC being asked to sign the waiver?
Yates: Because once AC signs the waiver, he has given up his right to have his tax information protected by section 6103. Then the Customs agent can fax the signed form to an IRS agent in Washington. The IRS agent has a file containing all of the 877 PLRs issued by ACCI. He will be able to tell Customs Inspector whether or not AC received a favorable 877 PLR.
Virginia La Torre Jeker: But AC didn’t get a favorable ruling. He must know that if he signs the waiver, he’ll be denied entry.
Yates: Right, so we’ll assume that he refuses to sign the waiver.
Virginia La Torre Jeker: Then what happens?
Yates: AC is denied entry anyway. He is detained and then sent out of the U.S. on the next available flight to anywhere land, any destination ASAP. By the way detained means “held” in a secure area such as “a detention cell, search room, interview room, or security office where an individual is detained for a temporary period of time out of public view and cannot flee.” See section 17 of the Inspectors Field Manual. That’s what a Customs guy told me would happen.
Virginia La Torre Jeker: That is what the proposed regulations for the Reed Amendment did? I thought you said this story was going to have a happy ending?
Yates: It does. Regulations necessary for implementing the Reed Amendment were never issued. What I just told you is what would have happened if they had been issued. Anyway, now let’s assume that AC received a favorable 877 PLR, but he comes to New York on a weekend.
Virginia La Torre Jeker: So he’s fine. He gets in, right?
Yates: He should be just fine, but like I said, he comes in on a weekend.
Virginia La Torre Jeker: So?
Yates: The IRS agent doesn’t work on the weekends. So, I guess AC has to wait until Monday to get in. In the mean time, I guess he gets detained.
Virginia La Torre Jeker: This is hideous! But, it’s so stupid it’s funny. There was going to be only one IRS agent assigned to this? And, New York isn’t the only port of entry into the U.S., you know.
Yates: The Devil is in the details, they always say. In my own defense, I had been taken off the Reed Amendment regulation team before we had even started on an initial draft.
Virginia La Torre Jeker: Unbelievable. Now can we talk about the Schumer Ex-Patriot Act.
Yates: Sure. If enacted, the Ex-Patriot Act will impose 30% tax and withholding on capital gains income realized by a former citizen who was covered by section 877A, Tax Responsibilities Of Expatriation. Section 877A imposes a mark-to-market tax on certain citizens and green card holders who meet certain income tax and net worth thresholds, or fail to certify that they have been fully compliant with U.S. tax laws for the 5-year-period ending before they expatriate. In short, pursuant to section 877A a former U.S. citizen or green card holder is treated as having sold all of his/her worldwide assets on the day before expatriation
Virginia La Torre Jeker: You know, more than a few of us are worried that some former green card holders would be subject to the Ex-Patriot Act? You just said that the Act will hit anyone who was subject to section 877A, and that section 877A can apply to both citizens and green card holders.
Yates: Absolutely not. The legislation contains an exception which to the application of the legislation “if such individual establishes to the satisfaction of the Secretary that the loss of such individual’s United States citizenship did not result in a substantial reduction in taxes.” (Emphasis added.) This language does not make sense if green card holders were intended to be covered by the Ex-Patriot Act. Why would there be an exception solely for former citizens and not former green card holders as well? In addition, all of the rants that I have read regarding the reason for this proposed legislation spoke only about former citizens, not former green card holders. Finally, including former green card holders in the class of individuals subject to the Ex-Patriot Act would have a catastrophic impact on our economy as far as attracting talent from outside our boarders goes. Who in the world would ever want to come to the U.S. to work, make money, AND PAY TAXES, TOO?
Virginia La Torre Jeker: Wow, is that your short answer? Sorry I mentioned our concerns.
Yates: Yeah, well, I get a little excited when I see junk like this sitting in the legislative hopper. Sorry about that.
Anyway, the short answer is that the Ex-Patriot Act is yet another example of very poorly drafted legislation. The rest of the short answer is that I wouldn’t hesitate to take the Service to the mat if this legislation became law and the Service tried to apply it to former green card holders!
Virginia La Torre Jeker: We better go on now. Whew! So the Ex-Patriot Act would apply to any former citizen who also was subject to section 877A? A double hit? I think that should be emphasized.
Yates: I agree, totally. But, the immigration part of the law is just as problematic. Any former U.S. citizen who was subject to 877A will be “inadmissible” if they try to re-enter the U.S. unless he/she can prove to the Department of Homeland Security (DHS) that he/she’s expatriation was not tax motivated. The legislation was apparently touched off by the expatriation of billionaire Face Book co-founder, Eduardo Savarin. Sponsors of the Act, Senators Schumer and Casey, apparently were “outraged” that someone who had made a fortune in the U.S. would then leave the country, taking their wealth with them. It’s an old argument. Same thing with the Reed Amendment, which was Congress’ reaction to Kenneth Dart’s (Dart Container) expatriation. He went to Belize. Soon thereafter, he wanted to return to the U.S. on a diplomatic visa. We stopped that; we contacted State the minute we found out. And, you’ll love this. When a certain congressman found out about wealthy Americans like Dart giving up their citizenship to avoid taxes he said, “those people should have their citizenship revoked!”
Virginia La Torre Jeker: Our tax dollars hard at work.
Yates: You got it!
Virginia La Torre Jeker: Let’s get back to the Ex-Patriot Act. What does DHS know about tax-motivated expatriation?
Yates: Probably nothing.
Virginia La Torre Jeker: So, how will they make a determination that someone’s expatriation was tax motivated?
Yates: DHS will have to depend on the IRS, just like INS did regarding the Reed Amendment. Then, IRS and ICE (Immigration and Customs Enforcement) will have to buddy-up to figure out how the inevitable port of entry/airport scene will work. It’s crazy. The whole idea of the mark-to-market tax under section 877A was to eliminate the “motive” element of a prior version of section 877. We liked what section 877A did. It made IRS’s job much easier.
Virginia La Torre Jeker: You wrote the guidance under section 877A didn’t you?
Yates: Yes, I was the principal drafter of Notice 2009-85, Guidance for Expatriates Under Section 877A. There is one more thing about the Ex-Patriot Act. If enacted it’s retroactive to 10 years prior to the date of enactment.
Virginia La Torre Jeker: Pretty harsh.
Yates: It’s bad policy, too. What if Mr. Savarin wants to invest in the U.S. and/or wants to come back here for another business venture? He must have paid taxes while he was here. He obviously created some jobs for people. Are we telling all successful people who leave the U.S. that we don’t want them or their money anymore, ever? That’s stupid, short-sighted . . . and, that’s Congress.
Virginia La Torre Jeker: I have one more question. You wanted the title of this interview to be Once You Go, You Can’t Come Back. It sounds like a song
Yates: It’s a lyric from a Kingston Trio song, Fast Freight.
Bill Yates will be giving a presentation on expatriation at the annual International Tax Conference presented by the New York State Society Of Certified Public Accountants on January 30, 2014. Bill is available for consultation at 703-585-1786 and at Inagua123@me.com.
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