Document Type

Article

Publication Title

San Diego Law Review

Volume

34

Publication Date

1997

Keywords

Expatriate, tax residency, Health Insurance Portability and Accountability Act, mark-to-market taxation, expatriate tax

Abstract

One of the most contentious tax legislative battles of the 104th Congress erupted over the Clinton administration's proposal to amend the U.S. tax rules applicable to expatriates. The administration proposed taxing the abandonment of either U.S. citizenship or long-term U.S. tax residency. The administration's proposal responded to a number of articles in the popular press that described the U.S. tax benefits of expatriation and divulged the names of well-heeled expatriates. Proponents claimed that Congress needed to revise the taxation of expatriates to prevent "billionaire Benedict Arnolds" from avoiding "their fair share" of U.S. income taxes. Opponents argued that the Clinton proposal would affect foreign investment in the United States and compared it to the loathed exit tax imposed by the former Soviet Union on emigrants. After the introduction of the administration's expatriate provisions, a legislative debate ensued. The Senate favored the administration's approach, under which an expatriate's property would be deemed to be sold for its fair market value-marked to market-on the date of expatriation. The House, however, generally favored retaining the existing expatriate regime, under which a tax-motivated expatriate is taxed like a citizen on income from the United States for ten years following expatriation. The House version passed Congress as part of the Health Insurance Portability and Accountability Act of 1996 and was signed into law on August 21, 1996. In this Article, I argue that Congress should adopt a mark-to-market tax regime for persons and property that enter or leave U.S. residence or trade or business taxation. Mark-to-market taxation embodies sound tax policy. It better reflects the ability-to-pay norm, because it includes in the tax base all changes in a citizen's net wealth. It also better reflects the norm of economic rationality, because all gains-U.S. and foreign-are taxed. Part II of this Article briefly summarizes the current U.S. income and transfer taxation of citizens, residents, and nonresidents, and discusses the Code provisions that are intended to protect residence basis tax jurisdiction. Part III focuses on the challenges to the U.S. tax system that expatriation poses and argues that mark-to-market taxation is the appropriate response. Part IV addresses policy issues that would arise under an accrual tax system for expatriates and immigrants. Part V discusses the current U.S. expatriate tax regime. Part VI addresses the analogous tax issues raised by foreigners becoming resident aliens or citizens or bringing property into a U.S. trade or business. In addition, Part VII considers some ancillary issues raised by a mark-to-market regime.

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