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Michael Pfeifer Comments on the Issuance of U.S. Guidance on Expatriate Tax Status

May 6, 2015, Worldwide Tax Daily

Michael G. Pfeifer spoke with Worldwide Tax Daily on letters he and the American Bar Association Section of Taxation sent to the U.S. Treasury  Department and the IRS. In their letters, Mr. Pfeifer and the ABA urged the government to issue guidance clarifying that the section 877A rules regarding termination of U.S. citizenship for tax purposes will not be applied retroactively. For the complete article, please visit Worldwide Tax Daily's website (subscription required).

Excerpt taken from the article "Practitioners Urge Issuance of U.S. Guidance on Expatriate Tax Status" by Kristen A. Parillo for Worldwide Tax Daily.

Implications for Current U.S. Taxation

Letters to Treasury and the IRS explaining the problem have been sent by the American Bar Association Section of Taxation, and by Michael G. Pfeifer of Caplin & Drysdale and Steve Trow of Trow & Rahal PC. Both letters state that many individuals who relinquished their U.S. citizenship before the AJCA and HEART Act were enacted are worried that the IRS may take the view that sections 877A and 7701(a)(50) retroactively reinstated their status as U.S. citizens for tax purposes.

In their letters, the ABA and Pfeifer and Trow summarized the history of the expatriation rules and analyze the effective date issues arising from section 877A. They argued that Congress couldn't have intended to retroactively apply the current expatriation tax rules to expatriating acts that took place before those rules were even enacted. According to Pfeifer and Trow, applying the current rules that way would be inconsistent with congressional actions reflected in the expatriation tax provisions enacted as part of the 2004 AJCA and the 1996 Health Insurance Portability and Accountability Act. They pointed out that the AJCA and the 1996 legislation applied only to expatriating acts taking place after their effective dates.

The ABA and Pfeifer and Trow also argued that a court would likely find retroactive application of section 877A unconstitutional under U.S. Supreme Court case law. The ABA pointed out that "it is well established that a statute must not be interpreted to compel absurd results," while Pfeifer and Trow said a retroactive application of section 877A would fall outside the limited circumstances that the Supreme Court has determined are permissible for changes to tax provisions.

The writers say Treasury and the IRS can resolve the problem through guidance. Pfeifer and Trow suggest the government issue a notice indicating that it will narrowly construe the definition of expatriation date in section 877A(g)(3) and (4) to conform to what might be reasonably assumed to have been Congress's intent when it enacted section 877A. They say the notice could provide that if an individual committed before June 3, 2004, an expatriating act that the State Department is satisfied resulted in the relinquishment of his U.S. citizenship for nationality purposes, the individual's citizenship for tax purposes should also be treated as relinquished, effective as of the date of the expatriating act, even if he didn't obtain a CLN at or soon after the time of the expatriating act.

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What's Next?

Pfeifer and Berg told Tax Analysts they hope the government will issue some sort of guidance sooner rather than later. Given the U.S. government's heightened enforcement efforts against offshore tax evasion, many former citizens fear they could get caught in the uncertainty. "It really is necessary for Treasury and the Service to come out with a clear statement that lifts this veil of fear and confusion that people have about their tax status," said Pfeifer. 

Pfeifer and Berg said they recognize that Treasury and the IRS have limited resources for issuing guidance. That no one can give an accurate estimate regarding how many people might be affected by a retroactive application of section 877A(g)(3) and (4) compounds the problem, Pfeifer added. "I'd say there are probably tens of thousands, but there's no way to get an actual roster of such people," he said. "The IRS and Treasury don't want to throw resources that are already stretched at problems that aren't going to affect a lot of people."
Berg said the implementation of FATCA has added a sense of urgency to the problem. "From a FATCA perspective, this is a big deal for foreign financial institutions that risk losing their clients because they have to turn them in," he said. "They just want to know how to administer this reasonable explanation provision and not walk their clients into this buzzsaw of prior nonfilings and a potential exit tax."

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