§511. REVISION OF INCOME, ESTATE, AND GIFT TAXES ON INDIVIDUALS WHO LOSE UNITED STATES CITIZENSHIP.

Health Insurance Portability and Accountability Act of 1996

TITLE V—REVENUE OFFSETS

(a) In General.—Subsection (a) of section 877 is amended to read as follows:

‘‘(a) Treatment of Expatriates.—

‘‘(1) In general.—Every nonresident alien individual who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection exceeds the tax which, without regard to this section, is imposed pursuant to section 871.

‘‘(2) Certain individuals treated as having tax avoidance purpose.—For purposes of paragraph (1), an individual shall be treated as having a principal purpose to avoid such taxes if—

‘‘(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $100,000, or

‘‘(B) the net worth of the individual as of such date is $500,000 or more.

In the case of the loss of United States citizenship in any calendar year after 1996, such $100,000 and $500,000 amounts shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting '1994' for '1992' in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.’’.

(b) Exceptions.—

(b)(1) In general.—Section 877 is amended by striking subsection (d), by redesignating subsection (c) as subsection (d), and by inserting after subsection (b) the following new subsection:

‘‘(c) Tax Avoidance Not Presumed in Certain Cases.—

‘‘(1) In general.—Subsection (a)(2) shall not apply to an individual if—

‘‘(A) such individual is described in a subparagraph of paragraph (2) of this subsection, and

‘‘(B) within the 1-year period beginning on the date of the loss of United States citizenship, such individual submits a ruling request for the Secretary's determination as to whether such loss has for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B.

‘‘(2) Individuals described.—

‘‘(A) Dual citizenship, etc.—An individual is described in this subparagraph if—

‘‘(i) the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, or

‘‘(ii) the individual becomes (not later than the close of a reasonable period after loss of United States citizenship) a citizen of the country in which—

‘‘(I) such individual was born,

‘‘(II) if such individual is married, such individual's spouse was born, or

‘‘(III) either of such individual's parents were born.

‘‘(B) Long-term foreign residents.—An individual is described in this subparagraph if, for each year in the 10-year period ending on the date of loss of United States citizenship, the individual was present in the United States for 30 days or less. The rule of section 7701(b)(3)(D)(ii) shall apply for purposes of this subparagraph.

‘‘(C) Renunciation upon reaching age of majority.—An individual is described in this subparagraph if the individual's loss of United States citizenship occurs before such individual attains age 18 ½

‘‘(D) Individuals specified in regulations.—An individual is described in this subparagraph if the individual is described in a category of individuals prescribed by regulation by the Secretary.’’.

(b)(2) Technical amendment.—Paragraph (1) of section 877(b) of such Code is amended by striking ‘‘subsection (c)’’ and inserting ‘‘subsection (d)’’.

(c) Treatment of Property Disposed of in Nonrecognition Transactions; Treatment of Distributions From Certain Controlled Foreign Corporations.—Subsection (d) of section 877, as redesignated by subsection (b), is amended to read as follows:

‘‘(d) Special Rules for Source, Etc.—For purposes of subsection (b)—

‘‘(1) Source rules.—The following items of gross income shall be treated as income from sources within the United States:

‘‘(A) Sale of property.—Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States.

‘‘(B) Stock or debt obligations.—Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia.

‘‘(C) Income or gain derived from controlled FOREIGN CORPORATION.—Any income or gain derived from stock in a foreign corporation but only—

‘‘(i) if the individual losing United States citizenship owned (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), at any time during the 2-year period ending on the date of the loss of United States citizenship, more than 50 percent of—

‘‘(I) the total combined voting power of all classes of stock entitled to vote of such corporation, or

‘‘(II) the total value of the stock of such corporation, and

‘‘(ii) to the extent such income or gain does not exceed the earnings and profits attributable to such stock which were earned or accumulated before the loss of citizenship and during periods that the ownership requirements of clause (i) are met.

‘‘(2) Gain recognition on certain exchanges.—

‘‘(A) In general.—In the case of any exchange of property to which this paragraph applies, notwithstanding any other provision of this title, such property shall be treated as sold for its fair market value on the date of such exchange, and any gain shall be recognized for the taxable year which includes such date.

‘‘(B) Exchanges to which paragraph applies.—This paragraph shall apply to any exchange during the 10-year period described in subsection (a) if—

‘‘(i) gain would not (but for this paragraph) be recognized on such exchange in whole or in part for purposes of this subtitle,

‘‘(ii) income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), and

‘‘(iii) income derived from the property acquired in the exchange would be from sources outside the United States.

‘‘(C) Exception.—Subparagraph (A) shall not apply if the individual enters into an agreement with the Secretary which specifies that any income or gain derived from the property acquired in the exchange (or any other property which has a basis determined in whole or part by reference to such property) during such 10-year period shall be treated as from sources within the United States. If the property transferred in the exchange is disposed of by the person acquiring such property, such agreement shall terminate and any gain which was not recognized by reason of such agreement shall be recognized as of the date of such disposition.

‘‘(D) Secretary may extend period.—To the extent provided in regulations prescribed by the Secretary, subparagraph (B) shall be applied by substituting the 15-year period beginning 5 years before the loss of United States citizenship for the 10-year period referred to therein.

‘‘(E) Secretary may require recognition of gain in certain cases.—To the extent provided in regulations prescribed by the Secretary—

‘‘(i) the removal of appreciated tangible personal property from the United States, and

‘‘(ii) any other occurrence which (without recognition of gain) results in a change in the source of the income or gain from property from sources within the United States to sources outside the United States, shall be treated as an exchange to which this paragraph applies.

‘‘(3) Substantial diminishing of risks of ownership.— For purposes of determining whether this section applies to any gain on the sale or exchange of any property, the running of the 10-year period described in subsection (a) shall be suspended for any period during which the individual's risk of loss with respect to the property is substantially diminished by-

‘‘(A) the holding of a put with respect to such property (or similar property),

‘‘(B) the holding by another person of a right to acquire the property, or

‘‘(C) a short sale or any other transaction.

‘‘(4) Treatment of property contributed to controlled foreign corporations.—

‘‘(A) In general.—If—

‘‘(i) an individual losing United States citizenship contributes property to any corporation which, at the time of the contribution, is described in subparagraph (B), and

‘‘(ii) income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), during the 10-year period referred to in subsection (a), any income or gain on such property (or any other property which has a basis determined in whole or part by reference to such property) received or accrued by the corporation shall be treated as received or accrued directly by such individual and not by such corporation. The preceding sentence shall not apply to the extent the property has been treated under subparagraph (C) as having been sold by such corporation.

‘‘(B) Corporation described.—A corporation is described in this subparagraph with respect to an individual if, were such individual a United States citizen—

‘‘(i) such corporation would be a controlled foreign corporation (as defined in 957), and

‘‘(ii) such individual would be a United States shareholder (as defined in section 951(b)) with respect to such corporation.

‘‘(C) Disposition of stock in corporation.—If stock in the corporation referred to in subparagraph (A) (or any other stock which has a basis determined in whole or part by reference to such stock) is disposed of during the 10-year period referred to in subsection (a) and while the property referred to in subparagraph (A) is held by such corporation, a pro rata share of such property (determined on the basis of the value of such stock) shall be treated as sold by the corporation immediately before such disposition.

‘‘(D) Anti-abuse rules.—The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the purposes of this paragraph, including where—

‘‘(i) the property is sold to the corporation, and

‘‘(ii) the property taken into account under subparagraph (A) is sold by the corporation.

‘‘(E) Information reporting.—The Secretary shall require such information reporting as is necessary to carry out the purposes of this paragraph.’’.

(d) Credit for Foreign Taxes Imposed on United States Source Income.—

(d)(1) Subsection (b) of section 877 is amended by adding at the end the following new sentence: ‘‘The tax imposed solely by reason of this section shall be reduced (but not below zero) by the amount of any income, war profits, and excess profits taxes (within the meaning of section 903) paid to any foreign country or possession of the United States on any income of the taxpayer on which tax is imposed solely by reason of this section.’’

(d)(2) Subsection (a) of section 877, as amended by subsection (a), is amended by inserting ‘‘(after any reduction in such tax under the last sentence of such subsection)’’ after ‘‘such subsection’’.

(e) Comparable Estate and Gift Tax Treatment.—

(e)(1) Estate tax.—

(e)(1)(A) In general.—Subsection (a) of section 2107 is amended to read as follows:

‘‘(a) Treatment of Expatriates.—

‘‘(1) Rate of tax.—A tax computed in accordance with the table contained in section 2001 is hereby imposed on the transfer of the taxable estate, determined as provided in section 2106, of every decedent nonresident not a citizen of the United States if, within the 10-year period ending with the date of death, such decedent lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle A.

‘‘(2) Certain individuals treated as having tax avoidance purpose.—

‘‘(A) In general.—For purposes of paragraph (1), an individual shall be treated as having a principal purpose to avoid such taxes if such individual is so treated under section 877(a)(2).

‘‘(B) Exception.—Subparagraph (A) shall not apply to a decedent meeting the requirements of section 877(c)(1).

(e)(1)(B) Credit for foreign death taxes.—Subsection (c) of section 2107 is amended by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph (1) the following new paragraph:

‘‘(2) Credit for foreign death taxes.—

‘‘(A) In general.—The tax imposed by subsection (a) shall be credited with the amount of any estate, inherit- ance, legacy, or succession taxes actually paid to any foreign country in respect of any property which is included in the gross estate solely by reason of subsection (b).

‘‘(B) Limitation on credit.—The credit allowed by subparagraph (A) for such taxes paid to a foreign country shall not exceed the lesser of—

‘‘(i) the amount which bears the same ratio to the amount of such taxes actually paid to such foreign country in respect of property included in the gross estate as the value of the property included in the gross estate solely by reason of subsection (b) bears to the value of all property subjected to such taxes by such foreign country, or

‘‘(ii) such property's proportionate share of the excess of—

‘‘(I) the tax imposed by subsection (a), over

‘‘(II) the tax which would be imposed by section 2101 but for this section.

‘‘(C) Proportionate share.—For purposes of subparagraph (B), a property's proportionate share is the percentage of the value of the property which is included in the gross estate solely by reason of subsection (b) bears to the total value of the gross estate.’’.

(e)(1)(C) Expansion of inclusion in gross estate of stock of foreign corporations.—Paragraph (2) of section 2107(b) is amended by striking ‘‘more than 50 percent of’’ and all that follows and inserting ‘‘more than 50 percent of—

‘‘(A) the total combined voting power of all classes of stock entitled to vote of such corporation, or

‘‘(B) the total value of the stock of such corporation,’’.

(e)(2) Gift tax.—

(e)(2)(A) In general.—Paragraph (3) of section 2501(a) is amended to read as follows:

‘‘(3) Exception.—

‘‘(A) Certain individuals.—Paragraph (2) shall not apply in the case of a donor who, within the 10-year period ending with the date of transfer, lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle A.

‘‘(B) Certain individuals treated as having tax avoidance purpose.—For purposes of subparagraph (A), an individual shall be treated as having a principal purpose to avoid such taxes if such individual is so treated under section 877(a)(2).

‘‘(C) Exception for certain individuals.—Subparagraph (B) shall not apply to a decedent meeting the requirements of section 877(c)(1).

‘‘(D) Credit for foreign gift taxes.—The tax imposed by this section solely by reason of this paragraph shall be credited with the amount of any gift tax actually paid to any foreign country in respect of any gift which is taxable under this section solely by reason of this paragraph.’’.

(f) Comparable Treatment of Lawful Permanent Residents Who Cease To Be Taxed as Residents.—

(f)(1) In general.—Section 877 is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection:

‘‘(e) Comparable Treatment of Lawful Permanent Residents Who Cease To Be Taxed as Residents.—

‘‘(1) In general.—Any long-term resident of the United States who—

‘‘(A) ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or

‘‘(B) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country, shall be treated for purposes of this section and sections 2107, 2501, and 6039F in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.

‘‘(2) Long-term resident.—For purposes of this subsection, the term 'long-term resident' means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

‘‘(3) Special rules.—

‘‘(A) Exceptions not to apply.—Subsection (c) shall not apply to an individual who is treated as provided in paragraph (1).

‘‘(B) Step-up in basis.—Solely for purposes of determining any tax imposed by reason of this subsection, property which was held by the long-term resident on the date the individual first became a resident of the United States shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.

‘‘(4) Authority to exempt individuals.—This subsection shall not apply to an individual who is described in a category of individuals prescribed by regulation by the Secretary.

‘‘(5) Regulations.—The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations providing for the application of this subsection in cases where an alien individual becomes a resident of the United States during the 10-year period after being treated as provided in paragraph (1).’’.

(f)(2) Conforming amendments.—

(f)(2)(A) Section 2107 is amended by striking subsection (d), by redesignating subsection (e) as subsection (d), and by inserting after subsection (d) (as so redesignated) the following new subsection:

‘‘(e) Cross Reference.—

‘‘For comparable treatment of long-term lawful permanent residents who ceased to be taxed as residents, see section 877(e).’’.

(f)(2)(B) Paragraph (3) of section 2501(a) (as amended by subsection (e)) is amended by adding at the end the following new subparagraph:

‘‘(E) Cross reference.—

‘‘For comparable treatment of long-term lawful permanent residents who ceased to be taxed as residents, see section 877(e).’’.

(g) EFFECTIVE DATE. (26 USC 877)—

(g)(1) In general.—The amendments made by this section shall apply to—

(g)(1)(A) individuals losing United States citizenship (within the meaning of section 877 of the Internal Revenue Code of 1986) on or after February 6, 1995, and

(g)(1)(B) long-term residents of the United States with respect to whom an event described in subparagraph (A) or (B) of section 877(e)(1) of such Code occurs on or after February 6, 1995.

(g)(2) Ruling requests.—In no event shall the 1-year period referred to in section 877(c)(1)(B) of such Code, as amended by this section, expire before the date which is 90 days after the date of the enactment of this Act.

(g)(3) Special rule.—

(g)(3)(A) In general.—In the case of an individual who performed an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)) before February 6, 1995, but who did not, on or before such date, furnish to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of such act, the amendments made by this section and section 512 shall apply to such individual except that the 10-year period described in section 877(a) of such Code shall not expire before the end of the 10-year period beginning on the date such statement is so furnished.

(g)(3)(B) Exception.—Subparagraph (A) shall not apply if the individual establishes to the satisfaction of the Secretary of the Treasury that such loss of United States citizenship occurred before February 6, 1994.