Relinquishing U.S. citizenship and expatriation

This is a question that comes up again and again. People we talk to about expatriation ask me what the difference is between “relinquishing” or “renouncing” U.S. citizenship. The answer is that you end up in the same place — you are no longer a U.S. citizen. It’s just how you get there.

TL;DR

You “renounce” U.S. citizenship if you show up in front of a government official and say “I’m outta here, Jack”. Do the paperwork they want, too. This action is “renouncing” and by doing so you “relinquish” your U.S. citizenship. You can also “relinquish” your citizenship by doing stuff that doesn’t involve showing up in front of a State Department official. You just do different things, and different paperwork. In other words, you can get there by car, by walking, or by taking a train. But you get there no matter which way you choose.

The Law

As always, start with the United States Code. The place to look is Title 8, United States Code, Chapter 12, Subchapter III, Part III. This is where you find the rules for how citizens of the United States (“nationals”) can terminate their U.S. citizen status. This applies to citizenship acquired by birth or through naturalization. There is also information that helps you figure out why the law uses parallel definitions (“citizen” and “national”). Once we are finished with this analysis, we will port our conclusions over to the Internal Revenue Code (found in Title 26 of the United States Code) to figure out what it all means for tax purposes.

Definitions–“National” of the United States

A “national” of the United States is someone who owes allegiance to the United States because he or she is a U.S. citizen, or (if a noncitizen) for some other reason. 8 U.S.C. Section 1101(a)(22). Thus, a U.S. citizen is always a “national” of the United States. See 8 U.S.C. Section 1101(a)(22)(A). The concept of being a “national” of the United States without being a citizen [8 U.S.C. Section 1101(a)(22)(B)] is interesting in an abstract way, but does not matter to people considering the tax implications of terminating their citizenship. The Internal Revenue Code only cares about citizens who relinquish or renounce their U.S. citizenship. It does not care about “nationals” of the United States who somehow lose nationality. See 26 U.S.C. Section 877A(g)(2)(A), where the word “expatriate” for purposes of tax is defined solely in terms of “citizens” of the United States. This means that someone who is purely a “national” of the United States (and not a citizen) may terminate that status without incurring the application of the exit tax provisions of Internal Revenue Code Sections 877A and 2801.

Definitions–“Citizen” of the United States

Since all of the fun and games for tax purposes revolves around citizenship and its relinquishment or renunciation, let’s look at what it takes to be a citizen of the United States. The first way to become a citizen of the United States is by birth. While birth within the borders of the United States is the simplest way to accomplish this, being born outside the United States under a variety of specified circumstances will also do the trick. See 8 U.S.C. Sections 1401 – 1409. As this discussion is for tax professionals and not immigration specialists, we will ignore the intricacies of acquiring citizenship by birth, and assume that the individual contemplating expatriation is, in fact, a U.S. citizen. The second way to become a U.S. citizen is by naturalization. See 8 U.S.C. Section 1421 – 1459. Again, there are a myriad ways to accomplish this, but the details are unimportant for tax purposes. All that matters is the result–U.S. citizenship has been attained–so we will not explore the many paths to citizenship through naturalization.

Loss of Citizenship

Now that we know the difference between a “national” of the United States and a “citizen”, let us turn to how citizenship status is terminated, and more specifically to how the Internal Revenue Code ties that event to tax consequences. Start first with the Internal Revenue Code. For tax purposes, the critical thing is that the individual “relinquishes” his or her U.S. citizenship. See 26 U.S.C. Section 877A(g)(4). The Code goes on to tell us what, specifically, it will take to “relinquish” U.S. citizenship. See 26 U.S.C. Section 877A(g)(4)(A) through (D). It is important to understand why we look to the Internal Revenue Code for definitions about citizenship and relinquishing that status. Common sense says we should look at the Immigration and Nationality Act, found in Title 8 of the United States Code. After all, that is where Congress said everything it wanted to say about the subject. However, remember we are looking at the tax consequences of relinquishing citizenship, and therefore we care only about what Congress said about that particular aspect of citizenship law–not citizenship law generally. Definitions and requirements do not automatically float from one Title of the United States Code to another. Something that Congress says in Title 8 will not automatically apply for purposes of Title 26 (the Internal Revenue Code). That is why Internal Revenue Code Section 877A(g)(4) takes such pains to cross-reference to four specific ways in which citizenship can be relinquished. It does so by specifically incorporating the rules found in the Immigration and Nationality Act into the Internal Revenue Code. This means we have consistency between the immigration rules and the tax rules. Only by the specific cross-reference can this be accomplished. Looking now at the Internal Revenue Code, let us see what it means to “relinquish” U.S. citizenship and thereby trigger the tax consequences created by Internal Revenue Code Sections 877A and 2801. There are four ways that the Internal Revenue Code lists as possible avenues to relinquishing U.S. citizenship. 8 U.S.C. Section 877A(g)(4)(A) through (D). These four in fact track some but not all of the ways that the Immigration and Nationality Act says that citizenship can be terminated. And of course the Internal Revenue Code, by enumerating four events that signify the loss of citizenship, really means seven. It is interesting to see what is omitted from the definition for tax purposes:

• Someone who renounces U.S. citizenship in time of war, with the U.S. Attorney General’s approval, will be considered to have relinquished U.S. citizenship under the Immigration and Nationality Act [see 8 U.S.C. Section 1481(a)(6)] but not under the Internal Revenue Code [see 26 U.S.C. Section 877A(g)(4)].
• Someone who commits an act of treason or an attempt to overthrow the U.S. government by force (and is convicted by court martial or a civil court) will lose citizenship [see 8 U.S.C. Section 1481(a)(7)], but will not be considered to have “relinquished” citizenship for the purposes of the Internal Revenue Code [see 26 U.S.C. Section 877A(g)(4), where no such parallel provision exists]. Someone convicted of treason or fomenting the violent overthrow of the U.S. government will, in other words, continue to be a U.S. taxpayer.

These two anomalies are unlikely to occur during the average tax professional’s career. But they point to an interesting feature in the Immigration and Nationality Act that is followed in the Internal Revenue Code: an individual does not lose citizenship until there is a definitive action on the part of the United States government documenting this result. In the case of renunciation of citizenship during wartime, the Attorney General signs off. In the case of treason and its associated acts, citizenship only terminates if a court (civil or military) convicts the individual. The pattern is followed in the Internal Revenue Code: one does not relinquish citizenship until the particular method has been verified by some type of official act of the United States government. It ain’t over until the fat lady sings. With all of those preliminaries out of the way, let us now abandon the Immigration and Nationality Act and focus our attention on the Internal Revenue Code. What does it say about “relinquishing” U.S. citizenship, and how does “renouncing” U.S. citizenship fit into the picture?

Naturalization in a Foreign State

The first way a U.S. citizen can “relinquish” U.S. citizenship for U.S. tax purposes is by becoming a naturalized citizen of another country. 26 U.S.C. Section 877A(g)(4)(B), cross-referencing to 8 U.S.C. Section 1481(a)(1). We therefore must look at the Immigration and Nationality Act to see what this means:

A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily . . . [and] with the intention of relinquishing United States nationality, obtaining naturalization in a foreign state upon his own application or upon an application filed by a duly authorized agent, after having attained the age of eighteen years[.]” 8 U.S.C. Section 1481(a)(1).

The effective date of this act for tax purposes is the date on which the individual submits documentation to the United States Department of State. 26 U.S.C. Section 877A(g)(4). In other words, the Internal Revenue Code is unconcerned with the effective date on which U.S. citizenship was lost by such a person, in the eyes of the Department of State. For tax purposes, the Internal Revenue Code looks for an objective date, easy to determine: when the individual submitted the paperwork to the Department of State.

Oath of Allegiance

The second way a U.S. citizen can relinquish U.S. citizenship for U.S. tax purposes is by making an oath of allegiance to another country. 26 U.S.C. Section 877A(g)(4)(B), cross-referencing to 8 U.S.C. Section 1481(a)(2).

“A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily . . . [and] with the intention of relinquishing United States nationality . . . [takes] an oath or [makes] an affirmation or other formal declaration of allegiance to a foreign state or a political subdivision thereof, after having attained the age of eighteen years[.]” 8 U.S.C. Section 1481(a)(2).

Again, the effective date–in the eyes of the Internal Revenue Service–will be the date on which documentation is submitted to the United States Department of State. 26 U.S.C. Section 877A(g)(4). The effective date for terminating citizenship under other provisions of Federal law will be irrelevant.

Join Foreign Armed Services

The third way a U.S. citizen can relinquish U.S. citizenship for U.S. tax purposes is by joining the armed services of another country engaged in war against the United States, or as an officer:

“A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily . . [and] with the intention of relinquishing United States nationality by . . . [enters], or [serves] in, the armed forces of a foreign state if such armed forces are engaged in hostilities against the United States[.]” 8 U.S.C. Section 1481(a)(3)(A).

A companion requirement causes you to relinquish U.S. citizenship if you join another country’s army as an officer, even if that country is not at war with the United States. 8 U.S.C. Section 1481(a)(3)(B). Merely joining the armed services of another country is insufficient for relinquishing citizenship for tax purposes. Submitting the right paperwork to the United States Department of State is what the Internal Revenue Service cares about, and waging war against the United States will not terminate your status as a U.S. taxpayer until then. 26 U.S.C. Section 877A(g)(4).

Work for a Foreign Government as a Foreign National

The fourth way a U.S. citizen can relinquish U.S. citizen for U.S. tax purposes is by working for a foreign government while simultaneously being a citizen of that country. 26 U.S.C. Section 877A(g)(4)(B), cross-referencing 8 U.S.C. Section 1481(a)(3)(A). The individual must intend, by doing so, to relinquish his U.S. citizenship. “A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily . . . [and] with the intention of relinquishing United States nationality . . . [accepts], [serves] in, or [performs] the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years if he has or acquires the nationality of such foreign state[.]” 8 U.S.C. Section 1481(a)(3)(A). Once again, the effective date for tax purposes is when the individual notifies the Department of State–not when employment by the foreign government commences. 26 U.S.C. Section 877A(g)(4).

Work for a Foreign Government With an Oath of Allegiance

The fifth way to relinquish citizenship for U.S. tax purposes is similar to the fourth. Someone who accepts employment by a foreign government in a job for which an oath of allegiance is required (and who intends to relinquish U.S. citizenship) will lose U.S. citizenship in the eyes of the Internal Revenue Service. 26 U.S.C. Section 877A(g)(4)(B), cross-referencing 8 U.S.C. Section 1481(a)(3)(B).

“A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily . . . [and] with the intention of relinquishing United States nationality . . . [by] accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state or a political subdivision thereof, after attaining the age of eighteen years for which office, post, or employment an oath, affirmation, or declaration of allegiance is required[.]” 8 U.S.C. Section 1481(a)(3)(B).

The effective date for tax purposes will be when paperwork is submitted to the Department of State, not when employment commences. 26 U.S.C. Section 877A(g)(4).

Formal Renunciation of Citizenship

The sixth–and by far the most common–method of relinquishing citizenship is by showing up at a U.S. Embassy and doing so in person. 26 U.S.C. Section 877A(g)(4)(A), cross-referencing 8 U.S.C. Section 1481(a)(5). This is how you relinquish U.S. citizenship by:

“. . . making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State[.]” 8 U.S.C. Section 1481(a)(5).

Like the other five ways to relinquish U.S. citizenship for tax purposes, the individual does something. In this case the “something” is standing in front of someone in a U.S. Embassy somewhere, giving them the magic paperwork, and saying the magic words. The effective date, as far as the Internal Revenue Service is concerned, is the date that the taxpayer takes the required action. Note that this does not require any responsive action from the United States government. The day that you do this, you have relinquished U.S. citizenship.

Issuance of Certificate of Loss of Nationality

The reflexive response of the Department of State in cases of loss of nationality is to issue paperwork confirming the event. This is called a Certificate of Loss of Nationality. For tax purposes, if the Department of State issues a Certificate of Loss of Nationality, you will be considered to have relinquished citizenship when it is issued. 26 U.S.C. Section 877A(g)(4)(C). This is the seventh moment in time that an individual can lose citizenship for tax purposes. In the case of someone who renounces citizenship formally at a U.S. Embassy, a Certificate of Loss of Nationality is issued in due course. For such a person, the effective date for tax purposes will be the earlier of the two dates: the date on which formal renunciation occurred, or the date when the Certificate of Loss of Nationality was issued. 26 U.S.C. Section 877A(g)(4). This is a slipshod way to write tax law, because only time travelers will receive a Certificate from the State Department before they actually show up and renounce their U.S. citizenship. It is improbable in the extreme to expect a Certificate of Loss of Nationality to be issued before the taxpayer takes an action triggering loss of citizenship. I am sure there is some reason why Congress wrote Internal Revenue Code Section 877A(g)(4) in the way that it did; I just do not understand it.

Relinquish vs Renounce

Back to where we began–what is the difference between renouncing citizenship and relinquishing citizenship? There is a simple answer: if you show up at an Embassy, fill in the paperwork they want you to fill in, and say the words they want you to say, you have renounced. You–by renouncing–relinquish your citizenship for tax purposes. All of the other methods described in this section have the same effect: you, by taking the indicated action (and, as required by the Internal Revenue Code, telling the Department of State about what you did), relinquish your citizenship for tax purposes. People care about this because they are angling for an earlier expatriation date than “now”, whatever “now” is. It won’t work. If you are a U.S. citizen, you will not have an expatriation date earlier than an objective event involving paperwork. Invoking the time traveler exception again, this is impossible to do unless you have that special ability. Determine your expatriation date for tax purposes as of right now (whenever “now” is for you), and compute the tax consequences accordingly. A few people care about selecting a method to relinquish U.S. citizenship in order to save the $450 fee that the State Department charges for the renunciation proceedings. Small potatoes. Pay the money.