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Abstract

Citizenship-based taxation was first enacted during the Civil War, in large part to express congressional disapproval of wealthy individuals who fled abroad to avoid bearing the financial and physical burdens of the war. A century later, motivated by a desire to encourage foreign investment in the United States, Congress passed legislation in 1966 that offered significant tax incentives to nonresident aliens, thereby creating an opportunity for tax abuse. To discourage U.S. citizens from expatriating to avoid U.S. taxation, Congress contemporaneously enacted I.R.C. section 877, which taxes expatriates on certain U.S.-source income for a ten-year period after expatriation. Congress, and the nation, viewed these tax-motivated expatriates as “economic Benedict Arnolds.” This Article follows the history and evolution of I.R.C. section 877—the alternative tax regime— as Congress addressed the weaknesses of this provision, and the politics of the replacement by Congress of this provision with I.R.C. section 877A, which imposed a mark-to-market regime (an exit tax) on U.S. citizens and long-term residents expatriating after June 2008. Along with a close examination of the federal income tax consequences of expatriation under both regimes, the gift and estate tax consequences of expatriation are also developed. Additionally, this Article explores the validity of I.R.C. sections 877 and 877A in relation to the U.S. Constitution and existing tax treaties. It then discusses the administrative and enforcement issues arising under the mark-to-market regime, and the administrative and enforcement issues still remaining under the alternative tax regime. Finally, the general social and economic fairness of the alternative tax regime and the mark-to-market regime is explored. Although I.R.C. section 877A is an improvement over the harshness of the alternative tax regime, the mark-to-market regime still violates the tax equity objectives of horizontal and vertical equity, resulting in unintended tax winners and losers.

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