Notice 98-34

DRAFTING INFORMATION
The principal author of this revenue
procedure is Leslie B. van der Wal of the
Office of Associate Chief Counsel
(International). For further information
regarding this revenue procedure contact
Mr. Carl Cooper at (202) 622-3840 (not a
toll-free call).

Notice 98–34
SECTION I. PURPOSE
Sections 877, 2107, and 2501(a)(3) of
the Internal Revenue Code (Code) govern
the federal tax treatment of certain former
U.S. citizens and former U.S. long-term
residents. Section IV of Notice 97–19,
1997–1 C.B. 394, provides guidance regarding the ruling request process under
these sections, including the procedures
for submitting a ruling request and the effect of a favorable ruling.
This notice modifies certain portions of
section IV of Notice 97–19 by providing
that certain individuals, in order to rebut
the presumption of tax motivation under
sections 877(a)(2), 2107(a)(2)(A), and
2501(a)(3)(B), are no longer required to
obtain a substantive ruling that the individual did not have a principal purpose of
tax avoidance. Rather, these individuals
may rebut the presumption of tax avoidance if they submit a complete ruling request in good faith. The Service will rule
as to whether a submission was complete
and provided in good faith. However, unless the Service also issues a substantive
ruling that the individual’s expatriation
did not have for one of its principal purposes the avoidance of U.S. taxes, an individual who receives a ruling that his or
her request is complete and was submitted
in good faith may, in a subsequent examination of the individual’s returns, ultimately be found to have had a principal
purpose of tax avoidance based on all the
facts and circumstances.
This notice also specifies the information required to be submitted in order to
receive a ruling from the Service that a request is complete and was submitted in
good faith, as well as modifies the categories of former long-term residents eligible to submit ruling requests.
Treasury and the Service expect to
issue regulations to incorporate the guid-

July 6, 1998

ance set forth in this notice. Until such
regulations are issued, taxpayers may rely
on the guidance set forth in this notice.
SECTION II. BACKGROUND
Section 877 generally provides that a
citizen who loses U.S. citizenship or a
long-term resident (as defined in section
877(e)(2)) who ceases to be taxed as a
U.S. resident (collectively, individuals
who “expatriate”) within the 10-year period immediately preceding the close of
the taxable year will be taxed on U.S.
source income (as modified by section
877(d)) for such taxable year, unless such
loss or cessation did not have for one of
its principal purposes the avoidance of
U.S. taxes. Sections 2107 and 2501(a)(3)
provide special estate and gift tax
regimes, respectively, for individuals who
expatriate with a principal purpose to
avoid U.S. taxes.
A former citizen is considered to have
expatriated with a principal purpose to
avoid U.S. taxes for purposes of sections
877, 2107 and 2501(a)(3) if the individual’s average income tax liability (the
“tax liability test”) or the individual’s net
worth (the “net worth test”) on the date of
expatriation exceed certain thresholds.
See sections 877(a)(2), and 2107(a)(2)(A)
and 2501(a)(3)(B).
A former U.S. citizen whose net worth
or average tax liability exceeds these
thresholds, however, will not be considered to have a principal purpose of tax
avoidance by reason of one of those tests
if that former citizen is described within
certain statutory categories and submits a
request for a ruling within one year of the
date of loss of U.S. citizenship for the
Secretary’s determination as to whether
such loss had for one of its principal purposes the avoidance of U.S. taxes. See
sections 877(c)(1), 2107(a)(2)(B), and
2501(a)(3)(C).
The tax liability and net worth tests
also apply for purposes of determining
whether a former long-term resident is
considered to have a principal purpose of
tax avoidance. Section 877(e)(3)(A) provides that the exception set forth in section 877(c) with respect to U.S. citizens
who submit a request for a ruling shall not
apply to former long-term residents.
However, section 877(e)(4) gives the Secretary the authority to exempt categories
of former long-term residents from sec-

30

tion 877. In addition, section 877(e)(5)
authorizes the Secretary to prescribe appropriate regulations to carry out the purposes of section 877(e).
In section IV of Notice 97–19, Treasury and the Service announced that, until
regulations are issued, a former long-term
resident may request a ruling for a determination as to whether such individual
had a principal purpose of tax avoidance
if the individual is within certain categories enumerated in section IV of Notice
97–19. Section IV of Notice 97–19 also
provides detailed guidance on ruling requests under sections 877, 2107 and
2501(a)(3), including the procedures for
submitting a request, the information that
must be submitted with a request, and the
effect of a favorable determination.
SECTION III. RULING REQUEST
SUBMISSIONS
Difficulties of current ruling practice.
Since the issuance of Notice 97–19, the
Service has received a substantial number
of requests for rulings under sections
877(c)(1), 2107(a)(2)(B), and 2501(a)(3)(C). In considering these requests, the
Service has found that making a determination regarding tax avoidance in an advance ruling presents difficulties due to
the inherently factual and subjective nature of the inquiry. In some cases, the Service has been able to reach a determination as to whether the individual’s
expatriation had for one of its principal
purposes the avoidance of U.S. taxes
based on the information submitted with
the ruling request. In other cases, however, the Service has not been able to
make a definitive advance determination
regarding a principal purpose of tax avoidance because the information submitted
with the ruling request did not clearly establish the existence or lack of such a principal purpose.
Under section IV of Notice 97–19, an
expatriate eligible to submit a ruling will
be subject to sections 877, 2107, or 2501,
unless such individual obtains a favorable
ruling, rather than merely submits a request, that the individual’s expatriation
did not have for one of its principal purposes the avoidance of U.S. taxes. Thus,
under current law, an expatriate would be
adversely affected (i.e., the presumption
of tax avoidance would apply) if the Service were unable to make an advance de-

1998–27 I.R.B.

termination regarding tax motivation in
certain cases because of the inherently
factual and subjective nature of such an
inquiry.
Modification of current ruling practice.
Due to the foregoing reasons, Treasury
and the Service have decided to modify
the current ruling practice. Under the
modified ruling practice, an individual
may overcome the presumption of tax
avoidance under sections 877(a)(2),
2107(a)(2)(A), and 2501(a)(3)(B) by submitting a request for a ruling as to
whether the individual’s expatriation had
for one of its principal purposes the
avoidance of U.S. taxes, provided that
such individual’s ruling request is complete and was submitted in good faith.
Under such circumstances, the presumption of tax avoidance under sections
877(a)(2), 2107(a)(2)(A), and 2501(a)(3)(B) will not apply even if the individual
does not receive a substantive ruling that
the individual’s expatriation did not have
for one of its principal purposes the avoidance of U.S. taxes. However, in a subsequent examination of such an individual’s
returns, the individual may ultimately be
found to have had a principal purpose of
tax avoidance based on the individual’s
facts and circumstances. Treasury and the
Service believe that this approach is supported by section 877(c)(1)(B), which
contemplates that the Service may determine that the conclusive presumption of
tax avoidance under section 877(a)(2)
does not apply if an eligible individual
submits a ruling request for a determination as to whether the individual’s expatriation had for one of its principal purposes
the avoidance of U.S. taxes.
Effect of ruling request submissions
and administration of rulings under new
ruling practice. To reflect the change in
the Service’s ruling practice, this notice
modifies section IV of Notice 97–19 as
set forth below.
Under this notice, if an expatriate’s tax
liability or net worth exceeds the applicable thresholds, the presumption in sections 877(a)(2), 2107(a)(2)(A) and
2501(a)(3)(B) that the expatriate had a
principal purpose of tax avoidance will
not apply if the expatriate (i) is eligible to
submit a ruling request that his or her expatriation did not have for one of its principal purposes the avoidance of U.S.
taxes, (ii) submits such a request in a

1998–27 I.R.B.

timely manner, and (iii) provides the Service with a complete and good faith ruling
request submission.
The Service will rule as to whether a
submission was complete and provided in
good faith. A ruling that a request constitutes a complete and good faith submission may, depending on the information
submitted, also contain either:
(1) a substantive ruling that the individual’s expatriation did not have for one
of its principal purposes the avoidance of
U.S. taxes in those cases where the information submitted clearly establishes the
lack of such a principal purpose; or
(2) a substantive ruling that the individual’s expatriation did have for one of
its principal purposes the avoidance of
U.S. taxes in those cases where the information submitted clearly establishes the
existence of such a principal purpose.
Alternatively, a ruling that a request
constitutes a complete and good faith submission may express no opinion as to
whether the individual’s expatriation had
for one of its principal purposes the avoidance of U.S. taxes in those cases where the
information submitted clearly establishes
neither the existence nor lack of such a
principal purpose. If the Service rules
solely that a request was complete and
submitted in good faith, such a ruling is
not conclusive as to whether the individual ultimately can be found to have a principal purpose of tax avoidance under sections 877(a)(1), 2107(a)(1), and
2501(a)(3)(A) based on the individual’s
facts and circumstances. See section
877(c)(1).
If, for any reason, the Service does not
issue a favorable substantive ruling that
the individual’s expatriation did not have
for one of its principal purposes the
avoidance of U.S. taxes, information collected as part of the ruling process may be
forwarded to the Office of Assistant Commissioner (International) to consider in
any later examination of the individual’s
returns.
Content of ruling request submissions.
In addressing the numerous requests received after the issuance of Notice 97-19,
the Service has found that the information
required in section IV of Notice 97-19 to
be submitted with ruling requests was insufficient in many instances for the Service to make a substantive determination
as to whether an individual’s expatriation

31

had for one of its principal purpose the
avoidance of U.S. taxes. Accordingly,
this notice modifies the information that
must be submitted with ruling requests to
ensure that all useful information is submitted with these requests. Much of the
information requested below was also requested in Notice 97–19. For convenience, however, the list below sets forth
all of the information that must be included with ruling requests submitted
after July 6, 1998.
To be considered a complete and good
faith submission by the Service, a request
submitted by a citizen or long-term resident for a ruling as to whether the individual’s expatriation had for one of its principal purposes the avoidance of U.S. taxes
must contain the following information,
with paragraphs labeled to correspond
with the numbers set forth below:
(1) the date (or expected date) of expatriation;
(2) a full explanation of the individual’s reasons for expatriating;
(3) the individual’s date of birth;
(4) all foreign countries of which the
individual is a resident for tax purposes
and/or intends to obtain residence for tax
purposes, and a statement as to whether
the individual is subject to worldwide income and estate taxation in the country of
residence. If the individual is not subject
to worldwide taxation, attach an explanation of the manner in which the individual
is taxed (e.g., whether foreign source pension income or capital gains are exempt
from tax);
(5) all foreign countries of which the
individual is a citizen and/or intends to
acquire citizenship after expatriation;
(6) the countries where the individual’s
spouse (if any) and parents were born, the
countries of citizenship and residence of
the individual’s spouse (if any), and a
statement as to whether the individual’s
spouse has expatriated or intends to expatriate;
(7) the country where the individual’s
tax home is located (within the meaning
of section 911(d)(3));
(8) a description of the individual’s ties
to the United States and the individual’s
ties to the foreign country where the individual resides (or intends to reside) for the
period that began five years prior to expatriation and ends on the date that the ruling request is submitted, including the lo-

July 6, 1998

cation of the individual’s permanent
home, family and social relations, occupation(s), political, cultural, or other activities, business activities, personal belongings, the place from which the
individual administers property, the juris-

diction in which the individual holds a
driver’s license, the location where the individual conducts routine personal banking activities, the location of the individual’s cemetery plot (if any), and any other
similar information;
(a)
Fair Market
Value (FMV)

Assets

(9) a balance sheet, in substantially the
following format, that sets forth the individual’s assets and liabilities immediately
prior to expatriation:

(b)
U.S. Adjusted
Basis

(c)
Gain (Loss)
[col.(a) less col.(b)]

1 Cash, including bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 Marketable stock and securities issued by U.S. companies . . . . . . .
3 Marketable stock and securities issued by foreign companies . . . .
4 Nonmarketable stock and securities issued by U.S. companies . . .
5 Nonmarketable stock and securities issued by foreign companies .
6 Pensions from services performed in the U.S. . . . . . . . . . . . . . . . . .
7 Pensions from services performed outside the U.S. . . . . . . . . . . . .
8 Partnership interests (attach statement as described below) . . . . . .
9 Assets held by trusts you own under sections 671 through 679
(attach statement as described below) . . . . . . . . . . . . . . . . . . . . . . .
10 Beneficial interests in nongrantor trusts (attach statement as
described below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 Intangibles used in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 Intangibles used outside the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 Loans to U.S. persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 Loans to foreign persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 Real property located in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . .
16 Real property located outside the U.S. . . . . . . . . . . . . . . . . . . . . . .
17 Business property located in the U.S. . . . . . . . . . . . . . . . . . . . . . . .
18 Business property located outside the U.S. . . . . . . . . . . . . . . . . . . .
19 Other assets (attach statement) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20 Total assets (add lines 1 through 19) . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities

Amount

21 Installment obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22 Mortgages, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24 Total liabilities (add lines 21 through 23) . . . . . . . . . . . . . . . . . . . .
25 Net worth (subtract line 24 from line 20) . . . . . . . . . . . . . . . . . . .
For purposes of allocating the property interests of a nongrantor trust to a beneficiary, use the methodology described
under section III of Notice 97–19 (i.e.,
based on facts and circumstances where

July 6, 1998

possible). To determine the value of a
beneficial interest in a nongrantor trust,
use the valuation principles under section
2512 and the regulations thereunder without regard to any prohibitions or restric-

32

tions on such interest. See section III of
Notice 97–19. In addition, the individual
must attach to the balance sheet a statement that separately identifies each partnership interest, each portion of a trust

1998–27 I.R.B.

that the individual is considered to own
under sections 671 through 679, and each
nongrantor trust in which the individual
holds a beneficial interest. This statement
must identify:
(i) the EIN of the partnership or trust
(if any),
(ii) the assets and liabilities of each
partnership or trust (categorized according to the categories of the balance sheet)
attributable to the individual’s interest in
the partnership or trust,
(iii) in the case of a grantor trust, an
explanation of the facts and law (including the applicable section of the Internal
Revenue Code) that establishes that the
trust (or portion of a trust) is treated for
U.S. tax purposes as owned by the individual, and
(iv) in the case of a nongrantor trust,
the methodology used to determine the individual’s beneficial interest in each trust;
(10) a statement as to whether there
have been (or are expected to be) significant changes in the individual’s assets and
liabilities for the period that began five
years prior to expatriation and ends ten
years following the date of expatriation.
If so, the individual should attach an explanation of such changes;
(11) a description of all exchanges described in section 877(d)(2)(B) and all removals of appreciated tangible personal
property from the United States (as described in section V of Notice 97–19),
that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including exchanges that took place prior to
February 6, 1995) and ending on the date
that the ruling request is submitted, or
(ii) occurred, or are expected to
occur, during the 10- year period following expatriation.
If the individual is subject to section 877
because of section 511(g)(3)(A) of the
Health Insurance Portability and Accountability Act of 1996 (see section X of Notice 97–19), the individual must also include a description of all exchanges
described under section 877(d)(2)(B) that
occurred on or after the date of the individual’s expatriating act (see section X of
Notice 97–19) and before February 6,
1995;
(12) a description of all occurrences
under section 877(d)(2)(E)(ii) that are
treated as exchanges under section

1998–27 I.R.B.

877(d)(2) (as described in section V of
Notice 97–19) that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including occurrences that took place prior to
February 24, 1997) and ending on the
date that the ruling request is submitted,
or
(ii) occurred, or are expected to
occur, during the 10-year period following expatriation;
(13) a statement describing the nature
and status of any ongoing audits, disputes
or other matters pending before the Internal Revenue Service;
(14) a statement as to whether the individual satisfied his or her U.S. tax liability
during the period that he or she was a U.S.
citizen or lawful permanent resident of
the United States;
(15) a copy of the individual’s U.S. tax
returns (including all attachments and
schedules) for each of the three years
prior to expatriation, and, if filed or required to be filed prior to the date the ruling request is submitted, the U.S. tax returns for the year during which the
individual expatriated and for all years
subsequent to expatriation. If Form 1116,
Foreign Tax Credit, was filed with these
income tax returns, provide copies of documents required to be attached to Form
1116 (e.g., foreign income tax return, receipt for payment of foreign tax, or other
secondary evidence of payment or accrual
of foreign taxes accepted by the District
Director, as described in Treas. Reg.
§ 1.905–2). If there is a discrepancy between the income or gain reported for tax
purposes with respect to the assets set
forth in the balance sheet in paragraph (9)
above and the income or gain that reasonably would be expected to be generated
by such assets, provide a complete explanation of such discrepancy;
(16) a copy of the information statement filed in accordance with section
6039G of the Code. If the information
statement has not been filed, a statement
as to when the individual intends to file
the information statement;
(17) a calculation of the individual’s
projected U.S. and foreign income tax liability upon a deemed disposition at fair
market value of all of the individual’s assets immediately following expatriation,
including a description of the foreign income tax treatment (e.g., tax-exempt in-

33

come and rates of tax) that would arise as
a result of such disposition, under each of
the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident;
(18) a projection of the individual’s
U.S. and foreign income tax liability for
each of the three years following expatriation, including a description of the foreign
income tax treatment (e.g., tax-exempt income and rates of tax), under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.
If the individual expects a substantial
change in his or her projected U.S. or foreign income tax liability as a result of a
change in income for the remainder of the
10-year period, attach an explanation;
(19) a statement indicating whether the
individual has transferred any property by
gift with an aggregate value of $100,000
or more (including gifts to the individual’s spouse), regardless of whether or not
such transfers were taxable under subtitle
B of the Code, during the period that
began five years prior to expatriation and
ending on the date that the ruling request
is submitted. If so, include a description
of the gift, provide an estimate of its fair
market value, indicate when and to
whom the gift was made, and attach
copies of the relevant U.S. gift tax returns
(if any);
(20) a statement indicating whether the
individual expects to make any substantial gifts during any year of the 10-year
period following expatriation. If so, include a projection of the U.S. and foreign
gift and other transfer taxes that would be
owed on the expected transfer of property
by gift during this period, including a description of the foreign tax treatment
(e.g., manner and rates of tax) that would
result upon the transfer of such property,
under each of the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and

July 6, 1998

(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident domiciled in the United States.
The individual should also describe the
expected gift, provide an estimate of its
fair market value, and indicate when and
to whom the individual expects to make
the gift;
(21) in the case of an individual age 60
or older on the date of expatriation, the
present value (determined as of the date
of expatriation) of the estimated U.S., foreign and other death taxes that would be
imposed as a result of the individual’s
death, and a description of the foreign tax
treatment that would arise as a result of
the individual’s death, under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident domiciled in the United States.
For purposes of this calculation, the estimated death tax is determined based on
the assumption that the individual’s taxable estate consists of the value of property that would comprise the taxable estate if the individual died immediately
before the date of expatriation without
taking into account any potential marital
or charitable deduction. The present
value of the estimated death tax liability
as of the date of expatriation is determined under the tables prescribed by section 7520 and Treas. Reg. § 20.2031–7,
using the appropriate interest rate under
section 7520 for that date and the individual’s age as of that date;
(22) in the case of an individual who
would be considered to own a trust under
sections 671 through 679 if the individual
had remained a U.S. citizen or U.S. resident, a description of the U.S. and foreign
tax treatment to both the trust and the individual (in the country of organization of
the trust and the individual’s country of
residence) of the expected trust income
and distributions for each of the three
years following expatriation, under each
of the following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.

July 6, 1998

If the individual expects a substantial
change in the projected U.S. or foreign income tax liability of such trust income
and distributions for the remainder of the
10-year period following expatriation, attach an explanation;
(23) in the case of an individual who is
a beneficiary (as determined under section III of Notice 97–19) of a trust, a description of the U.S. and foreign tax treatment of the expected trust distributions to
the individual for each of the three years
following expatriation, under each of the
following circumstances:
(i) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes, and
(ii) if the individual had remained a
U.S. citizen or U.S. lawful permanent resident.
If the individual expects a substantial
change in the projected U.S. or foreign income tax liability of such trust distributions for the remainder of the 10-year period following expatriation, attach an
explanation; and
(24) any other information reasonably
required by the Service after its review of
the submission.
Although individuals must provide
good faith estimates of fair market values,
formal appraisals are not required. If an
individual fails to provide the aforementioned information, including information
reasonably required by the Service, the
individual’s ruling request may be closed
pursuant to section 10.06(3) of Rev. Proc.
98–1, 1998-1 I.R.B. 7. If an individual’s
request is closed, the individual will not
be considered to have submitted a complete and good faith ruling request. Accordingly, the individual will be considered by the Service to have expatriated
with a principal purpose to avoid U.S.
taxes under sections 877(a)(2), 2107(a)(2)(A) and 2501(a)(3)(B).
Procedures for submitting ruling requests and user fees. Individuals should
refer to section 8 of Rev. Proc. 98–1,
1998–1 I.R.B. 7, 24, for general instructions on the proper procedures to follow
when submitting ruling requests. Individuals should also consult section 15 of
Rev. Proc. 98–1, 1998–1 I.R.B. 7, 51 for
information on the applicable user fee that
must be submitted with a ruling request.
Effective date. Section III of this notice
is effective for pending ruling requests

34

and requests submitted after July 6, 1998.
However, an individual with a request
currently pending with the Service as of
July 6, 1998 is not required to submit any
additional information unless requested to
do so.
This notice does not affect the validity
of any rulings previously issued by the
Service. An individual who previously
withdrew a ruling request is not considered
to have submitted a complete and good
faith request. However, such individual
may resubmit a ruling request in accordance with this notice. Such a resubmission must be filed by the later of October 6,
1998 or the date that is one year following
the date of the individual’s expatriation.
SECTION IV. LONG-TERM
RESIDENTS ELIGIBLE TO SUBMIT
RULING REQUESTS
Modification of categories of individuals eligible to submit ruling requests.
Section IV of Notice 97–19 provides that
long- term residents within certain categories are eligible to submit a ruling request. Under Category (1) of Notice 97–
19, long-term residents who are citizens
of certain countries and become fully liable to tax in such country by reason of
the individual’s residence are eligible to
submit a ruling request. This notice modifies Category (1) to read as follows:
(1) the individual becomes (not later
than the close of a reasonable period after
the individual’s expatriation) a resident
fully liable to income tax in one of the following countries:
(a) the country in which the individual was born,
(b) the country where the individual’s spouse was born, or
(c) the country where either of the
individual’s parents was born.
For this purpose, a resident who is not
domiciled in a country is not considered a
resident fully liable to income tax in such
country if his or her income is subject to
tax in a different manner than the income
of a resident who is domiciled in the
country.
If a former long-term resident within
the aforementioned category expatriated
prior to July 6, 1998 such individual will
be considered to have submitted a timely
ruling request if such request is filed by
the later of January 6, 1999 or the date

1998–27 I.R.B.

that is one year following the date of the
individual’s expatriation.
The following example illustrates circumstances under which an individual is
not considered a resident fully liable to income tax in a foreign jurisdiction:
Example 1. A, a former long-term resident, expatriated on January 1, 1998. A exceeded the threshold
of the net worth test on the date of her expatriation.
After A expatriated, A moved to Country B. A was
born in Country B. A is considered a resident of
Country B, but is not domiciled in Country B.
Under Country B’s income tax laws, nondomiciliary
residents of Country B are not taxed on foreign
source income unless such income is remitted to
Country B. Residents of Country B who are also
domiciled in Country B, however, are liable to tax in
Country B on worldwide income, regardless of
whether such income is remitted to Country B.
Since A is not liable to tax on foreign source income
in the same manner as a domiciliary resident of
Country B, A is not considered a resident fully liable
to income tax in Country B. Accordingly, A is not
eligible to submit a ruling request under paragraph
(1) above.

SECTION V. EFFECT ON OTHER
DOCUMENTS
Section IV of Notice 97–19 is modified.
REQUEST FOR COMMENTS
Treasury and the Service invite public
comments on the guidance provided in
this notice. Comments should be submitted by September 6, 1998 to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R (Notice 98–34)
Room 5228
Washington, DC 20044
or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html
The comments you submit will be
available for public inspection and copying.
DRAFTING INFORMATION
The principal author of this notice is
Trina Dang of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Ms. Dang or Willard Yates at (202) 6223880 (not a toll-free call).
PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed

1998–27 I.R.B.

and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1531.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The collection of information related to
the submission of ruling requests is required to help the Secretary make a determination as to whether an individual submitted a complete and good faith request
and to help the Secretary make a determination as to whether the individual expatriated with a principal purpose to avoid
U.S. taxes. This information will be used
by the Service for tax administration purposes.
The respondents will be eligible individuals who lose U.S. citizenship or cease
to be taxed as lawful permanent residents
of the United States. The estimated total
annual reporting burden is 350 hours.
The estimated annual burden per respondent is 3.5 hours. The estimated annual
number of respondents is 100. The estimated annual frequency of responses is
on occasion.
Books or records relating to collections
of information must be retained as long as
their contents may become material in the
administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by section 6103 of the Code.

Treatment of Hybrid
Arrangements Under Subpart F
Notice 98–35
In General
On January 16, 1998, the Treasury Department issued Notice 98–11, in which it
announced its intention to issue regulations to prevent the use of certain arrangements involving controlled foreign corporations and “hybrid branches” under
subpart F. A hybrid branch is regarded as
a branch for U.S. tax purposes, but as a
separate entity (e.g., a corporation) for
foreign tax purposes. On March 23,
1998, temporary and proposed regulations on these matters (T.D. 8767 and
REG–104537–97) were issued. The tem-

35

porary regulations cover transactions involving hybrid branches and equivalent
transactions involving partnerships under
subpart F. The proposed regulations, in
addition to the provisions also contained
in the temporary regulations, cover the
treatment of a CFC’s distributive share of
income of a partnership in which a CFC is
a partner.
In this Notice, the Treasury and the IRS
announce their intention to withdraw the
temporary regulations and proposed regulations issued on March 23, 1998 (T.D.
8767 and REG–104537–97). Notice 98–
11 is also hereby withdrawn. The public
hearing announced in the proposed regulations for July 15, 1998, will also be canceled.
Proposed Regulations on Hybrid
Transactions
The Treasury and the IRS also hereby
announce their intention to issue a notice
of proposed rulemaking covering hybrid
transactions. Under these proposed regulations, payments (including accruals) between a CFC and its hybrid branch, or between hybrid branches of the CFC, or
between a CFC (and its hybrid branch)
and the hybrid branch of a related CFC
(collectively “hybrid branch payments”)
will give rise to subpart F income in the
circumstances described below. When
certain conditions are present, the nonsubpart F income of the CFC, in the
amount of the hybrid branch payment,
will be recharacterized as subpart F income of the CFC. Those conditions include that: the hybrid branch payment reduces the foreign tax of the payor; the
hybrid branch payment would have been
foreign personal holding company income if made between separate CFCs;
and there is a significant disparity (as described below) between the effective rate
of tax on the payment in the hands of the
payee and the hypothetical rate of tax that
would have applied if the income had
been taxed in the hands of the payor.
The proposed regulations will make
clear that the CFC and the hybrid branch,
or the hybrid branches, will be treated as
separate corporations only to recharacterize non-subpart F income as subpart F income in the amount of the hybrid branch
payment, and to apply the tax disparity
rule. For all other purposes (e.g., for purposes of the earnings and profits limita-

July 6, 1998