On May 17, Senators Charles E. Schumer (D-NY) and Bob Casey
(D-PA) unveiled the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing
Tax-Related Incentives for Offshore Tenancy” Act). It's specifically aimed at
individuals like a Facebook co-founder and partial owner who has lived abroad
since 2009 in a no-capital-gains country, and has renounced his U.S.
citizenship, thus avoiding U.S. capital gains tax on potentially huge gains.
Code Sec. 877A already imposes an exit tax on expatriating
individuals who either have a net worth of $2 million or more, or have an
average income tax liability greater than an inflation-adjusted amount
($151,000 in 2012) over the last five years. The tax is based on the value of
all property and assets owned by the departing individual. According to Schumer
and Casey, the Ex-PATRIOT Act would provide that when an individual expatriates
for a substantial tax purpose (as determined by IRS), he or she would be
subject to a 30% capital gains tax on future investment gains. Code Sec. 871
already taxes non-resident aliens for dividends, interest and other items at
the 30% rate; the Ex-PATRIOT Act would add capital gains to this mix of taxable
earnings. The tax would apply to anyone who gave up his citizenship in the last
ten years but only would tax capital gains earned in the U.S. following the
enactment date.
The Ex-PATRIOT Act also provides that if IRS finds that
avoidance of taxes was a substantial purpose of expatriation, an individual who
renounced citizenship would be barred from any type of re-entry into the U.S.
Under the provision, IRS would have to make a decision regarding tax-avoidance
intent for every individual subject to Code Sec. 877A who renounces
citizenship. This change would be retroactive and apply to individuals who have
renounced citizenship for the 10-year period before the enactment date.
§ 877A Tax responsibilities of expatriation.
877A(a)(a) General
rules.
For purposes of
this subtitle—
877A(a)(1)(1)
New Law Analysis Mark to market.
All property of a covered expatriate shall be
treated as sold on the day before the expatriation date for its fair market
value.
877A(a)(2)(2)
New Law Analysis Recognition of gain or loss.
In the case of
any sale under paragraph (1)—
877A(a)(2)(A)(A) notwithstanding any
other provision of this title, any gain arising from such sale shall be taken
into account for the taxable year of the sale, and
877A(a)(2)(B)(B) any loss arising from such sale shall be taken into
account for the taxable year of the sale to the extent otherwise provided by
this title, except that section 1091 shall not apply to any such loss.
Proper adjustment
shall be made in the amount of any gain or loss subsequently realized for gain
or loss taken into account under the preceding sentence, determined without
regard to paragraph (3) .
877A(a)(3)(3)
Exclusion for certain gain.
877A(a)(3)(A)(A) New Law Analysis In general. The amount which would
(but for this paragraph) be includible in the gross income of any individual by
reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
877A(a)(3)(B)(B) Adjustment for inflation.
877A(a)(3)(B)(i)(i) New Law Analysis In general. In the case of any
taxable year beginning in a calendar year after 2008, the dollar amount in
subparagraph (A) shall be increased by an amount equal to—
877A(a)(3)(B)(i)(I)(I) such dollar amount, multiplied by
877A(a)(3)(B)(i)(II)(II) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the taxable year begins, by
substituting “calendar year 2007” for “calendar year 1992” in subparagraph (B)
thereof.
877A(a)(3)(B)(ii)(ii) New Law Analysis Rounding. If any amount as
adjusted under clause (i) is not a multiple of $1,000, such amount shall be
rounded to the nearest multiple of $1,000.
877A(b)(b)
Election to defer tax.
877A(b)(1)(1)
New Law Analysis In general.
If the
taxpayer elects the application of this subsection with respect to any property
treated as sold by reason of subsection (a) , the time for payment of the
additional tax attributable to such property shall be extended until the due
date of the return for the taxable year in which such property is disposed of
(or, in the case of property disposed of in a transaction in which gain is not
recognized in whole or in part, until such other date as the Secretary may
prescribe).
877A(b)(2)(2)
New Law Analysis Determination of tax with respect to property.
For purposes
of paragraph (1), the additional tax attributable to any property is an amount
which bears the same ratio to the additional tax imposed by this chapter for
the taxable year solely by reason of subsection (a) as the gain taken into
account under subsection (a) with respect to such property bears to the total
gain taken into account under subsection (a) with respect to all property to
which subsection (a) applies.
877A(b)(3)(3)
New Law Analysis Termination of extension.
The due date
for payment of tax may not be extended under this subsection later than the due
date for the return of tax imposed by this chapter for the taxable year which
includes the date of death of the expatriate (or, if earlier, the time that the
security provided with respect to the property fails to meet the requirements
of paragraph (4) , unless the taxpayer corrects such failure within the time
specified by the Secretary).
877A(b)(4)(4)
Security.
877A(b)(4)(A)(A) New Law Analysis In general. No election may be made
under paragraph (1) with respect to any property unless adequate security is
provided with respect to such property.
877A(b)(4)(B)(B) Adequate security. For purposes of subparagraph (A),
security with respect to any property shall be treated as adequate security if—
877A(b)(4)(B)(i)(i) New Law Analysis it is a bond which is furnished to,
and accepted by, the Secretary, which is conditioned on the payment of tax (and
interest thereon), and which meets the requirements of section 6325, or
877A(b)(4)(B)(ii)(ii) New Law Analysis it is another form of security
for such payment (including letters of credit) that meets such requirements as
the Secretary may prescribe.
877A(b)(5)(5)
New Law Analysis Waiver of certain rights.
No election
may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver
of any right under any treaty of the United States which would preclude
assessment or collection of any tax imposed by reason of this section.
877A(b)(6)(6)
New Law Analysis Elections.
An election
under paragraph (1) shall only apply to property described in the election and,
once made, is irrevocable.
877A(b)(7)(7)
New Law Analysis Interest.
For purposes
of section 6601, the last date for the payment of tax shall be determined
without regard to the election under this subsection .
877A(c)(c)
Exception for certain property.
Subsection (a)
shall not apply to—
877A(c)(1)(1)
New Law Analysis any deferred compensation item (as defined in subsection
(d)(4)),
877A(c)(2)(2)
New Law Analysis any specified tax deferred account (as defined in subsection
(e)(2)), and
877A(c)(3)(3)
New Law Analysis any interest in a nongrantor trust (as defined in subsection
(f)(3)).
877A(d)(d)
WG&L Treatises Treatment of deferred compensation items.
877A(d)(1)(1)
WG&L Treatises Withholding on eligible deferred compensation items.
877A(d)(1)(A)(A) New Law Analysis In general. In the case of any
eligible deferred compensation item, the payor shall deduct and withhold from
any taxable payment to a covered expatriate with respect to such item a tax
equal to 30 percent thereof.
877A(d)(1)(B)(B) New Law Analysis Taxable payment. For purposes of
subparagraph (A), the term “taxable payment” means with respect to a covered
expatriate any payment to the extent it would be includible in the gross income
of the covered expatriate if such expatriate continued to be subject to tax as
a citizen or resident of the United States. A deferred compensation item shall
be taken into account as a payment under the preceding sentence when such item
would be so includible.
877A(d)(2)(2)
Other deferred compensation items.
In the case of
any deferred compensation item which is not an eligible deferred compensation
item—
877A(d)(2)(A)(A)
877A(d)(2)(A)(i)(i) New Law Analysis with respect to any deferred
compensation item to which clause (ii) does not apply, an amount equal to the
present value of the covered expatriate's accrued benefit shall be treated as
having been received by such individual on the day before the expatriation date
as a distribution under the plan, and
877A(d)(2)(A)(ii)(ii) New Law Analysis with respect to any deferred
compensation item referred to in paragraph (4)(D), the rights of the covered
expatriate to such item shall be treated as becoming transferable and not
subject to a substantial risk of forfeiture on the day before the expatriation
date,
877A(d)(2)(B)(B) New Law Analysis no early distribution tax shall apply
by reason of such treatment, and
877A(d)(2)(C)(C) New Law Analysis appropriate adjustments shall be made
to subsequent distributions from the plan to reflect such treatment.
877A(d)(3)(3)
WG&L Treatises Eligible deferred compensation items.
For purposes
of this subsection , the term “eligible deferred compensation item” means any
deferred compensation item with respect to which—
877A(d)(3)(A)(A) the payor of such item is—
877A(d)(3)(A)(i)(i) New Law Analysis a United States person, or
877A(d)(3)(A)(ii)(ii) New Law Analysis a person who is not a United
States person but who elects to be treated as a United States person for
purposes of paragraph (1) and meets such requirements as the Secretary may
provide to ensure that the payor will meet the requirements of paragraph (1),
and
877A(d)(3)(B)(B) the covered expatriate—
877A(d)(3)(B)(i)(i) New Law Analysis notifies the payor of his status as
a covered expatriate, and
877A(d)(3)(B)(ii)(ii) New Law Analysis makes an irrevocable waiver of
any right to claim any reduction under any treaty with the United States in
withholding on such item.
877A(d)(4)(4)
Deferred compensation item.
For purposes of this subsection , the term
“deferred compensation item” means—
877A(d)(4)(A)(A) New Law Analysis any interest in a plan or arrangement
described in section 219(g)(5) ,
877A(d)(4)(B)(B) New Law Analysis any interest in a foreign pension plan
or similar retirement arrangement or program,
877A(d)(4)(C)(C) New Law Analysis any item of deferred compensation, and
877A(d)(4)(D)(D) New Law Analysis any property, or right to property,
which the individual is entitled to receive in connection with the performance
of services to the extent not previously taken into account under section 83 or
in accordance with section 83.
877A(d)(5)(5)
New Law Analysis Exception.
Paragraphs (1)
and (2) shall not apply to any deferred compensation item to the extent
attributable to services performed outside the United States while the covered
expatriate was not a citizen or resident of the United States.
877A(d)(6)(6)
Special rules.
877A(d)(6)(A)(A) New Law Analysis Application of withholding rules.
Rules similar to the rules of subchapter B of chapter 3 shall apply for
purposes of this subsection.
877A(d)(6)(B)(B)
New Law Analysis Application of tax. Any item subject to the withholding tax
imposed under paragraph (1) shall be subject to tax under section 871.
877A(d)(6)(C)(C) New Law Analysis Coordination with other withholding
requirements. Any item subject to withholding under paragraph (1) shall not be
subject to withholding under section 1441 or chapter 24.
877A(e)(e)
WG&L Treatises Treatment of specified tax deferred accounts.
877A(e)(1)(1)
Account treated as distributed.
In the case of any interest in a
specified tax deferred account held by a covered expatriate on the day before
the expatriation date—
877A(e)(1)(A)(A) New Law Analysis the covered expatriate shall be
treated as receiving a distribution of his entire interest in such account on
the day before the expatriation date,
877A(e)(1)(B)(B) New Law Analysis no early distribution tax shall apply
by reason of such treatment, and
877A(e)(1)(C)(C) New Law Analysis appropriate adjustments shall be made
to subsequent distributions from the account to reflect such treatment.
877A(e)(2)(2)
New Law Analysis Specified tax deferred account.
For purposes
of paragraph (1), the term “specified tax deferred account” means an individual
retirement plan (as defined in section 7701(a)(37) ) other than any arrangement
described in subsection (k) or (p) of section 408, a qualified tuition program
(as defined in section 529), a Coverdell education savings account (as defined
in section 530), a health savings account (as defined in section 223), and an
Archer MSA (as defined in section 220).
877A(f)(f) Special
rules for nongrantor trusts.
877A(f)(1)(1)
In general.
In the case of
a distribution (directly or indirectly) of any property from a nongrantor trust
to a covered expatriate—
877A(f)(1)(A)(A) New Law Analysis the trustee shall deduct and withhold
from such distribution an amount equal to 30 percent of the taxable portion of
the distribution, and
877A(f)(1)(B)(B) New Law Analysis if the fair market value of such
property exceeds its adjusted basis in the hands of the trust, gain shall be
recognized to the trust as if such property were sold to the expatriate at its
fair market value.
877A(f)(2)(2)
New Law Analysis Taxable portion.
For purposes
of this subsection, the term “taxable portion” means, with respect to any
distribution, that portion of the distribution which would be includible in the
gross income of the covered expatriate if such expatriate continued to be
subject to tax as a citizen or resident of the United States.
877A(f)(3)(3)
New Law Analysis Nongrantor trust.
For purposes
of this subsection, the term “nongrantor trust” means the portion of any trust
that the individual is not considered the owner of under subpart E of part I of
subchapter J. The determination under the preceding sentence shall be made
immediately before the expatriation date.
877A(f)(4)(4)
Special rules relating to withholding.
For purposes
of this subsection —
877A(f)(4)(A)(A) New Law Analysis rules similar to the rules of
subsection (d)(6) shall apply, and
877A(f)(4)(B)(B) New Law Analysis the covered expatriate shall be
treated as having waived any right to claim any reduction under any treaty with
the United States in withholding on any distribution to which paragraph (1)(A)
applies unless the covered expatriate agrees to such other treatment as the
Secretary determines appropriate.
877A(f)(5)(5)
New Law Analysis Application.
This
subsection shall apply to a nongrantor trust only if the covered expatriate was
a beneficiary of the trust on the day before the expatriation date.
877A(g)(g)
Definitions and special rules relating to expatriation.
For purposes of
this section—
877A(g)(1)(1)
Covered expatriate.
877A(g)(1)(A)(A) New Law Analysis In general. The term “covered
expatriate” means an expatriate who meets the requirements of subparagraph (A)
, (B), or (C) of section 877(a)(2) .
877A(g)(1)(B)(B) Exceptions. An individual shall not be treated as
meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
877A(g)(1)(B)(i)(i) the individual—
877A(g)(1)(B)(i)(I)(I) New Law Analysis became at birth a citizen of the
United States and a citizen of another country and, as of the expatriation
date, continues to be a citizen of, and is taxed as a resident of, such other
country, and
877A(g)(1)(B)(i)(II)(II) New Law Analysis has been a resident of the
United States (as defined in section 7701(b)(1)(A)(ii) ) for not more than 10
taxable years during the 15-taxable year period ending with the taxable year
during which the expatriation date occurs, or
877A(g)(1)(B)(ii)(ii)
877A(g)(1)(B)(ii)(I)(I) New Law Analysis the individual's relinquishment
of United States citizenship occurs before such individual attains age 181/2
and
877A(g)(1)(B)(ii)(II)(II) New Law Analysis the individual has been a
resident of the United States (as so defined) for not more than 10 taxable
years before the date of relinquishment.
877A(g)(1)(C)(C) New Law Analysis Covered expatriates also subject to
tax as citizens or residents. In the case of any covered expatriate who is subject
to tax as a citizen or resident of the United States for any period beginning
after the expatriation date, such individual shall not be treated as a covered
expatriate during such period for purposes of subsections (d)(1) and (f) and
section 2801.
877A(g)(2)(2)
WG&L Treatises Expatriate.
The term
“expatriate” means—
877A(g)(2)(A)(A) New Law Analysis any United States citizen who
relinquishes his citizenship, and
877A(g)(2)(B)(B) New Law Analysis any long-term resident of the United
States who ceases to be a lawful permanent resident of the United States
(within the meaning of section 7701(b)(6)).
877A(g)(3)(3)
Expatriation date.
The term
“expatriation date” means—
877A(g)(3)(A)(A) New Law Analysis the date an individual relinquishes
United States citizenship, or
877A(g)(3)(B)(B) New Law Analysis in the case of a long-term resident of
the United States, the date on which the individual ceases to be a lawful
permanent resident of the United States (within the meaning of section
7701(b)(6)).
877A(g)(4)(4)
New Law Analysis Relinquishment of citizenship.
A citizen
shall be treated as relinquishing his United States citizenship on the earliest
of—
877A(g)(4)(A)(A) New Law Analysis the date the individual renounces his
United States nationality before a diplomatic or consular officer of the United
States pursuant to paragraph (5) of section 349(a) of the Immigration and
Nationality Act (8 U.S.C. 1481(a)(5)),
877A(g)(4)(B)(B) New Law Analysis the date the individual furnishes to
the United States Department of State a signed statement of voluntary
relinquishment of United States nationality confirming the performance of 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)),
877A(g)(4)(C)(C) New Law Analysis the date the United States Department
of State issues to the individual a certificate of loss of nationality, or
877A(g)(4)(D)(D) New Law Analysis the date a court of the United States
cancels a naturalized citizen's certificate of naturalization.
Subparagraph
(A) or (B) shall not apply to any individual unless the renunciation or
voluntary relinquishment is subsequently approved by the issuance to the
individual of a certificate of loss of nationality by the United States
Department of State.
877A(g)(5)(5)
New Law Analysis Long-term resident.
The term
“long-term resident” has the meaning given to such term by section 877(e)(2) .
877A(g)(6)(6)
New Law Analysis Early distribution tax.
The term
“early distribution tax” means any increase in tax imposed under section 72(t),
220(e)(4) , 223(f)(4), 409A(a)(1)(B) , 529(c)(6), or 530(d)(4).
877A(h)(h) Other
rules.
877A(h)(1)(1)
Termination of deferrals, etc.
In the case of
any covered expatriate, notwithstanding any other provision of this title—
877A(h)(1)(A)(A) New Law Analysis any time period for acquiring property
which would result in the reduction in the amount of gain recognized with
respect to property disposed of by the taxpayer shall terminate on the day
before the expatriation date, and
877A(h)(1)(B)(B) New Law Analysis any extension of time for payment of
tax shall cease to apply on the day before the expatriation date and the unpaid
portion of such tax shall be due and payable at the time and in the manner
prescribed by the Secretary.
877A(h)(2)(2)
New Law Analysis Step-up in basis.
Solely for
purposes of determining any tax imposed by reason of subsection (a) , property
which was held by an individual on the date the individual first became a
resident of the United States (within the meaning of section 7701(b)) 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.
877A(h)(3)(3)
New Law Analysis Coordination with section 684.
If the expatriation of any individual would
result in the recognition of gain under section 684, this section shall be
applied after the application of section 684 .
877A(i)(i) New Law
Analysis Regulations.
The Secretary
shall prescribe such regulations as may be necessary or appropriate to carry
out the purposes of this section.
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
No comments:
Post a Comment