Sunday, May 20, 2012

Proposed new tax on expatriates section 877A


 

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.


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