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Form 8854 Exit Tax Calculations and Reporting: Minimizing the IRC 877A Expatriation Tax

THURSDAY , OCTOBER 26, 2017, 1:00-2:50 pm Eastern

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• Oct. 26, 2017

Form 8854 Exit Tax Calculations and Reporting

Philip D. W. Hodgen Hodgen Law, Pasadena, Calif. phil@hodgen.com Ann M. Seller Kohnen & Patton, Cincinnati aseller@kplaw.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

26 Oct 2017

• I. Exit Tax Provisions of Section 877A

A Quick Overview of the Income Tax Rules

5

26 Oct 2017

Personal Status: Citizen or “Long-Term Resident”

6

Citizen or Long-Term Resident Expatriation Event Expatriate Start Three Tests Covered Expatriate Paperwork Paperwork Plus Tax IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1)

26 Oct 2017

Something Happens: That Personal Status Ends

7

Citizen or Long-Term Resident Expatriation Event Expatriate Start Three Tests Covered Expatriate Paperwork Paperwork Plus Tax IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1)

26 Oct 2017

Result: You are an Expatriate

8

Citizen or Long-Term Resident Expatriation Event Expatriate Start Three Tests Covered Expatriate Paperwork Paperwork Plus Tax IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1)

26 Oct 2017

And If You Are Rich (Unless Exempt) or Bad . . .

9

Citizen or Long-Term Resident Expatriation Event Expatriate Start Three Tests Covered Expatriate Paperwork Paperwork Plus Tax IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1)

26 Oct 2017

You Are a Covered Expatriate

10

Citizen or Long-Term Resident Expatriation Event Expatriate Start Three Tests Covered Expatriate Paperwork Paperwork Plus Tax IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1)

26 Oct 2017

Income Tax at Exit: Three Special Rules

• Specified Tax-Deferred Accounts - (IRAs, for

example). Deemed distribution (no early distribution penalty). IRC §877A(e).

• Deferred Compensation - “ineligible” taxed as a

deemed present value lump sum distribution; “eligible” has 30% withheld from distributions. IRC §877A(d).

• Trust Distributions - 30% withholding on the taxable

portion of the trust distributions when paid. IRC §877A(f).

11

26 Oct 2017

Income Tax at Exit: Everything Else

• Everything Else - deemed sale; gain/loss recognized.

IRC §877A(a)(1).

• The first $699,000 of capital gain is exempted from

taxation (2017 expatriations). IRC §877A(a)(3), Rev.

• Proc. 2016-55, §3.33. Indexed for inflation.

12

• II. COVERED EXPATRIATES

Ann M. Seller Kohnen & Patton LLP aseller@kplaw.com 513-381-0656

Covered Expatriate: How do you become one?

Who can become one?

• 1. U.S. Citizens and certain Green Card Holders
• a. Green Card for 8 of the previous 15 years

i. Dual Resident Rule

Objective Test: three prongs

• 1. Compliancy Test: Must be able to certify compliance with all requirements

under the Internal Revenue Code for the past five years (Title 26)

• 2. Average Income Tax Liability over the previous 5 years : $162,000 (2017)
• 3. Net Worth Test: $2,000,000

Objective Test: Exceptions to the application of the financial prongs

• 1. Dual citizens at birth
• 2. Minors (age 18½)

14

Covered Expatriate: Net Worth Test

Net Worth Test: $2,000,000

I. Only guidance available is Notice 97-19

• 1. Use gift tax valuation rule under IRC 2512 to value assets
• 2. Valuation of Beneficial Interest in Trusts

a. Two Steps: i. First, allocate all interest in trust property to the beneficiaries 1. Facts and Circumstances 2. Intestacy rules under the Uniform Probate Code, as amended ii. Second, value the allocated interest under IRC 2512

b. Example: B’s father established a Trust for the benefit of B and C. Facts: Trust income and corpus may be distributed at the trustee's discretion to either B or C

• All of the interests in property owned by Trust 2 must first be allocated to either B or C
• If the facts and circumstances do not indicate how to allocate the trust's property, use the

rules of intestate succession (determined by reference to B's father's intestacy) in the Uniform Probate Code (UPC)

• If B's father died intestate, the UPC would allocate his property equally between B and C

Conclusion: B will be treated as owning half of the interests in property owned by Trust 15

26 Oct 2017

• III. Components of Form 8854: Overview

A Quick Overview of Form 8854

16

26 Oct 2017

Why Form 8854 Exists

• Required by IRC §6039G
• Different parts apply depending on your expatriation

date.

• Filing Form 8854 is not necessary to terminate U.S. tax

status as a resident alien or U.S. citizen.

17

26 Oct 2017

• III. Components of Form 8854: Part I

Expatriating Acts (Line 5)

18

26 Oct 2017

Form 8854, Part I, Line 5: Expatriation Date

19

26 Oct 2017

Citizen: What Is Your Expatriation Date?

20

26 Oct 2017

Citizens: How to Relinquish Nationality

• U.S. citizens have U.S. nationality.
• An “expatriate” is a U.S. citizen who relinquishes U.S.
• nationality. IRC §877A(g)(2)(A).
• “Relinquish” means doing one of six voluntary acts with

the intention of relinquishing U.S. nationality. 8 U.S.C. §1481(a).

• Most common: renunciation. 8 U.S.C. §1481(a)(5).

21

26 Oct 2017

Citizens: Expatriation Date (Renunciation)

• “The date an individual relinquishes citizenship”. IRC

§877A(g)(3)(A).

• Expatriation date for relinquishment by renunciation is

the earlier of:

• The date of renunciation. IRC §877A(g)(4)(A).
• The date the State Department issues a Certificate of

Loss of Nationality. IRC §877A(g)(4)(C).

22

26 Oct 2017

Citizens: Expatriation Date (Other Relinquishment)

• Earlier of:
• The date the individual furnishes a signed statement
• f voluntary relinquishment of United States

nationality under 8 U.S.C. §1481(a)(1)-(4). IRC §877A(g)(4)(B).

• The date the State Department issues a Certificate of

Loss of Nationality. IRC §877A(g)(4)(C).

23

26 Oct 2017

Retroactive Relinquishment is a Problem

• Question: you file paperwork in 2017. The Certificate of

Loss of Nationality is issued in 2017 and says “Your U.S. nationality terminated in 1978.” When did you expatriate?

• Answer: I think your expatriation date is 1978.
• Desirable: don’t have to worry about IRC §877A.
• Logic: See prior IRC §7701(n) that explicitly said you

remain a citizen until Form 8854 filed. Eliminated when IRC §877A replaced IRC §877.

24

26 Oct 2017

Prior IRC §7701(n)(1) - Continued Citizenship

(n) Special Rules For Determining When An Individual Is No Longer A United States Citizen Or Long-Term Resident—For purposes of this chapter— (1) United States Citizens—An individual who would (but for this paragraph) cease to be treated as a citizen of the United States shall continue to be treated as a citizen of the United States until such individual-- (A) gives notice of an expatriating act (with the requisite intent to relinquish citizenship) to the Secretary of State, and (B) provides a statement in accordance with section 6039G (if such a statement is otherwise required).

25

26 Oct 2017

Long-Term Resident: Abandon/Revoke Visa

26

26 Oct 2017

Long-Term Resident Defined: IRC §877(e)(2)

• Status (green card) plus time:
• Lawful permanent resident (means someone with

permanent resident status; see IRC §7701(b)(6)).

• “In” at least 8 of the 15 year period ending with the

expatriation year.

• Six years and two days is all it takes to be a long-term

resident.

27

26 Oct 2017

Received Permanent Resident Status In 2010

28

Permanent Resident Status = Yes Number of Years Toward Long- Term Resident Status 2010 1 2011 2 2012 3 2013 4 2014 5 2015 6 2016 7 2017 8

26 Oct 2017

Lawful Permanent Residents and Treaty Elections

• In computing your “in 8 of the last 15 years” do not

count years if:

• you are not yet a long-term resident, and
• you make a valid treaty election for the entire calendar

year to be a nonresident alien.

• IRC §§877(e)(2), 877A(g)(5).

29

26 Oct 2017

Permanent Resident Status Received in 2010

30

Permanent Resident Status = Yes Years Counted Toward Long-Term Resident Not a Long-Term Resident 2010 1 1 2011 2 2 2012 3 Treaty Election 2013 4 3 2014 5 4 2015 6 5 2016 7 6 2017 8 7

26 Oct 2017

Long-Term Residents: Visa Status Terminated

• Abandoned: the individual voluntarily gives up

permanent resident status. File Form I-407.

• Revoked: the government terminates permanent

resident status by administrative or judicial proceedings.

• Your green card expired? You are still a permanent

resident and a U.S. taxpayer.

31

26 Oct 2017

Long-Term Resident: Visa Status Effective Date

• Abandon: the day you hand in your Form I-407.
• Revoke: final administrative ruling date; if you appeal to

a court, a final judicial order is required.

• Regs. §301.7701(b)-1(b)(3).

32

26 Oct 2017

Long-Term Resident: Treaty Election

33

26 Oct 2017

Long-Term Resident: Treaty Election

• “An individual shall cease to be treated as a lawful

permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.”

• IRC §7701(b)(6), flush language.

34

26 Oct 2017

Long-Term Resident: Treaty Election Effective Date

• The date you “commence to be treated as a resident” of

the other country.

• Supported by your claims on Form 8833.
• Note that this is not necessarily January 1.

35

26 Oct 2017

• III. Components of Form 8854: Part III

For Covered Expatriates Who Expatriated In Prior Years

37

26 Oct 2017

Form 8854, Part III

38

26 Oct 2017

Form 8854, Part III: Keeping Track of You

• Covered expatriates only.
• Expatriated in a previous year.
• One or more of:
• Mark-to-market capital gain tax payment is deferred.

IRC §877A(b).

• Deferred compensation received. IRC §877A(d).
• Distributions from a nongrantor trust. IRC §877A(f).

39

26 Oct 2017

• III. Components of Form 8854: Part IV, Section

A

Are You a Covered Expatriate?

40

26 Oct 2017

Form 8854, Part IV(A): Covered Expatriate?

41

26 Oct 2017

Covered Expatriates Fail At Least One Test

42

Title 26 Obligations OK? Net Worth < $2 Million? Not a Covered Expatriate Yes Yes 5 year Tax Liability < $162,000? Covered Expatriate Prior Five Years’ Tax Obligations Not Satisfied Start: Expatriate Exception Applies? Net Worth Above $2 Million Prior Five Years’ Average Tax Liability > $162,000 Dual Citizen or Young Adult No Exception Applies

26 Oct 2017

Line 1: Net Income Tax Liability Test

43

26 Oct 2017

Line 1: Net Income Tax Liability Test

• Average income tax liability for prior 5 years ≥

$162,000 (2017 expatriations). Adjusts annually for inflation. IRC §§877A(g)(1)(A), 877(a)(2)(A);

• Rev. Proc. 2016-55, §3.32.
• Use the rules in IRC §38(c)(1) to compute “tax

liability”. Notice 97-19, §III, Notice 2009-85, §2(B).

• Foreign tax credit reduces “tax liability”. IRC

§38(c)(1) flush language; IRC §27.

• No net investment income tax, no self-

employment tax, etc.

44

26 Oct 2017

Net Income Tax Liability Test: MFJ

• Married filing jointly?
• Do not divide the individual’s average tax liability by two.

Notice 97-19, §III; Notice 2009-85, §2(B).

45

26 Oct 2017

Line 2: Net Worth Test

46

26 Oct 2017

Line 2: Net Worth Test

• Net worth ≥ $2,000,000. (Not indexed for inflation). IRC

§§877(a)(2)(B), 877A(g)(1)(A).

• Measure value on the day before expatriation.
• Assets = if giving it away would be a taxable gift if you

were a U.S. citizen, include it. Also include the value of beneficial interests in trusts. Notice 97-19, §III, Notice 2009-85, §2(B).

• Subtract liabilities to get net worth.

47

26 Oct 2017

Line 3: Dual Citizen Exception (Dual Citizenship)

48

26 Oct 2017

Dual Citizen Exception: What It Is

• “. . . 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.” IRC §877A(g)(1)(B)(i)(I).

49

26 Oct 2017

Dual Citizen Exception: Known Unknowns

• “Became a citizen at birth . . . .” probably (!) means

citizenship was automatically possible due to the fact of birth in the right circumstances, even if it took a while to do the paperwork to perfect citizenship status.

• “. . . continues to be a citizen . . .” probably (!) means

citizenship status has been uninterrupted since birth.

• “. . . taxed as a resident . . . of such other country” is
• confusing. What if the country has no income tax? Is it

impossible to qualify for the dual citizen exception?

50

26 Oct 2017

Line 4: Dual Citizen Exception (Residence)

51

26 Oct 2017

Line 4: Dual Citizen Exception (Residence)

• “. . . 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

• ccurs[.]” IRC §877A(g)(1)(B)(i)(II).
• IRC §7701(b)(1)(A)(ii) is the substantial presence test.

52

26 Oct 2017

Line 5: Young Adult Exception

53

26 Oct 2017

Line 5: Young Adult Exception

• “. . . the individual’s relinquishment of United States

citizenship occurs before such individual attains age 18½. . .” IRC §877A(g)(1)(B)(ii)(I).

• “. . . 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. . .” IRC §877A(g)(1)(B)(ii)(II).

54

26 Oct 2017

Line 6: Certification Test

55

26 Oct 2017

Line 6: Certification Test—What It Is

• “[S]uch individual fails to certify under penalty of perjury

that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence

• f such compliance as the Secretary may require.” IRC

§877(a)(2)(C).

• “This title” = Title 26, United States Code. (AKA the

Internal Revenue Code).

56

26 Oct 2017

Line 6: Certification Test—What It Means

• Can you certify full compliance with all Federal tax
• bligations if you have normal minor errors on your tax

returns in the five-year period?

• Or does the certification test only cause you to fail if you

have major compliance failures?

• I do not have an answer. Nor does the IRS (yet).

57

26 Oct 2017

Line 6: Certification Test—What I Think

• If the IRS published a form for it (e.g., Form 8621, Form

3520) and you didn’t file that form, that’s a major failure that will cause you to fail the certification test. Fix it.

• If you did something and the noncompliance penalty is

large or creates an open statute of limitations, that’s a major failure. Fix it.

• Small mistakes? Disallowed deductions? It might be OK,

but who knows? Why not be bulletproof? Why rely on the kindness of strangers?

58

26 Oct 2017

• III. Components of Form 8854: Part IV, Section

B

For Covered Expatriates Only: What’s Taxed, and How Much

59

26 Oct 2017

Form 8854, Part IV(B): The Exit Tax Itself (Sort

• f)

60

26 Oct 2017

Form 8854, Part IV(B): Mark-to-Market

61

26 Oct 2017

• III. Components of Form 8854: Part IV, Section

C

Deferral of Tax on Mark-to-Market Gain

62

26 Oct 2017

Form 8854, Part IV(C): Tax Deferral

63

26 Oct 2017

• III. Components of Form 8854: Part V, Schedule

A

The Expatriate’s Balance Sheet

64

26 Oct 2017

Form 8854, Part V(A): Assets

65

26 Oct 2017

• III. Components of Form 8854: Part V, Schedule

B

The Expatriate’s Income Statement

66

26 Oct 2017

Form 8854, Section V(B): Income Statement

67

• IV. IRC § 2801

COVERED GIFTS & BEQUESTS

Background

Generally, § 2801 imposes a tax on any U.S. citizen or resident who received a covered gift or bequest (aka a gift or bequest from a covered expatriate). IRC § 2801 was enacted to so that the estate and gift tax rules were not harsher

• n expatriates than non-expatriates.

Current status: Notice 2009-85 provided that gifts or bequests on or after June 17, 2008, from a covered expatriate would be subject to a transfer tax under § 2801 and further provided that satisfaction of the reporting and tax obligations under § 2801 would be deferred pending the Service’s issuance of separate guidance. The IRS issues proposed regulations on September 9, 2015.

70

§ 2801 Inheritance Tax

I. Inheritance tax on any U.S. citizen or resident who receives a covered gift or bequest. II. Tax Rate is the highest rate imposed for estate tax, or 40% I. Fair market value of interest received, not given

• III. The affected transferee is liable for the tax
• IV. Prop. Regs. – Report the tax on a Form 708

V. No income tax basis adjustment is available for §2801 tax paid

• VI. Credit for foreign gift and estate tax paid

I. Problematic for some countries (i.e. U.K.)

• VII. Exposure is indefinite
• VIII. Treaty Relief

71

What is affected?

I. Covered Gifts and Bequests (aka Covered Transfers) A. Any intervivos gift or testamentary bequest, whether direct or indirect, to an affected transferee

1.

• Prop. Reg. - any property that would have been includible in the gross estate
• f the covered expatriate (”CE”) under U.S. estate tax if the CE has been a

U.S. citizen at the time of death 2. Situs is irrelevant 1. E.g. The gift of U.S. intangible asset is subject to inhertiance tax 3. Beware of §§2036-2042, 2044 interests 4. Indirect Transfers. 1. Lapse of a general power of appointment held by a CE (e.g. Crummey) 2. Power of appointment granted by a CE but exercised by non-CE in favor

• f an affected transferee

72

What is affected? The Double Whammy

• Prop. Reg. 28.2801-3(f), example 3. - Covered gift in trust with grant of general power of

appointment over trust property. A CE funds an irrevocable foreign trust for the benefit of the CE’s child who is a U.S. domicile and CE’s grandchild who is a U.S. citizen. CE's child has a lifetime GPOA over the trust assets, which he exercises to distribute $100,000 to CE’s grandchild. The result: The $100,000 received by the CE’s grandchild is subject to §2801. The $100,000 appointed by the CE’s child is subject to gift tax.

73

Who is affected?

I. Transferee is liable for the tax II. Who is the transferee? I. “Any U.S. citizen or resident” who received a covered gift or bequest

I. U.S. resident means U.S. domicile II. Not applicable to non-resident aliens

II.

• Prop. Regs. - U.S. shareholders, partners, members or other interest holder of a

domestic entity that receives a covered transfer III. Domestic Trust I. Trust pays the tax immediately regardless if there are any U.S. beneficiaries IV. Foreign Trust

I. Tax deferred until distribution to U.S. recipient II. U.S. recipient pays tax even if not a beneficiary of the trust (e.g. POA beneficiary)

I. §164 deduction available for tax attributable to amount included in gross income of U.S. recipient of a distribution from a foreign trust 74

Who is affected? Foreign Trusts

Foreign trusts continued...

I. 2801 Ratio (similar concept to GST inclusion ratio)

I. Inclusion ratio between 0 and 1, which determines the percentage of each distribution subject to 2801. II. Planning Opportunities: I. Structure foreign trusts to require segregation of covered transfers II. Foreign Trusts can report gifts on a timely filed Form 708 to preserve the §2801 exclusion.

II. Available annual election to be treated as a domestic trust for §2801 only

I. Requires the appointment of a U.S. agent. (Prop. Regs.) II. “Purging” election – pays tax on all current and previous covered transfers. I. This also occurs upon the migration of a foreign trust.

75

Exceptions

I. Exceptions for certain recipients. I. Spouse - Qualifying transfers to a spouse under §§ 2056 and 2523

I. QDOTs for non-citizen spouses (aka green card holders) II. Traps: Bequest to a spouse by a CE whose estate does not consist of U.S. assets. Is a QTIP/QDOT election possible?

II. Charities under §§ 2055 and 2523 II. Exceptions for certain transfers I. Taxable transfers reported on timely filed Form 709 or Form 706. II. Transfers made during a year when the CE is a U.S. tax resident (aka domicile) III. Annual Exclusion Gifts I. Applies per recipient II. No present interest requirement III. No medical or educational exemption IV. Supersized annual exclusion for non-citizen spouse

76

Issues

I. Issues:

A. How does beneficiary know if decedent is a covered expatriate?

1. A Protective Form 708 is an option.

B. How does a beneficiary of a foreign trust determine if the distribution is associated with the contribution by the CE?

1. Default is an inclusion ratio of 1.

C. Will the inheritance tax remain intact if the estate tax is repealed?

77

26 Oct 2017

• V. Pre-Expatriation Planning Strategies

How to Eliminate or Mitigate the Damage

78

26 Oct 2017

• 1. Don’t Be an Expatriate (Noncitizens Only)
• Do not become a permanent resident. Use any other

visa category to live in the United States.

• Prevent long-term resident status.
• Abandon green card status before the 8th year.
• Use treaty elections to be a nonresident prior to the

8th year.

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26 Oct 2017

• 2. Don’t Be a Covered Expatriate
• Net worth test
• Net tax liability test
• Certification test

80

26 Oct 2017

Net Income Tax Liability Test: MFJ → MFS

81

Filing Status Tax Liability Five Year Average 2012 (MFJ) 200,000 2013 (MFJ) 200,000 2014 (MFJ) 200,000 2015 (MFJ) 200,000 2016 (MFJ) 200,000 200,000 2017 (MFS) 100,000 180,000 2018 (MFS) 100,000 160,000

26 Oct 2017

Net Worth Test: Gifts

82

Assets H (Expatriate) W (U.S. or NRA) Cash 1,500,000 1,500,000 Stock 1,500,000 1,500,000 Individual Total 3,000,000 3,000,000 Cash 400,000 2,600,000 Stock 1,500,000 1,500,000 Individual Total 1,900,000 4,100,000

26 Oct 2017

Transfers: Gift Tax Risks (Marital Deduction)

• Traditionally, interspousal gifts are not subject to gift tax.

There is a marital deduction that reduces taxable gifts to

• zero. IRC §2523(a).
• The marital deduction is not permitted for gifts to

noncitizen spouses. IRC §2523(i).

83

26 Oct 2017

Transfers: Gift Tax Risks (Unified Credit)

• If you are relying on the unified credit, make your

gifts in one calendar year and expatriate in the next.

• The amount of unified credit available for gifts

depends on your citizenship/resident status on December 31. IRC §2505(a)(1).

• In the expatriation year you will be a nonresident

noncitizen on December 31, and your unified credit available is zero.

• The small gift exclusion is still available ($14,000

in 2017).

84

26 Oct 2017

Transfers: Capital Gain Tax Risk

• Non-gift transfers to nonresident alien spouses will be

treated as a gain recognition event. IRC §1041(d).

• E.g., watch out for “you get my half of the house, and

I get your half of the bank account.” That will be treated as the expatriate’s sale of his interest in the house in exchange for cash in the bank account.

• Solve this problem by having the nonresident alien

spouse elect under IRC §6013(g) to be a resident alien for income tax purposes in the year of transfer.

85

26 Oct 2017

Net Worth Test: Green Card Holder’s Strategy

• Gift tax rules apply to U.S. citizens and residents.

“Resident” means domiciled in the United States. Regs. §25.2501-1(b).

• A green card holder domiciled abroad is subject to gift

tax on U.S. real estate transfers and gifts of U.S.-situs tangible personal property. IRC §2501(a)(1), (2).

• Foreign assets and intangible personal property can be

given away without concern for gift taxation or reporting to the U.S.

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26 Oct 2017

• 3. Mitigate Damage to Covered Expatriates
• Minimize mark-to-market gain by gift transfers. E.g.,

give away high capital gain assets, keep cash.

• Where exit tax is unavoidable, ensure foreign tax credit

availability in the expatriate’s home country. (Hint: it probably isn’t).

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26 Oct 2017

Mitigate the Damage of Double Taxation

• The exit tax is a tax imposed on a fake

(non)event.

• It will not generate a foreign tax credit in the other

country, because no taxable event happened

• there. The asset wasn’t sold.
• The fake (non)event for exit tax purposes will

therefore not increase basis in the foreign country.

• Result: a covered expatriate pays tax twice, once

to the USA to expatriate, and once again when a gain recognition event happens in his/her home country.

88

26 Oct 2017

Double Taxation Example (Real Estate)

• U.S. citizen is a covered expatriate.
• One of the assets owned by the covered expatriate is

real estate in France.

• The U.S. citizen pays mark-to-market exit tax to the

United States for the unrealized capital gain on the French real estate.

• Later, when the (former) U.S. citizen sells the French

real estate, he pays tax on the capital gain in France.

89

26 Oct 2017

Double Taxation Example (Pension)

• A covered expatriate has a foreign pension. This is an

“ineligible deferred compensation” item.

• The pension is treated as having made a lump sum

distribution of the present value of the vested pension benefits at the time of expatriation. U.S. tax is paid on that “pretend” pension distribution.

• Later, the (former) U.S. citizen retires and starts

receiving pension payments. Those pension payments are taxed in the home country of the (former) U.S. citizen.

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Canada ←→ USA Expatriation

• If Canadians come to the USA, they can make an

election for U.S. tax purposes that will allow them to eliminate double-taxation on assets that were subject to the Canadian departure tax. Rev. Proc. 2010-19.

• The Canada/U.S. Income Tax Treaty allows expatriating

Americans in Canada to get the same double-taxation

• relief. Article XIII, Paragraph (7).

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