Expats Live in Fear of Malevolent Time Machine
Of relevance is the following:
It should be self-evident, however, that such a result is absurd, and cannot have been intended.
Congress cannot possibly have meant to treat individuals who had long since relinquished their U.S. citizenship, and whose expatriations had always been respected for federal tax purposes, as if they had been citizens all along.
Undoubtedly, Code Sec. 877A was meant to apply solely to individuals that, on (or after) the date of enactment, were otherwise treated as citizens (or long-term residents) for federal tax purposes.
Any individual who took all steps required to successfully terminate citizenship for federal tax purposes, under the tax laws as in effect immediately prior to enactment of the 2008 Act, would not again need to relinquish U.S. citizenship and thus could not be within the intended scope of Code Sec 877A(g)(4).
The Journal of Taxation, March 2010, has an article “IRS Provides Some Guidance on the New Expatriation Exit Tax”. The article interprets IRS Notice 2009-85 which provides guidance on the exit tax for covered expatriates. I’m posting it here for reference. (It was edited by Michael Miller).
The article contains the following on how the IRS has tried to expand the tax base of covered expatriates. Please see, in particular, the last sentence below:
“It is clear that the IRS intends to expand the tax base by using all available estate tax inclusion provisions and denying the use of any provisions that otherwise would reduce the tax base. As a result, assets that the covered expatriate no longer owns could be subject to the exit tax. This could occur because provisions such as Sections 2035, 2036, and 2038 are designed to include assets in the decedent’s gross estate for estate tax purposes where the decedent made a transfer within three years of death or retained a proscribed interest or power.
There does not appear to be a sound policy justification for this expansion, especially considering the covered expatriate is prohibited from taking deductions. The ultimate implication is that there may be many circumstances in which the covered expatriate could be paying double tax — first, a gift tax on a transfer made within three years of expatriation, and then a second tax on the same transfer under Section 2035 in the covered expatriate’s tax base subject to income tax. This is a perverse result considering that, in the estate tax context, the decedent’s gross estate would include the same property but there would be an offset for previously taxed gifts.
Perhaps this expanded tax base is designed to catch individuals with green cards, but who would otherwise qualify as covered expatriates, who made gifts of their non-U.S.-situs assets prior to expatriating. If done carefully, such gifts might otherwise allow these individuals to circumvent the net worth test and income tax test because a green card holder is not de facto domiciled in the U.S. and non-U.S.-situs assets would not be subject to U.S. gift tax. A cynic might conclude that because the expat community has virtually no PACs lobbying Congress, the decision was made to use the exit tax and expanded tax base as a revenue raiser. ”
http://www.hklaw.com/files/Publication/454a4da6-d692-41b8-b9dd-367f9f8846c3/Presentation/PublicationAttachment/edb41a72-92bb-419c-bf9a-3de0351be763/Packman-March2010.pdf
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