Coincidentally, on the same day that the latest Federal Register “published expatriates” list finally came out, the Washington Post “In the Loop” blog reports that Tina Turner has finally visited the U.S. embassy in Bern to sign her DS-4079 to confirm that she naturalised as a Swiss citizen with the intention of giving up U.S. citizenship. (No doubt the latter news will overshadow the former, and I fully expect that in the coming days some newspapers will mix up the two news items and erroneously report that Tina Turner appeared in the list.)
Anyway, the news of Tina’s relinquishment comes straight from the horse’s mouth — an embassy “activity report” (but not a public one?) — and is likely to be quite accurate, but the Washington Post wrote something else that comes from an anonymous and entirely misinformed reader:
The key word in the embassy report apparently is the term “relinquishment.” That means, a knowledgeable source told us, that she did not “formally renounce her U.S. citizenship under 349(a)(5) Immigration and Nationality Act, but took Swiss citizenship with the intent to lose her U.S. citizenship.” As opposed to formal renunciation — a much more complex process, we were told — there are no “tax or other penalties for loss of citizenship in this fashion.”
Writer Al Kamen was probably anxious to get the news out, but he was right to hedge this un-fact-checked quotation with “apparently” and “we were told”. (Update, 14 November: he has since issued a correction.) A reading of the actual text of 26 USC § 877A — the portion of the Internal Revenue Code which imposes the “exit tax” on newly-minted ex-citizens — confirms that the “knowledgeable source” is incorrect: the tax consequences are the same whether you renounce citizenship, relinquish citizenship, lose citizenship by court-ordered denaturalisation like an ex-Nazi, or even give up your green card when you were never a citizen at all.
Kamen’s report confirms how Tina relinquished U.S. citizenship:
“Long-time Swiss resident Tina Turner” was in the embassy Oct. 24 to sign her “Statement of Voluntary Relinquishment of U.S. Citizenship under Section 349 (a)(1) of the INA” — the Immigration and Naturalization Act.
So we head to the “definitions” section of the exit tax statute of the Internal Revenue Code, where we find the first piece of text relevant to this situation, § 877A(g)(4):
(4) Relinquishment of citizenship
A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) 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)),
(B) 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)),
(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Very clearly, Tina falls under (B). So she is “treated as relinquishing [her] United States citizenship” on that date. What does that mean? We go up to § 877A(g)(2), where we find:
The term “expatriate” means—
(A) any United States citizen who relinquishes his citizenship, and
(B) 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)).
Italics added by me for emphasis: Tina is an “expatriate”, not just in the normal English language sense of “living abroad” but in the tax sense of “let’s take a highly ambiguous ordinary word and redefine it for our own purposes to maximise public confusion”. But there’s more. § 877A(g)(1):
(1) Covered expatriate
(A) In general
The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877 (a)(2).
26 USC § 877(a)(2)(A), (B), and (C) are the three famous tests: do you have at least $2 million (not inflation-adjusted) in worldwide assets, did you owe at least $124,000 (inflation-adjusted) in U.S. taxes over the past five years, or are you missing any tax forms in those years. Tina is an “expatriate”, and it is safe to guess that she has enough assets so that she “meets the requirements of subparagraph (A)”. Therefore, she meets the two prongs of the test to be a “covered expatriate”. The consequences of that are found in § 877A(a)(1) et seq.:
(a) General rules
For purposes of this subtitle—
(1) 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.
Hence, Tina will pay capital gains tax on all her worldwide property. It does not matter that most of those capital gains are on property like the home in which she actually lives in Switzerland, and are attributable to the time she has been living outside of the U.S. for the past two decades (during which she still had to pay U.S. income taxes). Uncle Sam demands his cut, and you don’t even get an exclusion for your primary residence. But there’s even more. From § 2801(a):
(a) In general
If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to the product of—
(1) the highest rate of tax specified in the table contained in section 2001 (c) as in effect on the date of such receipt (or, if greater, the highest rate of tax specified in the table applicable under section 2502 (a) as in effect on the date), and
(2) the value of such covered gift or bequest.
Note the word “covered” here; you may suspect that it’s in the same sense as “covered expatriate” above, and you’d be right. § 2801(e):
(e) Covered gift or bequest
(1) In general
For purposes of this chapter, the term “covered gift or bequest” means—
(A) any property acquired by gift directly or indirectly from an individual who, at the time of such acquisition, is a covered expatriate, and
(B) any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate.
In other words, whatever Tina gives to her children in the U.S. will be taxed at a higher rate than if she remained a U.S. citizen: the highest gift/estate tax rate without any $5 million exclusion. On top of that, she loses any Swiss tax breaks she may have enjoyed as a foreigner, if she was ever using them in the first place (it’s unlikely she would have anyway, since whatever she saved in Swiss taxes would simply mean more taxes she had to pay to the U.S.) — Swiss citizens cannot qualify for the special “lump sum” régime du forfait for foreigners who aren’t employed or doing business in the country. And she also faces the risk that demagogues like Chuck Schumer and Jack Reed will push through legislation to ban her from the U.S. for the rest of her life.
And despite all this, Tina would still rather be a citizen of the country where she lives than the country which she left behind — just like the rest of us emigrants around the world, of far more ordinary means, who have also decided to stop being U.S. citizens in order to save our mortgages and preserve our ability to live normal lives in the countries of our choosing.
Update, 14 November: After various experts including Pepperdine Law School’s Paul Caron over at TaxProf Blog (who links to us here at the Isaac Brock Society) and Michael Pfeifer of Caplin & Drysdale weighed in, Al Kamen followed up with a second post setting the record straight. Unfortunately, “a lie can get halfway around the world before the truth laces up its boots”, and some other newspapers have already repeated the error about the alleged lack of tax consequences for relinquishment, including eNews Channel Africa, the Philippines’ ABS-CBN news, and the U.S.’ Newsmax.