Avoiding the Lobster Pot: Why becoming a Naturalized Citizen or LPR can be the proverbial “Lobster [Tax] Pot”
Two famous tax professors coined a wonderful analogy that can largely be applicable to any non-U.S. citizen who is considering either becoming a (1) lawful permanent resident (LPR), or (2) a naturalized citizen.
Tax professors Boris I. Bittker (Yale) and James S. Eustice (NYU), both of whom are now deceased, wrote –
- “[Under the tax laws] a corporation is like a lobster pot: it is easy to enter, difficult to live in, and painful to get out of.”
I think the same analogy is very much appropriate to a non-U.S. citizen who becomes a LPR or a naturalized citizen, without fully understanding the U.S. federal tax consequences of such a decision. The word “corporation” merely should be changed with “lawful permanent resident” or “naturalized citizen” in the quote from Bittker and Eustice when considering the potential long-term application of the “expatriation tax” rules.
The analogy is particularly applicable for two reasons. First, individuals are usually less sophisticated and, often times, simply unaware of complex tax laws. Corporate taxpayers often can have a better understanding of complex U.S. tax laws – i.e., the “lobster trap” via sophisticated tax advisers.
Second, some lobster traps have an “escape vent” for small lobsters. Similarly, the tax laws on expatriation can treat individuals with smaller amounts of assets or U.S. tax liabilities, very differently and more favorably under the law. See, Certification Requirement of Section 877(a)(2)(C) – (5 Years of Tax Compliance) and Important Timing Considerations per the Statute,
Non-U.S. citizens who are not certain they will spend the rest of their lives in the U.S., should carefully consider if they indeed wish to obtain LPR or become a naturalized citizen. This is because of the long-term tax consequences of Sections 877, 877A, 2801, etc. for those who later abandon their LPR status or renounce their U.S. citizenship.
Of course, this blog, is dedicated to shedding light on the income tax, estate and gift tax, and “covered gift” and “covered” inheritance tax consequences to those who enter the “lobster trap.”
Many more may wish to simply shy far away from the lobster trap to begin with.