Tax-Expatriation

Will Congress Repeal the Estate Tax? If so, will the “Inheritance Tax” for “Covered Expatriates” get Repealed too?

Posted on May 10, 2017 Updated on July 19, 2024

The current U.S. Treasury Secretary announced in an April 26, 2017 press briefing the intention of the current Administration to repeal the estate tax.

The current estate tax has been in existence for 101 years (with prior versions in the 19th century).  Please see the following articles published some years ago for a history of the estate tax since its enactment with the Revenue Act of 1916; Patrick Fleenor, staff economist at the Tax Foundation, A History and Overview of Estate Taxes in the United States and The Estate Tax:  Ninety Years and Counting, by Darien Jacobson, Brian Raub and Barry Johnson.

See Figure C from the article by Jacobson, et. al. that provides a highlight of significant changes in the U.S. estate tax law:

If Congress and the President do repeal a tax that has been in existince for over 100 years, it is hard to imagine that such a repeal will be permanent going forward in other administrations and congressional bodies?  In contrast, the U.S. Treasury  released its FACT SHEET: Administration’s FY2017 Budget Tax Proposals a little over a year ago where its then stated goal (under a very different Administration) was to increase the scope and amount of the estate and gift tax –

Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009. This proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009.  The top tax rate would be 45 percent and the exclusion amount would be $3.5 million per person for estate and GST taxes, and $1 million for gift taxes.  The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2016.

The important question for “covered expatriates” (really for their future U.S. beneficiareis) is whether a repeal of the estate tax for U.S. persons will also include the repeal of the “inheritance tax” under Section 2801 that was newly adopted in 2008.  See, prior posts relevant to Section 2801,

–  The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”

– Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)

Will Treasury Ever Finalize the 2801 Regulations? Meanwhile – U.S. beneficiaries are exposed to tax on “covered gifts” and “covered bequests.”

Posted on April 18, 2017 Updated on July 19, 2024

Treasury has not yet finalized the 2801 regulations.  The tax that is imposed under Section 2801 was passed into law in 2008, yet the collection of the tax has been suspended until the regulations are finalized.

In May 2014, I submitted comments awaiting expected proposed regulations.  Covered Gifts and Bequests: The Need for Guidance (5+ Years Out) 

The proposed regulations were eventually published in September 2015 by Treasury; but still are not final. See, Guidance under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests from Covered Expatriates

See, a prior post from September 2015 – Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)

In May 2016 the ABA, Real Property, Trust and Estate Law Committee issued – “Comments on Guidance under Section 2801”

I addressed the following issues in my comments:

First, the collection of the tax has been suspended until after guidance is issued along with IRS Form 708.

Second, this is the first U.S. federal tax of its kind as a true “inheritance” tax, in the case of bequests. It is also apparently the first tax of its kind on the recipient of gifts, which are otherwise exempt from income tax.

Third, the IRS has no way to help effectively track the tax, its application, collection and general enforcement.

Fourth, there is no basic guidance beyond the statute for “any United States citizen or resident” who receives such a gift or a bequest to make a host of decisions to properly determine or calculate the tax.

Fifth, presumably no “United States citizen or resident” has ever even paid such a tax, due to its suspension; although the law is now almost six years old.

Sixth, the statute imposes no time requirement for when the tax must be paid.

Seventh, since many of the assets likely to be gifted or bequeathed will be located outside the U.S. in different countries with different currencies and economic variables and legal systems compared to the U.S., there is a particular need to know the allowable methods of valuing the property gifted or bequeathed.

Eighth, Chapter 4 of Subtitle A, FATCA will bring greater awareness of U.S. tax law requirements for U.S. citizens and residents living outside the U.S., specifically including Section 2801.

Ninth and finally, there have been a record number of U.S. citizens who have renounced or relinquished their citizenship during the year 2013, which increases the number of affected taxpayers who might receive covered gifts or bequests.

Finally, there have been other thoughtful comments, including from ACTEC regarding the proposed 2801 proposed regulations – but still no final regulations and no statute of limitations periods running against the government to collect taxes which may be owing going back nearly 10 years!!

New Treasury Regulations Can Effect Some Long-Term Residents (“Green Card” Holders)

Posted on March 27, 2017 Updated on July 19, 2024

There have been numerous posts about how Lawful Permanent Residents (“LPRs”) who have not formally abandoned their green card might have adverse U.S. tax consequences as part of the U.S. “expatriation tax.”

See for instance –

Tax Expatriation: The Numbers Affected Are Far Greater for Lawful Permanent Residents vs. Citizens

Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card

See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9.

The U.S. Treasury issued new Regulations that can impact LPRs who have previously filed U.S. 1040NR tax returns under an applicable income tax treaty.   On December 13, 2016, the these final regulations require foreign-owned, single-member U.S. limited liability companies (“SM-LLCs”) that are treated as disregarded entities for U.S. tax purposes to file an information return to report certain transactions.

An individual who is a LPR can fall into this category in certain circumstances; namely where they cease to be a “U.S. person” under IRC Section 7701(b)(6).

Accordingly, the regulations treat such SM-LLCs as domestic corporations and require them to file IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The regulations also require these SM-LLCs to maintain records with respect to the reported information.

United States citizens leaving after presidential elections?

Posted on November 14, 2016

The popular press has reported that the Canadian immigration service website crashed shortly after the results of the election.  See Fox News, Nov. 9, 2016, Canadian immigration website crashes during election

It will be interesting to see if there will be a surge in United States citizens, not just the accidental American living outside the U.S., who will be inclined to renounce citizenship?   These are not easy or legally simple steps, as various posts in this website explain.  At a minimum, the individual must have citizenship in at least one other country, so as not to be left stateless.

It could be very difficult to mathematically determine whether this comes to pass, simply since the data provided for all names of individuals, does not include where they reside currently and for how long, inside or outside of the United States.

Of course, some may desire to move and live outside United States, without actually remounting their United States citizenship.

Expatriation Tax Form 8854 is Part of Criminal Tax Case

Posted on November 8, 2016 Updated on July 19, 2024

The U.S. Department of Justice announced a US$100M FBAR penalty and criminal guilty plea in an international tax evasion case.  The government’s press release on November 4, 2016, provided as follows:

• A Rochester, New York emeritus professor of business administration pleaded guilty today to conspiring with others to defraud the United States and to submitting a false expatriation statement to the Internal Revenue Service (IRS), announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division, and U.S. Attorney Dana J. Boente of the Eastern District of Virginia, after the plea was accepted by U.S. District Judge T.S. Ellis III. 

The case is extraordinary in the steps apparently taken by the business investor/professor in hiding some US$200M of assets overseas.  The facts are egregious as reported and tie directly to IRS Form 8854.  Hence, this seems to be a very good criminal tax case for the government.  See a prior post that briefly discusses IRC Section 7206(1), see, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?

Prior posts have discussed the importance of certifying truthfully and accurately as to all items of information requested on IRS Form 8854, Initial and Annual Expatriation Statement; which is made under penalties of perjury (like all U.S. tax statements).  See, Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))

Also, prior posts have discussed the steps taken by the government to track taxpayers and their assets globally, to help assure they comply with U.S. federal tax law.  See a prior related post, 19 Jan 2014 – Should IRS use Department of Homeland Security to Track Taxpayers Overseas Re: Civil (not Criminal) Tax Matters? The IRS works with Department of Homeland Security with TECs Database to Track Movement of Taxpayers

The recent press release explains how a false IRS Form 8854 was prepared by a co-conspirator of the taxpayer, as follows:

• In 2013, the individual who had nominal control over Horsky’s accounts at the Zurich-based bank conspired with Horsky to relinquish the individual’s U.S. citizenship, in part to ensure that Horsky’s control of the offshore accounts would not be reported to the IRS.  In 2014, this individual filed with the IRS a false Form 8854 (Initial Annual Expatriation Statement) that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years. 

The importance of a complete and accurate IRS Form 8854, is to enable a taxpayer (if they meet other statutory requirements) to avoid “covered expatriate” status.  See, the Tax Court case earlier this year 2016, Topsnik v. Commissioner (2016), where the Court found the taxpayer had failed to meet the certification requirements and was necessarily a “covered expatriate.” 

Whether criminally or civilly, taxpayers should never underestimate the importance of filing complete and accurate tax returns; specifically including IRS Form 8854, Initial and Annual Expatriation Statement.

Maybe most important of all, it is crucial the taxpayer understands the full range of legal and tax consequences to them regarding the important steps that might lead to “tax expatriation.”  The law is complex and fraught with potential minefields.  It’s always advisable to have thoughtfully analyzed and considered the consequences of “tax expatriation” long before taking specific steps (pre as opposed to post-expatriation) of renunciation of U.S. citizenship or abandonment of lawful permanent residency.

The U.S. Supreme Court and Tax Cases (e.g., Topsnik and Section 877A)

Posted on November 4, 2016 Updated on July 19, 2024

Individuals around the world are often curious about how and when the U.S. Supreme Court hears tax cases.  In some countries, tax cases represent the majority or large percentage of total cases heard by their Supreme Court (e.g., Mexico). 

The Supreme Court typically hears some 100-150 cases per year out of more than 7000 cases a year it is asked to review.  Many of these cases deal with the constitutionality of particular laws.  They rarely take up tax cases.

The 2013 term was unusual in that the Supreme Court heard three federal tax cases (U.S. v. Woods, U.S. v. Quality Stores, Inc. and U.S. v. Clarke).  Similarly, in 2015 the Supreme Court issued opinions in three tax cases (although each dealt with powers of states to impose taxation – Alabama Dept. of Revenue v. CSX Transportation, Inc. a property tax case; Direct Marketing Association v. Brohl  a sales tax case; and, Maryland v. Wynne an income tax case).

None of these cases or any Supreme Court case before them has dealt with the U.S. “exit tax” arising out of IRC Sections 877, 877A, 2801, et. seq. Indeed, to date, there have been few cases heard by other courts regarding these provisions.  One of the most important and relevant is the Topsnik v. Comm’r  (146 T.C. No. 1) case published this year.  The Topsnik case will be discussed in more detail in a later post.  The short version is that the taxpayer in Topsnik lost the case and was found to have been a “covered expatriate” with the consequent adverse tax consequences that follow.

Taxpayers have a right of appeal from the U.S. Tax Court.  If a case is appealed from the U.S. Tax Court, e.g., Topsnik  or another federal court (e.g., from Court of Federal Claims) it will go to one of 13 appellate courts.  An appeal from one of these 13 appellate courts will lie with the U.S. Supreme Court.

The U.S. Supreme Court is generally not obliged to review cases (per the Certiori Act of 1925), including tax cases, and will rarely take up a tax case, whether or not it addresses a Constitutional question.  Hence, a case like Topsnik  will almost certainly never become binding precedent to all the courts in the land, e.g., the Court of Federal Claims.

Like Canada’s “Deemed Acquisition” Rules: IRC Section 877A(h)(2)

Posted on November 3, 2016 Updated on July 19, 2024

The Canadian income tax system has a sensible rule that treats immigrants into the country “as if” they had sold their non-Canadian assets just prior to becoming a Canadian income tax resident.

The Canada Revenue Agency (“CRA”) explains it as follows:

• If you owned certain properties, other than taxable Canadian properties, while you were a non-resident of Canada, we consider you to have sold the properties and to have immediately reacquired them at a cost equal to their fair market value on the date you became a resident of Canada. This is called a deemed acquisition.

• Usually, the fair market value is the highest dollar value you can get for your property in a normal business transaction.

• You should keep a record of the fair market value of your properties on the date you arrived in Canada. The fair market value will be your cost when you calculate your gain or loss from selling the property in the future.

The U.S. does not have such a rule generally for immigrants coming to America.  Instead, the non-U.S. citizen will typically have their historic tax basis (by applying U.S. tax principles) in the property they own prior to coming to the U.S.   For instance, an immigrant from the South American continent who owns real estate in their country of citizenship, may have a large “unrealized gain” in that property for U.S. federal income tax purposes.

This means that if the South American sells the real estate, while being a U.S. income tax resident (after immigrating to the U.S.), the gain in the South American real estate will be subject to taxation in the U.S.  This is very different from the sensible Canadian rule, which exempts the appreciation in the property of the immigrant while living outside of the North American continent.

This can be a very bad result for the uninformed immigrant, since the example above can get worse, when the immigrant to the U.S. has received properties in the form of gifts (e.g., from their family members) which could have very low tax bases per U.S. tax law.   Assume a gift of South American real estate received by the immigrant prior to moving to the U.S. with a low historic basis of US$500K.  Assume further it is sold for US$3.3M while the immigrant is residing in the U.S.  If the property was worth US$3.2M when she immigrated to the U.S., only US$100K of appreciation occurred while residing in the U.S.  Nevertheless, under U.S. law, the entire US$2.8M gain (US$2.7M of which occurred while living outside the U.S.) will generally be subject to U.S. federal income tax.

This comes as quite a surprise to many. 

An immigrant to Canada in the same case, would only have US$100K of taxable gain, with the US$2.7M gain being free from taxation under Canada’s “deemed acquisition” rules.

There is one exception in the U.S. tax law.  Unfortunately, it applies to “covered expatriates” who readers of this site understand, that the U.S. tax regimes are typically quite undesirable.  They are as follows:

• The “Mark to Market” taxation on unrealized gains of worldwide assets, arising from the renunciation of U.S. citizenship or termination of “long-term residency” status  (i.e., the so-called “exit tax”);  See, Inflation Adjusted Exclusion Amounts Since Inception of 2008 “Mark to Market” Expatriation Tax Law: Example   and

• The tax payable by U.S. beneficiaries whenever they receive so-called “covered gifts” and/or “covered bequests.”  See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.” (April 2014) and a post from September 2015, Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!).

The statutory provision under IRC Section 877A(h)(2)  provides relief from the first tax; for purposes of calculating the “mark to market” tax.  It provides in relevant part that the “covered expatriate” –

• . . . shall be treated as having a basis on such date [the date of immigration to the U.S. in the first place] of not less than the fair market value of such property on such date . . .”

Accordingly, the appreciation of the property owned by the immigrant (see, US$2.7M example above – who is in the process of emigrating out of the U.S. -by way of “covered expatriate” status)  will generally escape income taxation under IRC Section 877A(h)(2)  on the unrealized gain in the property that arises prior to moving to the U.S. in the first place.   This limited rule is similar to the sensible Canadian “deemed acquisition” rules.

Unfortunately, there is no such rule as this “deemed acquisition” concept that could reduce the future tax payable by U.S. beneficiaries of “covered gifts” and “covered bequests.”