U.S. Imposes Mark-to-Market Exit Tax

Article written by John C. Newman, Esq.
Posted on Sep 10, 2012

A little history is helpful in understanding the imposition of an exit tax on US citizens and long-term residents who commit a taxable act of expatriation on or after June 17, 2008. Since 1966, the Internal Revenue Code has contained anti-abuse rules attempting to tax individuals who renounce their US citizenship for tax avoidance.2 These 1966 rules (codified in Code §877) were created when the international taxation rules of the Code were systematized in their current structure. The 1966 anti-abuse rule was difficult to enforce.3 When the US Congress created the HIPAA rules in 1996, it raised necessary revenue by replacing much-amended §877 rules with a provision imposing–for a ten-year period following expatriation–an “alternative tax regime” on a US citizen who relinquished citizenship to avoid the worldwide reach of US tax rules, but only if such expatriation was treated (in the words of the Code) as having a “tax avoidance purpose.”

The alternative tax regime involved the imposition of US tax on a broadly-defined notion of US source income, but only if it resulted in a higher tax than the straight application of US tax rules to the individual as a non-resident. The 1996 alternative tax regime was broader in scope than its predecessor, covering not only expatriating US citizens, but also non-citizen individuals who held lawful permanent resident status for eight of the previous fifteen years and then left US taxing jurisdiction. These 1996 rules were repeatedly tweaked through Treasury regulations, IRS revenue ruling policies, and ultimately by legislation passed in June 2004.4 Notwithstanding these legislative and administrative improvements, the alternative taxation regime was found to be unworkable. Fortunately for those who at least must be aware of the new exit tax, but unfortunately for those subject to their mark-to-market taxation rules, the alternative taxation regime ceased to be applied (except for definitional purposes) for expatriation events after June 16, 2008. In general, therefore, all that need be understood by the immigration practitioner are the tax and compliance rules that apply after that date. Certain regulatory principles, however, are carried over from prior legislation.

A summary of the reach of U.S. worldwide taxation rules is set forth below (Section I), and those readers familiar with these rules may skip to the explanation of the scope of the new tax rules (Section II). If the immigration lawyer finds that he has clients covered by the new exit tax and who may need advice on its potential burden, the rules for imposition of the tax are examined in Section III. An example of how this tax affects a hypothetical French long-term resident is then offered (Section IV), along with some planning tips.

I. Overview of US International Tax Rules

In general, for income, estate, and gift tax purposes, US citizens are subject to federal tax on a worldwide basis. From this point, the specific rules diverge, with one set for income tax purposes and another set for what might be termed “transfer tax” purposes (i.e., for US taxation of estates and gifts).

For income tax purposes, to paraphrase the words of the Code, US citizens are taxed on their worldwide incomes from whatever geographic or productive source derived. A rather complex and imperfect foreign tax credit is offered to offset some of the financial burden of paying foreign tax on foreign source income. One of the major imperfections is that the foreign tax credit does not affect a taxpayer’s calculation of his state income tax burden, if any.

Non-citizens who are considered as tax residents in the US are subject to the same US worldwide taxing jurisdiction. Non-citizens are deemed to be US tax residents if they pass one of two objective tests (Code §7701(b)). The first is a mathematical days-of-presence test, termed the “substantial presence” test. A non-citizen is taxed as a resident if he or she is present in the United States for 183 days or more calculated on a three-year rolling average basis. The effect of the rolling average calculation is that a non-citizen will be deemed to be a resident of the United States if he or she is present during each of the three measuring years for more than 122 days.5 The second test is commonly called the “green card” test. A non-citizen who benefits from permanent residence status is taxed as a resident simply because he or she has this status. A non-citizen may claim the double taxation protection afforded by a bilateral tax treaty with the United States, but such a claim must be made by filing IRS form 8833. Under Code § 6114, such a claim cannot be implied.

Non-citizens who are non-residents for tax purposes generally are subject to US tax only on income from US sources and income effectively connected with the conduct of a US trade or business within the United States. Effectively-connected income is taxed at progressive income tax rates, whereas certain types of passive US source income are taxed at a flat 30 percent rate (frequently reduced by tax treaties).

For income tax purposes, certain types of trusts are considered as owned by the grantor (“grantor trusts”), and their income is taxed in the hands of the grantor. Non-grantor trusts are independent taxpayers, and income accumulated in such trusts is taxed at highly compressed tax rates to encourage the distribution of such income to beneficiaries in whose hands it is then taxed.6 Except to the extent that a transfer by a US taxpayer to a trust is to a grantor trust, any transfer of property to a foreign trust or estate is treated as if the property were sold by the taxpayer to the recipient trust.

The determination of whether a non-citizen is subject to US transfer taxes (estate and gift taxes) is not based on the objective tests used for income tax purposes. A non-citizen is subject to the full panoply of US transfer taxes if he or she is domiciled in the United States. Domicile is a subjective test. In the classic definition of domicile, an individual is domiciled where s/he intends to reside without removing her- or himself therefrom. A citizen’s or a US-domiciled non-resident’s gifts or estate are subject to worldwide transfer taxation. Non-citizens who are not domiciled in the United States are subject to US estate and gift tax only with respect to discrete categories of US-sited property.

As a concomitant of its citizenship tax rules and as explained in the introduction, since 1966 the United States has attempted to impose its tax rules on US citizens who relinquish US citizenship with a principal purpose of avoiding US income taxes. In 1996, in response to press reports that indicated that a small number of very wealthy individuals had relinquished their US citizenship to avoid US income tax while continuing to maintain substantial contacts with the United States, the US Congress amended Code §877 to reach these high-net-worth and tax-motivated expatriates. The new rules covered individuals whose average US federal income tax liability for the five years preceding expatriation exceeded $100,000 or whose net worth on the date of expatriation exceeded $500,000. Such expatriates were deemed to have left US taxing jurisdiction to avoid tax unless they proved otherwise. As is true of much anti-tax-abuse legislation, a wide variety of technical rules were crafted to prevent the individual from engaging in tax planning to avoid the tax. These same amendments applied the alternative tax regime to long-term US residents, defined as non-citizens who were lawful permanent residents for eight of the fifteen years preceding expatriation, with the same income and net worth tests. 7

Following the Joint Committee of Taxation report of February 2003, the so-called American Job Creation Act of 2004 expanded the scope of the alternative tax regime to apply to a larger group of expatriating individuals. The new rules contained a provision that replaced the subjective “intent to avoid US income taxation” test with an objective standard. Under the AJCA, the alternative tax regime would apply to individuals whose average annual tax liability for the proceeding five years was more than $124,000 or whose net worth exceeded $2 million dollars on the date of expatriation, regardless of intent. In addition, the post-2004 rules specified that any expatriated individual who was physically present in the United States for more than thirty days for any year during a 10 year trailing period after expatriation was taxed as if s/he were a US citizen.

The above saga of income tax amendments was paralleled by a series of estate and gift tax amendments attempting to accomplish the same general purpose of closing the door on abusive expatriation to avoid tax. Whatever their efficacy, the pre-June 17, 2008 rules were repealed by the Heroes Act of 2008, which used this and other tax amendments to fund additional benefits for US veterans. The following sets forth the rules as they will now apply.

II. General Explanation and Scope of Exit Tax

A. In General.

The personal income tax aspects of the expatriation tax rules are found at new Code § 877A. As discussed above, this Code provision imposes an exit tax on certain US citizens who relinquish their citizenship and on certain long-term US residents who terminate their US residency. The exit tax imposes a federal income tax on the net unrealized gain on most of the expatriating taxpayer’s property as if the property had been sold for its fair market value the day before the expatriation event. For non-US-citizens, the tax basis of the property deemed sold will be its fair market value on the date the individual first became a resident of the United States, unless the taxpayer elects to use the historic basis of the property. Upon imposition of this “mark-to-market” tax, the tax bases of the taxpayer’s assets will increase to their fair market values. Because a variety of Code provisions normally would allow deferral of certain types of such gains (such as for like-kind exchanges), the new § 877A specifically overrides Code deferral rules. Like pre-June 2008 law, the exit tax is aimed at high net wealth individuals. A rather high gains exemption amount also is allowed: any net gain resulting from the mark-to-market of the taxpayer’s assets is recognized only to the extent that it exceeds $600,000 (a figure adjusted for inflation in later years). In addition to the mark-to-market income tax rule, new estate and gift tax rules will apply to certain transfers made to US persons by US citizens who relinquish their US citizenship and by certain long-term US residents who terminate their US residency (Code § 2801).

B. Covered Expatriates

The exit tax applies to what are termed “covered expatriates”, a definition that reposes on existing Code §877. The exact rules are different for US citizens and for departing long-term residents.

1. US Citizens

Any US citizen who relinquishes his/her citizenship and who fulfills one of the following three criteria is subject to the mark-to-market exit tax:

(1) Has average annual net income tax liability in excess of $139,000 for the five years preceding the date of loss of US citizenship (the amount will be adjusted for future inflation);

(2) Has a net worth of $2 million dollars or more on the expatriation date; or

(3) Fails to certify under penalty of perjury that he or she has complied with all US federal tax obligations for the preceding five years, including by providing such further evidence as the Secretary of Treasury may require. 8

If an individual is covered by the expatriation tax due to the fact that she has high annual net income tax (criteria 1, above) or because of her high net worth (criteria 2, above), the individual still may be exempt under two rather narrow exceptions. First, if, as of the expatriation date, the individual has dual citizenship, the expatriation tax will not apply if the individual continues to be a citizen of and is taxed in such other country, and provided also that the individual has not been an income tax resident of the United States for more than ten years during the fifteen year period preceding the expatriation date under the substantial presence test. Second, a US citizen who relinquishes his/her US citizenship before reaching the age of eighteen and one-half will not be subject to the expatriation tax provided he or she was not a resident of the United States for more than the ten taxable years before such relinquishment under the substantial presence test.

A US citizen is treated as having relinquished his US citizenship on the date (“expatriation date”) of the earliest to occur of:

  • the date the individual renounces his US nationality before a diplomatic or consular officer under INA § 349(a)(5);
  • the date the individual furnished to the Department of State a signed statement voluntarily relinquishing US nationality confirming an act of expatriation specified in INA § 349(a)(1-4);
  • the date the Department of State issues the taxpayer a certificate of loss of nationality; or
  • a US court cancels the taxpayer’s naturalization certificate. (although the individual still could be considered as a US resident if still holding a green card).

2. Non-US Citizens

Unfortunately for the immigration lawyer, the exit tax also applies to certain long-term residents of the United States who cease to be lawful permanent residents. For this purpose, a long-term resident means any individual other than a citizen of the United States who is a lawful permanent resident (“LPR”) in at least eight taxable years during the period of fifteen taxable years ending with the taxable year during which the expatriation date occurs. An individual is not treated as a lawful permanent resident of the United States for any taxable year if during such year the individual is treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and does not formally waive the treaty benefits. The IRS can make this determination by monitoring the filing of formal claims of treaty protection under Code §6039G. This definition is based on venerable Code §877, and therefore former court decisions and the existing regulations will remain valid. For example, in measuring the number of years that an individual had LPR status, any calendar year during which the individual was an LPR for a single day is counted as one full year.

A long-term resident is deemed to commit a covered act of expatriation on the date he or she: (i) voluntarily abandons his or her LPR status by signing a form I-407 disclosure; (ii) the Department of Homeland Security determines that LPR status is abandoned; (iii) the individual is subject to a final order of removal and actually leaves the United States9; or (iv) the date that the individual commences to be treated as a resident of a foreign country under a tax treaty, does not waive such treatment, and informs the IRS of the commencement of such treatment.10

III. Mechanics of the Exit Tax

The determination of the expatriation date is significant for exit tax planning purposes. For purposes of the exit tax, a covered expatriate is treated as having sold, on the day before the expatriation date, for its fair market value all of the taxpayer’s property of whatever kind and wherever situated. All such gains are taken into account for the taxable year of the deemed sale, and any loss arising from such sale is also taken into account to the extent allowable by the Code. The new Code provision provides for a $600,000 exemption of such gain, and therefore, only rather wealthy individuals are likely to be reached by this exit tax even if they become subject to the tax as a result of failing to file the appropriate IRS Form 8854 making the required declaration that he or she has complied with all tax laws for the five years prior to expatriation (Section II. B. 1. criteria 3, above). Deferred compensation, a beneficiary interest in a non-grantor trust, and certain tax-deferred accounts are excepted from the mark-to-market tax, but are subject to a withholding tax.

For gift and estate tax purposes, a special transfer tax is imposed on certain transfers from covered expatriates to their US citizen beneficiaries.

Because the exit tax is a tax on a deemed disposition, it is possible that the taxpayer may not have the liquidity necessary to pay his or her federal income tax on the gains that are deemed realized. The new rules allow the taxpayer to defer payment of the exit tax until the property that generates the tax liability that has to be satisfied is disposed of, the taxpayer dies, or such date as the Secretary of Treasury may prescribe in regulations. To make the deferral election, the taxpayer must offer adequate security in the form of a bond acceptable to the Secretary of Treasury. In addition, the electing taxpayer must make an irrevocable waiver of any rights under a treaty with the United States that would preclude assessment or collection of any tax that is deferred. An interest charge is imposed at the Code § 6601 rate, which is the interest rate on underpayments of tax. This rate is the federal short term rate plus three percentage points, a rate that varies quarterly. It is currently quite low, about 3.5 percent.

Deferred compensation items (as defined in Code §219(g)(5)) are treated differently. Such items include interests in a foreign pension plan or similar arrangement, US deferred compensation plans, and any right to property that has not yet been taken into income. This legal description includes US public pension plans, §403(b) annuities, among other members of the US deferred compensation menagerie. For covered expatriates who receive payments from an “eligible deferred compensation item,” the mark-to-market exit tax will not apply immediately to the taxpayer’s entire present interest in the plan, but the plan administrator or other payor must deduct and withhold 30 percent from the payments. A deferred compensation item is an eligible deferred compensation item if the plan administrator or other payor is a US person or a non-US-person who elects to be treated as a US person for purposes of the 30 percent withholding tax rules. The covered expatriate must notify the payor of his status as a covered expatriate and irrevocably waive any treaty right to a reduced withholding tax. If the deferred compensation item falls outside the scope of the withholding tax, then the item is subject to the mark-to-market exit tax on its present value as of the day before the date of expatriation. Pension or other deferred compensation rights that are attributable to service performed outside the United States while the covered expatriate was not a citizen or resident are excluded from these rules.

IRA accounts, health savings accounts, qualified tuition programs, etc. are treated differently (Code § 877A(e)). Such accounts are deemed distributed on the day before the expatriation date. Balances in such accounts are thereby taken into income and hence reached by the expatriation tax. No early distribution penalty is applied to the deemed distribution, and appropriate tax treatment is accorded to subsequent distributions to account for prior taxation.

A covered expatriate’s interest in a grantor trust is also subject to the mark-to-market exit tax (Code §877A(f)). A covered expatriate’s beneficial interest in a non-grantor trust held on the expatriation date is treated like a deferred compensation item; i.e., the trustee must deduct 30 percent of any direct or indirect distribution to the extent that it would be includable in the expatriate’s income if he or she was still a US citizen or resident.

For purposes of the deferral rules on open transactions (such as like-kind exchanges) or on extensions of time to make tax payments, the open period or extension of time terminates on the day before the expatriation date.

US estate and gift taxes apply to covered expatriates who make covered gifts or bequests to US citizens or residents (new Code section 2801). A covered gift or bequest is a transfer by gift from an individual who is a covered expatriate at the time of the gift, or who was a covered expatriate at the time of his death. Unless exempt under the annual gift tax exclusion ($13,000 per donee per year in 2009 for gifts of present interests), such transfers if not shown on a timely filed US gift or estate tax return are taxed in the hands of the recipient of the taxable transfer. The applicable tax rate is the highest marginal gift or estate tax rate in effect on the date of the receipt (45% in 2009). Deductions are allowed for transfers to charities and to spouses under existing US transfer tax rules.

Code § 6039(a) imposes an annual filing requirement on taxpayers subject to the § 877A exit tax, enforced by a $10,000 penalty. This same provision contains a “name and shame” rule; the names of expatriating US citizens must be printed in the Federal Register.

If the individual who is a covered expatriate again becomes subject to US tax as a citizen or resident after the expatriation date, the individual is not treated as a covered expatriate for purposes of applying the withholding tax rules on deferred compensation, income distributions from non-grantor trusts, and gifts and bequests. If the individual again commits a taxable act of expatriation, the mark-to-market exit tax rules are applied with a new expatriation date.

IV. Example

Assume that a French citizen couple moved to the United States in 1975 so that the husband could take up an executive position with a French bank in a major east coast city. The couple left their apartment near the Bastille for the husband’s mother’s use without rent. Upon the husband’s mother’s death in Paris, the husband inherited the family’s country home in Normandy, and his sister moved into the Paris apartment. Instead of paying rent, the sister has proceeded to renovate the apartment to modern standards. During the couple’s stay in the United States, they had two US children who became US citizens at birth. Both attended Ivy League schools and have married US citizens. The wife started a local cooking school, which has done quite well. She is the author of three or four successful cookbooks that promote her cooking school. As is typical, the French bank has continued to contribute to the executive’s French pension plan through direct transfers from the French bank’s headquarters, and the French wife has a $400,000 401(k) balance. When the financial crisis hit, the French bank downsized. Without much planning, the couple took a buy-out and retired to France at the end of 2008. To avoid having to file US tax returns for 2009, on December 15, 2008 they surrendered their permanent residence cards making formal declarations on Form I-407.

This French couple is certainly subject to the mark-to-market exit tax because they committed an act of expatriation when they surrendered their permanent residence cards. The following are the different tax compliance elements that are implicated in this example:

1. US Personal Residence. We will assume that the couple had to leave before they sold their residence (which we will assume they acquired for $150,000 in 1975). As such, it will be subject to the mark-to-market rules based on its 2008 year-end fair market value: assume $800,000. The deemed sale occurred on December 14, 2008, while they were still US tax residents. We can assume that the personal residence exemption will exempt the first $500,000 in gains (see, Code §121 “Exclusion of Gain from Sale of Principal Residence”). The mark-to-market tax base for this item is $150,000 [$800,000 – ($500,000 exemption + cost basis $150,000)].

2. Wife’s Copyright Royalty. The wife’s accountant will have to secure an appraisal of the fair market value of the stream of payments that are anticipated from the intellectual property rights owned by the wife. This stream of payments will include any foreign intellectual property rights from translation of her books into foreign languages. The fair market value of these rights will be added to the exit tax return. A stream of copyright payments is not an eligible deferral item; therefore, the 30% withholding may not be elected. For purposes of this example, assume that over the wife’s actuarial life, the discounted present value of the royalties is $500,000. The wife should elect to defer payment of tax on the deemed sale of these intellectual property rights, although it is unclear how this deferral will work with a stream of copyright payments. The wife may wish to pay tax on the deemed gain as she receives the income from the copyrights (as for tax deferred plans) because whatever value remains in her estate that passes to her US citizen children will trigger the Code §2801 transfer tax in addition to any remaining deferred mark-to-market tax.

3. Paris Apartment. The Bastille area of Paris experienced a phenomenal run-up in real property values as a result of the creation of the Bastille Opera House. The rather dilapidated apartments in the area have appreciated ten- or twenty-fold. Assuming that the apartment was purchased for $100,000 in French francs in 1975, and it is now worth ten times that amount ($1 million, when converted from euros), our French expatriating husband has a $900,000 deemed gain on the Paris apartment. Unlike in France, the US does not actualize a purchase price for monetary inflation when calculating gains. Likely, the couple will have to offer a lien (directly or indirectly) on this apartment as security for the deferral of US tax on the deemed gain.

4. Normandy Country Home. On the death of the French husband’s mother, the Normandy home would have been given a step-up in tax basis to its fair market value (because U.S. income tax rules apply to assets wherever they are located if their gains are taxed to US citizens or residents). Assuming a mere tripling of the fair market value of the Normandy home from its $400,000 date of death fair market value, the French citizen husband has an additional $800,000 mark-to-market gain. Here again, one wonders what type of security the US Treasury will require to secure deferred tax payments.

5. French Pension Plan. If the French pension plan administrator agrees to collect the 30 percent withholding tax and sign the IRS compliance documentation required to guarantee its payment, the fair market value of the husband’s interest in this plan is eligible for deferral. Assuming that the French plan administrator makes a Gallic shrug and refuses to be beholden to the US Treasury for its tax compliance, then an actuary will have to compute the discounted fair market value of the stream of payments that the French executive will receive. Typically, French pension plans pay out sixty to eighty percent of a successful executive’s last year’s salary as an annual pension, in some form or another. If our hypothetical bank executive retired when his US salary was $300,000, the stream of forward payments (even at the 66% level) could be $200,000 per year. From his 62-year old retirement age to his actuarial date of death at 85, the present value could be at least $2.5 million (depending on the current discount rate). This sum is added to the French executive’s exit tax base, except for that portion representing his services abroad while a US non-resident (ten percent of the amount). Mark-to-market tax base: $2,250,000. Here again, one wonders what type of security can be offered in the French equivalent of a defined benefit plan. One also wonders what happens if the executive dies prematurely, and the actuarial assumption of value was too high.

6. Wife’s 401(k). An elective deferral can be made subject to the 30 percent withholding tax because US plan administrators regularly withhold and pay on income taxes. This amount will not be included in the exit tax, but the tax will collected at 30 per cent of its amount as paid.

7. Wife’s Cooking School. The French citizen wife has decided not to sell her cooking school, but to return to the East Coast for three months of the year (with her husband) to give cooking courses and continue to operate the school. The full fair market value of the French cooking school (assume $600,000 net of her cost basis) will be included in the expatriation tax base.

8. Total Tax Base. The total deemed gains are: $150,000 (personal residence) + $500,000 (copyright royalties) + $900,000 (Paris apartment) + $800,000 (Normandy country home) + $2,250,000 (French pension plan) + $600,000 (cooking school) = $5,200,000. Deducting the $600,000 exemption, the couple has a $4,600,000 mark-to-market exit tax base.

Assuming all of the tax base consists of long-term capital gains, this couple will owe the US Treasury a capital gains tax of (15% X $4,600,000) $690,000. At least one of the items may be ordinary income (the copyrights), and hence the gain attracts a higher tax rate. This tax figure does not include the 30 percent withholding tax on the 401(k) plan. In addition, this couple’s US tax lawyer should examine state law and determine the couple’s state liability, if any, and to make sure any annual tax filings are made. Finally, a US estate tax planner should be consulted so that the Code §2801 transfer tax can be managed before this couple passes their assets to their French citizen children. The §2801 tax stings particularly because it is payable by the US children recipients.

Given the onerous tax consequences that are imposed on this departing French couple, some advance tax planning would have been advisable. In the author’s experience the situation of this French banker who resided in the United States for an extended period and then retired in France is not extraordinary. The planning possibilities are rather complex. First, the applicable US-France tax treaty might be examined for whatever protection it provides. While France and the US initialed a protocol to their tax treaty on January 13, 2009, the protocol articulates double taxation rules only with the former US alternative tax regime and not with the new exit tax. Our couple might seek some form of treaty protection, but the French tax authorities are unlikely to be overly antagonistic to the US exit tax. France adopted an exit tax modeled on the US alternative tax regime in 1998, although the European Court of Justice found that it violated its freedom of establishment rules when applied to expatriates within the European Union and the highest French appellate court in tax matters agreed. 11

This couple might have engaged in the traditional US estate planning transactions to pass assets down a generation before their expatriation. With much of the couple’s assets in France, the French gift and succession duty aspects of such estate tax planning transfers would likely be the determinative factor in whether or not such transactions would work to reduce the overall tax burden. Some of the classic forms of international compensation planning might have been used to reduce the tax on the French defined benefit plan if such an exit tax could have been anticipated. A variety of other planning techniques could have been implemented if the French taxpayers’ departure had been planned; these are best considered as the domain of the international tax planning community.

1 John Newman practices law at Facey Goss McPhee P.C. in Rutland, Vermont. He is the author of The French Tax and Business Law Guide published by Sweat & Maxwell, a loose-leaf service on French business law. He also is the author of a book in French on US tax and business law, Dossiers International, Etats Unis published by Editions Francis Lefebvre. Prior to moving to Vermont, he practiced law in Paris, France and Washington, DC. John’s current concentration in immigration law covers religious immigration, family immigration, and inbound investor planning.
2 The Foreign Investors Tax Act of 1966.
3 For a successful application of the Foreign Investors Tax Act version of Code §877, see Kronenberg v. Comr., 64 T.C. 428 (1975) (taxpayer relinquished US citizenship in favor of his existing Swiss citizenship one day before liquidation distribution was received; taxation under §877 confirmed).
4 American Jobs Creation Act of 2004, P.L. 108-357, § 804.
5 This is because to the days in the year for which the determination is made (year Y) the individuals days of presence in the prior year (year Y-1) are added for one-third of their amount, and the days of presence in the year preceding that (year Y-2) are added for one-sixth of their amount.
6 For taxation of 2008 incomes, the rate on estates and non-grantor trusts reached 35 percent at $10,700 of income.
7 Immigration practitioners will recall that this 1996 legislation enacted a new basis of inadmissibility (INA § 212(a)(10(E)) , which denies admission to US citizens whom the Attorney General determined had renounce their U.S. citizenship with the purpose of avoiding taxation. The 2003 Report of the Joint Committee on Taxation (p. 138) explains why the Congressional staff believes that this rule is unenforceable without further legislation.
8 Likely this declaration will be made, as it is now, on IRS Form 8854. This form requires the taxpayer to reveal a variety of additional information on the taxpayer’s previous tax liability and net worth. A balance sheet is then completed by the taxpayer that would allow the IRS to determine the gain subject to the exit tax.
9 These prior three specific examples of expatriation for long-term residents are given on the Form 8854. The former rule that an individual who is not a citizen retains residence until the individual gives official notice of an expatriation act or the termination of residence has been repealed.
10 Code § 877A(g)(2)(B), which cross references § 7701(b)(6).
11 See French Tax and Business Law Guide ¶30-300.

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