
James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Author: James F. McDonough
Date: November 27, 2013

Of Counsel
732-568-8360 jmcdonough@sh-law.com
Recently, the Washington Post announced that Tina Turner relinquished her U.S. citizenship. Another publication stated that, for income tax purposes, there is a distinction between renouncing and relinquishing a person’s U.S. citizenship and that relinquishing has lesser adverse consequences.
§877 and §877A of the Internal Revenue Code (IRC) were enacted to address the issue of expatriates and taxation. In 1966, §877 was enacted; however, IRS had to prove the principal purpose was tax avoidance and the statute was ineffective and unenforceable. Amendments were made in 1996, as part of HIPPA, that expanded the scope of coverage to include long-term residents as well as citizens. Second, IRS no longer had to prove motive. Instead a presumption of tax avoidance was created that applied when certain income and net worth levels were met. Third, U.S.-source income was more carefully defined and its scope was expanded. Amendments were made to estate tax provisions as well. §877 taxed the individual for a period of ten years after departure. In the years 1999-2004, numerous letter rulings were requested and issued on whether the individual overcame the presumption of tax avoidance. A favorable ruling caused §877 not to apply, while an adverse ruling or a “no-decision” ruling left one subject to tax.
In 2004, the American Jobs Creation Act modified the rules making them more objective, such as the elimination of the presumption and abolished ruling requests. Congress remained unsatisfied with §877. In 2008, Congress enacted §877A which imposed an exit tax calculated on a mark-to-market basis. Stated another way, an expatriate is deemed to sell his or her assets for fair market value on the day before expatriation. The exit tax was designed to make tax-motivated expatriations prohibitively expensive.
Now, back to Ms. Turner, who has lived in Switzerland for over twenty years and married a Swiss resident. To some, renunciation versus relinquishment may be a distinction without a difference. One should note that the U.S.-Swiss Tax Treaty was entered into in 1997 after the 1996 amendments. That treaty and six others did not reserve to the U.S. the right former residents. A curious question is whether or not Ms Turner renounced her citizenship under §349(9)(5) Immigration & Nationality Act. She reportedly stated that she had no ties to the U.S. but may not have “renounced.” An alternative to renunciation includes obtaining naturalization in a foreign state after age 18 and notifying the Department of State of such an act. One report was Ms. Turner advised that she is a citizen and resident of a foreign county under a U.S treaty without waiver of benefits.
The curious part of all of this is whether she was able to convert her intangible assets into foreign sited assets under the tax treaty. After all, she was a resident of Switzerland and intangibles are typically deemed sited where the individual is resident.
Determining when expatriation occurs is critical, especially with respect to the different versions of the statute and rules that may apply.
Ms. Turner is not the only person to expatriate from the U.S. We reported that Facebook co-founder, the Brazilian-born Edwardo Saverin, expatriated to Singapore in 2009. His departure occurred well before the Facebook IPO, no doubt a strategic move, as his renunciation in 2011 saved taxes.
We also reported in March of this year that Puerto Rico had enacted a special regime in order to attract wealthy persons to invest in the island. This regime, unlike economic citizenship programs of other countries, does not invoke §877A.
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