THE EXPAT TAX IS LAW - THE DOOR IS NOW CLOSED!
by
Marc M. Harris
After last year's failed attempt to pass an American
expatriate tax, the U.S. Treasury Department succeeded in
sneaking the provisions into the miscellaneous revenue positions
of the recently passed Health Coverage Availability and
Affordability Act of 1996. Given the failure of their high
profile campaign last year, the Treasury Department switched
strategies this year and undertook one of stealth. While the
press was talking about tax-deductible contributions to medical
savings accounts (MSAs), provisions tightening the expatriation
tax rules were implemented. Foreign grantor trust rules were
also tightened under the law.
In order to provide the health insurance and care benefits
provided under the law, a separate tax title adds certain revenue
raising provisions. In general, these revenue offsets add
provisions aimed at making certain the United States get their
fair share plus some when U.S. citizens and permanent residents
expatriate. In short, Uncle Sam would like to tell its
expatriates that they earned their money from the United States,
not in it.
A review of selected sections of the Congressional Record
provides some additional insight into the thinking behind these
new provisions.
"It has come to the attention of Congress that some
very wealthy individuals have been relinquishing their
citizenship to avoid U.S. income, estate and gift tax. The
bill does not want to discourage citizens from exercising
their right to expatriate, but does not want to provide a
tax incentive for such an action..."
If Congress truly wanted to eliminate the incentive for
expatriation, it might be better to eliminate high taxation and
put an end to the litigation crisis rather than creating another
layer of government regulation and bureaucracy.
"Congress believes the changes are consistent with
existing tax treaties in conferring a tax credit for taxes
paid in the foreign country, and to the extent they are
inconsistent, the Treasury Department will re-negotiate the
treaties to account for the changes. The new provisions
take precedence over any treaties..."
To make certain that other countries will not benefit from
America's brain drain, the United States will once again embark
on a campaign to bully other nations into accepting America's
oppressive system of taxation and regulation.
"This bill would subject former citizens to the
expatriation provisions with no inquiry into their motive
and requires individuals who exchange property that would
otherwise be exempt from U.S. taxation as foreign source
income must immediately recognize U.S. source income on any
gain from such a transaction. The Secretary is authorized
to issue regulations to treat removal of tangible property
from the U.S. and other conversions to foreign source
income. For example, any income from stock transferred to a
foreign source, such as dividends, would be converted to
U.S. source and immediately taxed..."
Logic dictates that if this tax were to approach 100%, it
would look quite similar to currency controls and foreign
investment prohibitions. Since it only goes about half of the
way, we can assume that we are 50% down the road toward American
currency and foreign investment controls.
"A new information reporting requirement has been added
requiring former citizens and long-term residents to
complete information reporting at the time of
expatriation..."
Just to make certain that no one escapes from the United
States without leaving all their wealth behind, the new
information reporting requirements will make certain that the
Treasury Department always knows where your assets are placed.
Of course, if you fail to report, civil and criminal sanctions
will apply. The new treaty negotiations will most likely include
provisions to extradite those "expat tax evaders" back home for
their "criminal act" of leaving a country that was once known as
the home of the free. Our sources at the Internal Revenue
Service tell us this treaty provision will be known as the Hotel
California provision -- you can check out, but you can never
leave.
"The bill also requires that a U.S. person that
receives a distribution from a trust must report that to the
Service..."
Now Uncle Sam is not only seeking to penalize those patriots
that have placed their funds out of harm's way, but now the
potential recipients of those receipts. If the logic of current
money laundering statutes apply as they do in most tax cases, the
bank that accepts the cashing of the beneficiary's distribution
check from a foreign trust will be a co-conspirator in this
"unpatriotic" affair.
"Effective for transfers made after February 6, 1995,
if a non-resident alien becomes a resident within five years
of transferring property to a foreign trust, the transferor
will be considered to have transferred the property on the
date he became a resident..."
The Statue of Liberty stands as America's great symbol of
open immigration with its famous inscription "give us your tired
and poor." With this provision, any person who hopes to emigrate
to the United States will definitely become tired of complying
with U.S. regulations and poor after he complies with them.
"If a U.S. person receives more than $10,000 worth of
gifts from one foreign person during any tax year, he must
file a report with the Service. If he fails to file a
report, the Service has the sole discretion to determine the
taxation of the property received by the U.S. person and the
person is liable for a penalty of 5 percent of the value of
the gift for each month he fails to file a report..."
Currency controls and foreign investment restrictions work
both ways. Not only will governments prevent you from sending
your money out, but they will also prevent you from sending your
money in without their fair share plus some.
"The Service has the power to prescribe regulations to
prevent the avoidance of the Estate, Trust and Beneficiary
part of the Code..."
This provision is known as an Abusive Transaction provision.
It is commonly referred to by international human rights
organizations as the arbitrary and capricious application of
laws.
"Once the Secretary of the Treasury establishes a
reasonable belief that the expatriate's loss of U.S.
citizenship would result in a substantial reduction in
estate, inheritance, legacy, and succession taxes, the
burden of proving that one of the principal purposes of the
loss of U.S. citizenship was not avoidance of U.S. income or
estate tax is on the executor of the decedent's estate..."
If these provisions were making you feel a bit suicidal,
please forget it. Uncle Sam is not only going to pursue you to
the grave, but also your executors and heirs.
Other items in the Congressional Record provide an even
greater insight into Washington's motivations:
"Because U.S. citizens who retain their citizenship are
subject to income tax on accrued appreciation when they
dispose of their assets, as well as estate tax on the full
value of assets that are held until death, the Committee
believes it fair and equitable to tax expatriates on the
appreciation in their assets when they relinquish their U.S.
citizenship. The Committee believes that an exception from
the expatriation tax should be provided for individuals
whose income and net worth are relatively modest..."
If you are poor, you may leave; however, if you were a
productive American in the United States that no longer exists,
you must stay and pay or leave behind the fruits of your
productivity. America's Second Civil War has begun and it is
known as Class Warfare.
"Exceptions from the expatriation tax are provided for
individuals. (An) exception applies to a U.S. citizen who
relinquishes citizenship before reaching age 18-1/2,
provided that the individual was a resident of the United
States for no more than 5 taxable years before such
relinquishment..."
Since one cannot renounce their American citizenship prior
to their 18th birthday, the children of an American resident
overseas have only 6 months to renounce their citizenship and
avoid the application of these laws. Ho many 18 year olds are
capable of making this type of decision?
"Under the provision, an individual is permitted to
elect to defer payment of the expatriation tax with respect
to the deemed sale of any property. Under this election,
the expatriation tax with respect to a particular property,
plus interest thereon, is due when the property is
subsequently disposed of. In order to elect deferral of the
expatriation tax, the individual is required to provide
adequate security to ensure that the deferred expatriation
tax and interest ultimately will be paid... In the event
that the security provided with respect to a particular
property subsequently becomes inadequate and the individual
fails to correct such situation, the deferred expatriation
tax and interest with respect to such property becomes due.
As a further condition to making this election, the
individual is required to consent to the waiver of any
treaty rights that would preclude the collection of the
expatriation tax."
Only in Congress could one dream of a law that requires its
former citizens to waive their rights in a foreign country in
order to escape from the political, social, and economic tyranny
of the United States.
"Under the provision, special rules apply to trust
interests held by the individual at the time of
relinquishment of citizenship or termination of residency.
In addition, an individual who holds (or who is treated as
holding) a trust interest at the time of relinquishment of
citizenship or termination of residency is required to
disclose on his or her tax return the methodology used to
determine his or her interest in the trust, and whether such
individual knows (or has reason to know) that any other
beneficiary of the trust uses a different method..."
The latter provision is known as the "Stool Pigeon" clause --
you are required to turn your fellow beneficiaries over to the
Internal Revenue Service. Similar laws existed in Nazi Germany
that encouraged children to turn their parents and neighbors over
to the authorities.
"If the individual holds an interest in a trust that is
not a qualified trust, a special rule applies for purposes
of determining the amount of the expatriation tax due with
respect to such trust interest. Such separate trust is
treated as having sold its assets as of the date of
relinquishment or citizenship or termination of residency
and having distributed all proceeds to the individual, and
the individual is treated as having recontributed such
proceeds to the trust. The individual is subject to the
expatriation tax with respect to any net income or gain
arising from the deemed distribution from the trust. A
beneficiary's interest in a non-qualified trust is the basis
of all facts and circumstances. If the individual has an
interest in a qualified trust, a different set of rules
applies. In determining this amount, all contingent and
discretionary interests are resolved in the individual's
favor (i.e. the individual is allocated the maximum amount
that he or she potentially could receive under the terms of
the trust instrument)..."
The United States is quite generous in calculating the tax
based on the maximum possible distribution. In their arrogance,
it appears that the law does not detail how to recover the excess
tax if the maximum level is never reached. Alternatively,
Congress never intended for former Americans to comply with this
law.
"If the individual does not agree to such a waiver of
treaty rights, the tax with respect to distributions to the
individual is imposed on the trust, the trustee is
personally liable therefor, and any other beneficiary of the
trust will have a right of contribution against such
individual with respect to such tax."
Based on the above, no foreign financial institution with
offices or business in the United States would accept the
trusteeship of an American's assets.
"Under the provision, an individual is permitted to
make an irrevocable election to continue to be taxed as a
U.S. citizen with respect to all property that otherwise is
covered by the expatriation tax. This election is an "all-
or-nothing" election;..."
Congress is quite generous with this provision in allowing
expatriating Americans to continue being chased by tax collectors
for the rest of their lives overseas.
"Under the provision, an individual is treated as
having relinquished U.S. citizenship on the date that the
individual first makes known to a U.S. government or
consular officer his or her intention to relinquish U.S.
citizenship... A U.S. citizen who furnishes to the State
Department a signed statement of voluntary relinquishment of
U.S. nationality, confirming the performance of an
expatriating act with the requisite intent to relinquish his
or her citizenship is treated as having relinquished his or
her citizenship on the date the statement is so furnished
(regardless of when the expatriating act was performed),
provided that the voluntary relinquishment is later
confirmed by the issuance of a CLN (Certificate of Loss of
Nationality). If neither of these circumstances exist, the
individual is treated as having relinquished citizenship on
the date a CLN is issued or a certificate of naturalization
is cancelled. The date of relinquishment of citizenship
determined under the provision applies for all tax
purposes..."
Based on this provision, almost any American who now wishes
to undertake the expatriation route will be subject to the tax.
In short, the door has closed for most Americans.
"Under the provision, the exclusion from income does
not apply to the value of any property received by gift or
inheritance from an individual who was subject to the
expatriation tax. Accordingly, a U.S. taxpayer who receives
a gift or inheritance from such an individual is required to
include the value of such gift or inheritance in gross
income and is subject to U.S. income tax on such amount..."
This implies that if an American expatriate sends funds back
to support his aging parents, his parents will need to treat
these gifts as taxable income. If the parents fail to report
these amounts, they could also suffer civil and criminal
penalties associated with tax evasion.
"Under the provision, an individual who relinquishes
citizenship or terminates residency is required to provide a
statement which includes the individual's social security
number, forwarding foreign address, new country of residence
and citizenship and, in the case of individuals with a net
worth of at least $500,000, a balance sheet..."
Given the desire to obtain balance sheets from expatriating
Americans, it is only a matter of time before the IRS requires
the inclusion of personal balance sheets of individual taxpayers
with their Form 1040s or at least those they suspect might wish
to expatriate.
"In the case of a former citizen, such statement is due
not later than the date the individual's citizenship is
treated as relinquished and is provided to the State
Department..."
In short, this means that you cannot obtain your certificate
of loss of nationality without providing the information to the
United States government.
"Further, the provision requires the Secretary of the
Treasury to publish in the Federal Register the names of all
former U.S. citizens with respect to whom it receives the
required statements or whose names it receives under the
foregoing information-sharing provisions..."
Now your friends and neighbors can know that you have
expatriated. Although Congress respects the right of Americans
to expatriate, it will publish your name in the Federal Register
as if expatriation were a criminal act.
"The provision directs the Treasury Department to
undertake a study on the tax compliance of U.S. citizens and
green-card holders residing outside the United States and to
make recommendations regarding the improvement of such
compliance. The findings of such study and such
recommendations are required to be reported to the House
Committee on Ways and Means and the Senate Committee on
Finance within 90 days of the date of enactment..."
Uncle Sam has awoken to the fact that most Americans living
overseas are the most likely individuals to expatriate and as a
result, they are gearing up to create a machine to attack them as
well.
"The provision is effective for U.S. citizens whose date
of relinquishment of citizenship (as determined under the
provision occurred on or after February 6, 1995. U.S.
citizens who committed an expatriating act with the
requisite intent to relinquish their U.S. citizenship prior
to February 6, 1995, but whose date of relinquishment of
citizenship (as determined under the provision) does not
occur until after such date, are subject to the expatriation
tax..."
This means that if you have not already relinquished your
citizenship or have only done so recently, you are subject to the
expat tax. The door has closed, but not completely.
About the Author
Marc M. Harris is a certified public accountant and
president of
The Harris Organisation. He has already developed a
strategy for legally avoiding the expat tax, which he discusses
only in personal appointments. Reprinted from
The Marc M Harris Analysis, a publication of
The Harris Organisation. The Libertarian Library has reprinted this article with the permission of
The Marc M Harris Analysis.
Copyright © 1996 by Marc M. Harris
Additional information on offshore strategies is available at
The Offshore Entrepreneur.
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