Individual Suggests Fix for Flaws in Expatriate Gift Rules
Individual Suggests Fix for Flaws in Expatriate Gift Rules
- AuthorsPinto, Heitor David
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2015-28157
- Tax Analysts Electronic Citation2015 TNT 247-21
Comment on the "Guidance Under Section 2801 Regarding the
Imposition of Tax on Certain Gifts and Bequests From Covered
Expatriates"
Heitor David Pinto
November 9, 2015
Summary
Congress's declared intention with section 2801 was to impose a tax on transfers from expatriates similar to the estate and gift taxes that are avoided by expatriation, so the decision to expatriate would be "tax-neutral". However, section 2801 does not include the crucial large general exemption on estate and gift taxes, and as a result it drastically increases taxes due to expatriation, making it very far from "tax-neutral". This gross discrepancy was obviously an error.
Although the IRS does not have the authority to legislate, it does consider Congress's intention when interpreting the law. In the case of section 2801, since the law is completely opposed to the intention, its implementation should simply remain suspended, as it has been for more than 7 years. The IRS should not implement section 2801 until Congress rectifies the error.
Congress's intention and section 2801
When the House Ways and Means and Senate Finance Committees proposed the changes to the expatriation tax that were enacted by Congress in 2008, they both declared that:
"The Committee recognizes that citizens and long-term residents of the United States have a right not only to physically leave the United States to live elsewhere, but also to relinquish their citizenship or terminate their residency. The Committee does not believe that the Internal Revenue Code should be used to stop U.S. citizens and long-term residents from relinquishing citizenship or terminating residency; however, the Committee also does not believe that the Code should provide a tax incentive for doing so. In other words, to the extent possible, an individual's decision to relinquish citizenship or terminate long-term residency should be tax-neutral.
( . . . )
The Committee also believes that, where U.S. estate or gift taxes are avoided with respect to a transfer of property to a U.S. person by reason of the expatriation of the donor, it is appropriate for the recipient to be subject to a transfer tax similar to the avoided transfer taxes."1,2 (emphasis added)
In its proposed guidance, the IRS confirmed that:
"Congress determined that it was appropriate, in the interests of tax equity, to impose a tax on U.S. citizens or residents who receive, from an expatriate, a transfer that would otherwise have escaped U.S. estate and/or gift taxes as a consequence of expatriation."3 (emphasis added)
However, the transfer tax in section 2801 does not only apply "where U.S. estate or gift taxes are avoided", and it is not at all "similar to the avoided transfer taxes". In reality it is immensely higher, because it does not provide the very large exemption on estate and gift taxes of U.S. citizens or residents, currently $5,430,000. Instead, only the annual gift tax exemption is available, currently $14,000. People who have less than $5,430,000 cannot possibly be avoiding estate or gift taxes by expatriating, since they are not subject to it in the first place, yet the transfer tax of section 2801 applies to almost their entire estate. Therefore, the transfer tax makes expatriation far from "tax-neutral" as Congress stated. It severely increases the tax liability of people who expatriate compared to their liability if they remained U.S. citizens or residents.
Example
An immigrant family comes to the United States. After 10 years, the children are adults and decide to remain in the country, while the parents decide to return to their country of origin and formally abandon their U.S. permanent residence. Each of the parents owns $5 million. Since they were U.S. residents for more than 8 years and own more than $2 million, they are deemed "covered expatriates" and thus subject to section 2801. When they leave their estate to their children, they will be subject to a transfer tax of about $4 million total. However, if they remained U.S. residents, there would be no tax at all. This disparate result is obviously not Congress's intention.
The example above is not an exception, it is actually the typical case. First, the number of immigrants who abandon U.S. permanent residence is much higher than the number of individuals who renounce U.S. citizenship, so section 2801 is much more likely to apply to former immigrants than to former citizens.4, 5 Second, the vast majority of U.S. citizens or residents with more than $2 million (the threshold to be subject to section 2801) own less than $5.43 million (the estate and gift tax exemption), and most of the rest own less than twice this amount. Therefore, section 2801 is only close to "tax-neutral" to a very small minority of individuals subject to it, as shown in the table below.
Individuals subject to section 2801 (if expatriated)
______________________________________________________________________________
Estate or Tax ratio
Net worth Individuals Individuals gift tax Section 2801 (neutral
($ millions) (thousands) (percentage) ($ millions) ($ millions) = 1.0)
______________________________________________________________________________
2.0-3.5 1,008 54.8% 0.0 0.8-1.4 incomparable
3.5-5.0 364 19.8% 0.0 1.4-2.0 incomparable
5.0-10.0 286 15.5% 0.0-1.8 2.0-4.0 > 2.2
10.0-20.0 116 6.3% 1.8-5.8 4.0-8.0 1.4-2.2
> 20.0 66 3.6% > 5.8 > 8.0 1.0-1.4
______________________________________________________________________________
Source:6
Suggestion
Section 2801 is drastically opposed to Congress's intention. The omission of the general estate tax exemption from section 2801 was clearly an error, so the IRS should not implement this section until Congress corrects it. Its implementation has already been delayed for more than 7 years, so obviously it is not a priority for the IRS.
Alternatively, if the IRS has such authority, it could provide the same general estate tax exemption to lifetime gifts or bequests received by U.S. citizens or residents from "covered expatriates". This crucial provision would actually make the transfer tax of section 2801 "similar to the avoided transfer taxes", as Congress intended, "in the interests of tax equity", as mentioned by the IRS.
FOOTNOTES
1 House Report 110-281, Library of Congress, July 31, 2007.
2 Senate Report 110-228, Library of Congress, November 13, 2007.
3 Guidance Under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates, Federal Register, October 9, 2015.
4 Form I-407 -- Abandonment of Lawful Permanent Resident Status, U.S. Citizenship and Immigration Services, June 26, 2013. In fiscal years 2009 to 2012, 70,778 individuals abandoned U.S. permanent residence.
5 Quarterly Publication of Individuals Who Have Chosen to Expatriate, Wikipedia, compiled from the Federal Register. In fiscal years 2009 to 2012, 5,008 individuals renounced or relinquished U.S. citizenship.
6 Personal Wealth 2007: Top Wealth Holders with Gross Assets of $2.0 Million or More, Type of Property by Size of Net Worth, Internal Revenue Service, January 2012.
END OF FOOTNOTES
- AuthorsPinto, Heitor David
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2015-28157
- Tax Analysts Electronic Citation2015 TNT 247-21