Relinquishing U.S. Citizenship
By Stephen J. Dunn
Facebook co-founder Eduardo Saverin caused a stir recently by moving to Singapore and renouncing his U.S. citizenship. In so doing he halved the income tax rate on his future income, from 39.6% in the U.S. to 20% in Singapore. He eliminated tax on his future capital gains ─the U.S. taxes capital gains at 15%, but Singapore dropped its capital gains tax effective February 15, 2008. He also will avoid estate tax at his death. The top rate of U.S. estate tax—which would apply to a large estate such as Saverin’s—increases to 55% on January 1, 2013. Singapore has no estate tax.
Saverin will avoid the tenacious U.S. worldwide tax system. The U.S. is unique in imposing its income tax on its citizens’ and its resident aliens’ worldwide income, offering them a credit for foreign tax paid on the income. The U.S. imposes its estate tax on its citizens’ and its resident aliens’ worldwide estates, allowing them a credit for foreign estate tax paid by their estate. To police this regime, the U.S. requires its citizens and its resident aliens to annually file a report, Form TD F 90-22.1 (“FBAR”), disclosing their foreign accounts. A draconian penalty lies for failure to report an account—up to 50% of the account balance.
Beginning for tax returns due in 2012, the Internal Revenue Service requires citizens and resident aliens with foreign financial accounts exceeding threshold amounts to file with their U.S. income tax return Form 8938, Statement of Specified Foreign Assets. A taxpayer who fails to file a required Form 8938 is subject to a $10,000 penalty. The penalty increases by $10,000 for each 30 days which the delinquency continues beyond 90 days, up to a maximum penalty of $50,000.
Many are incensed by Saverin’s conduct, as our country gave him the opportunity to earn his fortune. He did incur a substantial “exit tax” upon expatriating. Internal Revenue Code § 877A(a)(1) provides that a “covered expatriate” shall be treated as selling all of his property at fair market value on the day before the expatriation date. Thus, if Mr. Saverin’s only property consists of Facebook stock valued at $3 billion, and he has no adjusted basis in it, he incurred an exit tax, at the current U.S. capital gain tax rate of 15%, of $450 million.
“Covered expatriate” for purposes of IRC § 877A(a)(1) means an expatriate—
(1) whose average annual net income tax for the five tax years preceding the tax year of loss of U.S. citizenship exceeds $124,000;
(2) whose net worth on the date of loss of U.S. citizenship is at least $2,000,000; or
(3) who fails to certify to the Secretary of the Treasury that he has complied with U.S. tax law for the five tax years preceding the year of loss of U.S. citizenship, or who fails to provide the Secretary evidence of such compliance as the Secretary may require.
Thus, a U.S. citizen who is not a “covered expatriate” can relinquish U.S. citizenship without incurring the exit tax. Those who are not exempt from the exit tax can exclude the first $651,000 of gain on the deemed sale of their property in determining the tax.
“Expatiate” for purposes of IRC § 877A(a)(1) includes a U.S. citizen who has committed one of the following expatriating acts with intent to relinquish U.S. citizenship:
(1) obtaining naturalization in a foreign state upon application after having attained the age of 18 years;
(2) taking an oath or making an affirmation or other formal declaration of allegiance to a foreign state after having attained the age of 18 years;
(3) entering, or serving in, the armed forces of a foreign state if (a) such armed forces are engaged in hostilities against the U.S., or (b) such person is a commissioned or a noncommissioned officer;
(4) (a) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state after attaining the age of 18 years, if he has or has acquired the nationality of such foreign state, or (b) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state after attaining the age of 18 years for which office, post, of employment and oath, affirmation, of declaration of allegiance is required; or
(5) making a formal renunciation of nationality before a diplomatic of consular officer of the U.S. in a foreign state, in such form as may be prescribed by the Secretary of State.
(1)-(4) above are sometimes called “relinquishing” U.S. citizenship, and (5) “renouncing” it.
There are cases in which relinquishment of U.S. citizenship may not seem such an ungrateful act. Consider, for example, the long-time Canadian resident who happens to have been born in the U.S. He intends to remain in Canada and to die there. Why should he pay U.S. income tax? Why should he report his assets to the U.S. government?
The arguments for relinquishing U.S. citizenship for that of Canada fade, however, when one considers the oath they must swear to do so:
“I swear or affirm that I will be faithful and bear true allegiance to her Majesty Queen of Elizabeth the Second, Queen of Canada, Her Heirs and Successors, and that I will faithfully observe the laws of Canada and fulfill my duties as a Canadian Citizen.”
While I have nothing against Queen Elizabeth II, I could not swear allegiance to the British monarch. Our forefathers fought two wars against the British. Had the Revolution failed, as it nearly did, the founding fathers would have been “attained” for high treason—they would have been executed, and their property seized.
The Patriot militia fought bravely and spilled their blood against the veteran British Army at Bunker Hill.
In the winter of 1776, Washington’s Army did not have enough to eat, and many of them had nothing to wear on their feet. But they remained with Washington, for the cause of their country. My heart is heavy when I think of Washington and what he did for our country. To this day the British call him “rebel.”
On Long Island, as the British were about to cooly hang him, young Captain Nathan Hale’s only regret was that he had but one life to give for his country.
The British held tens of thousands of American prisoners in rancid conditions in the hulls of prison ships. At death the Americans were buried in shallow graves. To this day their bones still wash ashore on Long Island, a reminder of the price paid for liberty long ago.
At my son’s recent graduation from medical school, he was among a dozen members of the class who are active duty U.S. military. They will treat U.S. military, the military that won our country’s freedom 230 years ago, and has protected it ever since. Many of them will serve in harm’s way.
Some of the young doctors will serve on aircraft carriers. What other country has aircraft carriers? One of those aircraft carriers is the USS George Washington.
The United States is the greatest, most powerful country on the face of the earth. When the world has a serious problem, it turns to the United States to solve it. We are governed by the rule of law. Capitalism is what has made our country great. Yes, our taxes are too high, far too high. Yes, there are those who want to turn our country away from capitalism. These are hardly arguments not for relinquishing U.S. citizenship. Americans do not run from challenges. We bear down and solve them.