Proposed Methods to Enhance the Implementation and Enforcement of the Expatriation Tax (IRC § 877A)¹

By Helen S. Cheng & Dina Y. Nam²

EXECUTIVE SUMMARY

Section 877A of the Internal Revenue Code of 1986, as amended ("IRC"), sets forth the current expatriation tax regime for U.S. citizens and long-term residents who relinquish their U.S. citizenship or terminate their long-term U.S. residency status. Although individuals choose to expatriate for different reasons, some of which could be construed as tax-motivated, the ultimate purpose of IRC Section 877A (hereinafter referred to as "Section 877A") is to provide an objective system for collecting what is colloquially referred to as an exit tax for those wanting to cut ties with the United States.

The current regime imposes a one-time tax liability on expatriating individuals who meet certain income, asset or reporting requirements. These individuals, who are considered "covered expatriates" under the law, are subject to a mark-to-market tax when they relinquish their citizenship or long-term residency status. In effect, a covered expatriate is treated as having sold all of his or her worldwide assets as of the date of expatriation, and is subject to tax on the deemed gain. Further, any gift or bequest from the covered expatriate to a U.S. person is considered a "covered" gift or bequest, and the U.S. transferee must pay transfer tax on this covered gift or bequest at the highest gift or estate tax marginal rate.