International Business, Tax, Estate and Asset Preservation Planning


March 2015 

Stephen A. Malley
Malley photo


Stephen A. Malley has for over 40 years specialized in the areas of international business, tax and finance, transnational estate, tax, and asset protection planning,  and pre-immigration and expatriation planning. Mr. Malley's  practice includes domestic and foreign licensing of intellectual property,  and  the formation of  captive liability insurance companies.


Clients include:


*U.S. companies with or developing foreign operations


*U.S. citizens with foreign assets or conducting business and investing overseas


*Foreign individuals with U.S. assets and/or U.S. business


*Domestic and transnational estate and asset protection planning

Learn more about Stephen A. Malley


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Record numbers of U.S. Citizens and Green Card Holders are expatriating to avoid the complicated and confusing IRS reporting requirements, income tax on world-wide income, and the potentially punitive estate tax. The Federal Register reports that in 2014, 3415 U.S. Citizens renounced their Citizenship, although we do not know how many were subject to the "exit tax" and other penalties.


The London Mayor's recent well publicized dilemma is illustrative of the long arm of the IRS. He was born in the U.S. and is therefore a U.S. Citizen, but he has not lived here since the age of five. The Mayor sold his UK residence for a large profit, not taxed in the U.K. (sale of a first home). The IRS assessed him for the tax on the gain, interest and penalties, and it could also impose severe penalties for his failure to file the FBAR forms to report all his "foreign" bank accounts, and perhaps for failure to file other various forms relating to business interests.


The London Mayor was apparently aware of his U.S. Citizenship, but there are many who are "accidental" American Citizens and unaware of their U.S. tax and reporting obligations. Until recently, such people caught in the U.S. tax web received no special treatment and were subject to penalties and interest, even if they entered the IRS "amnesty" program. Just recently, the IRS created a lower penalty regime for such innocent victims, but qualification is difficult.


U.S. CITIZENS: A U.S. Citizen who seeks to expatriate, i.e. renounce Citizenship, is a "covered expatriate" subject to the exit tax and other applicable tax rules, if such person meets the $2mm net worth test, or paid income tax in excess of a specified amount for the past five years, or who cannot certify that all tax returns and relevant IRS reports were filed for the past five years (this is a difficult test to meet considering the often confusing number of reporting forms). The exit tax is calculated on the market values of world-wide assets over the tax basis. The tax applies, for example, to built-in gain on real estate, stock portfolios, and to domestic and foreign pension plans (present values), deferred compensation plans, and to interests in certain Trusts. Note there is an exemption against the tax which is currently in excess of 680,000, adjusted for inflation.


The U.S. Citizen considering expatriation should consider the consequences, in addition to the exit tax. There are always personal issues to consider, especially if there are U.S. beneficiaries. Future gifts to U.S. beneficiaries will be subject to the highest gift tax to be paid by the recipient of the gift; normally the gift tax obligation is on the person making the gift. There are other punitive tax rules applicable only to expatriates.


The procedures to renounce U.S. Citizenship are well defined and are not discussed here. There are other ways to lose U.S. Citizenship, such as taking an oath of allegiance to a foreign Country or serving as a soldier in a Country engaged in "hostility" with the U.S. But, these acts which may result in loss of Citizenship for immigration purposes may not affect on-going U.S. tax obligations.


GREEN CARD: Green Card holders have a particular dilemma. The Green Card holder is, by definition, a "permanent resident". He or she will be a "covered expatriate", subject to the exit tax and other relevant rules, if (1). If the Card is held for eight years out of fifteen years or (2) assets exceed $2mm (with minimal exceptions, or (3) has paid income tax in excess of the stated minimum (about $157,000 in 2014)for the past five years; or (4) fails to certify that all tax forms and returns have been filed for the past five years. The Green Card holder is entitled to the exemption mentioned above. Such persons often have foreign based pension plans, to be included in calculating the exit tax; the IRS provides guidelines for determining present values.


It is not uncommon for a Green Card holder to leave the U.S. and to not surrender the Green Card. While there is no hard and fast rule of when a Green Card holder is no longer considered a permanent U.S. resident, there is judicial precedent that loosely defines a "temporary" visit abroad. Current reported practice by Immigration (perhaps not to be trusted) is that a six month absence will not trigger a revocation procedure, but one's passport may be stamped as a warning. The Green Card holder can possibly take advantage of a re-entry permit, and take other steps to demonstrate an intention to remain a U.S. permanent resident despite a longer absence. Planning is important.

The current aggressive practices of both Immigration and the IRS must be recognized. An extended absence may trigger detention at Immigration at either a U.S. airport or at foreign airports where U.S. Immigration operates. The Green Card may be confiscated and tax authorities may be brought in; if tax returns and required reports have not been filed, there is exposure to serious penalties.  


The procedures to surrender the Green Card are well defined, and once final, such person may escape the U.S. tax system entirely, except for U.S. source income and U.S. "sited" assets.  


REPORTING: In addition to any required tax return, the main reporting form for both Citizen and Green Card "covered expatriates" is 8854. It may have to be filed annually, for example to report distributions from deferred compensation plans, from non-grantor trusts, or for elections to defer the exit tax. There are other forms which may be required depending on the facts.



COMPLEX RULES: The rules governing expatriation for both Citizens and Green Card holders are complex, and failure to comply with the rules and reporting requirements may expose one to serious penalties.  


This article is a general overview of the complex issues discussed. This article is not a definitive discussion of the issues and subject matter and it is not intended to be legal advice.

Stephen A. Malley
A Professional Corporation


2015 Stephen A. Malley, J.D.