CAN U.S. EXPATRIATES BE BARRED FROM THE U.S?

Presented aT The Oxford Club & The Sovereign Society International Investment Seminar Bermuda Brain Trust, Bermuda

Most tax practitioners have been very aware of the recent focus that U.S. legislators have given to "taxpatriates", U.S. citizens who are expatriating for tax purposes. Various roadblocks were proposed with some actually implemented. However there appears to have been a great deal of confusion in the popular press about an immigration law in this area. Headlines such as "And don't come back" (Forbes Nov. 18,1996) and "Your papers please!" (Forbes June 16,1997) give the impression that taxpatriates will somehow uniformly not be able to visit the U.S. in the future. This is far from true, but this type of false propaganda has served to scare off the misinformed from what has been and still remains to be an excellent tax and asset protection strategy.

In order to understand where the confusion lies, it is worth looking at the immigration provision in question. In September 1996, as part of a larger immigration bill, the U.S. Congress created a new ground of potential exclusion for any "former citizen of the United States who officially renounces their United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States". (Immigration and Nationality Act (INA) sec. 212(A)(10)).

On its face, the section appears to be quite draconian but an understanding of immigration and citizenship law reveals that the applicability of this statute is not be as broad as it appears. The first thing to note is that the section applies only to former citizens who "officially renounce". In fact, official renunciation is only one way of losing U.S. citizenship. An official renunciation is the act of abandoning U.S. citizenship before a U.S. consular officer at an American embassy or consulate outside the United States. However, it is also possible to lose U.S. citizenship by performing a potentially expatriating act if that act is accompanied by an intention to lose U.S. citizenship. As a result a taxpatriate can lose their U.S. citizenship (a requirement of losing U.S. tax liability) in a manner which does not trigger the provision.

There are several types of expatriating acts with the most notable being the acquisition of the citizenship of another country. This is a key element of the expatriating strategy as not only does the taxpatriate not want to be a stateless person, they want to enjoy a level of visa-free travel and stability that is comparable to the one they enjoyed as U.S. citizens. Proper legal advice on the selection of a new citizenship is critical. Whether the new citizenship is acquired through ancestry, naturalization or purchase of an economic citizenship, the taxpatriate must make sure that their new citizenship gives them the ability to travel to their favorite countries (including the U.S.) without requiring the indulgence of officials to issue visas. In addition, the last thing that the taxpatriate wants to have happen is an arrest at a foreign airport for traveling on a fraudulent document, or having their new citizenship revoked because of a change in government of his new country.

The other relevant phrase in sec. 212(A)(10) is "for the purpose of avoiding taxation". It is unclear how the INS will interpret this phrase. In a recent discussion with a key member of the Immigration subcommittee, they indicated that they did not feel that they would even start considering regulations interpreting this phrase until at least mid 2000. This will be almost four years from the passage of the original bill.

The U.S. Internal Revenue Service applies a rule that presumes a person renounced citizenship for tax reasons if that person has an average income tax of more that US $100,000 or a net worth of more than US $500,000 (Internal Revenue Code sec. 877). However, the INS has indicated that they will not apply such a categorical presumption to the new ground of exclusion. Instead, it is believed that they will create a standard, which does not rely solely on monetary amounts. From a practical perspective, it will be difficult for the U.S. government to find that a former citizen renounced citizenship to avoid taxation.

As of today, the U.S. government has not attempted to enforce this provision against a single former citizen. This is not surprising given the fact that the person responsible for overseeing the INS, Attorney General Janet Reno publicly questioned the constitutionality of the section before it became law. The real beauty of this law has been the scare that it has given to potential taxpatriates. How long this effect will last in light of closer examination is an interesting question.

©COPYRIGHT 1999-2007
DAVID S. LESPERANCE

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