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Thursday, March 10, 2016

Expatriation Case

Cases on the new expatriation regime under Code Section 877A are few and far between. The Tax Court has now issued an opinion involving a U.S. resident who gave up his green card and the resulting consequences under Code Section 877A.

The case has two interesting points. The first goes to the issue whether one can be a covered expatriate solely by not filing a Form 8854 that certifies five years of tax compliance at the time of expatriation. Remember that Code Section 877A applies to persons giving up their citizenship or U.S. residency only if they are a “covered expatriate.” This generally means the expatriate has income or assets in excess of statutory thresholds, or does not certify the five years of compliance.

Here, the taxpayer did not file a Form 8854 when he surrendered his green card. Further, the taxpayer in fact had not fully complied with required filings for the preceding five years.

Do these provisions really mean that even if a taxpayer falls below the income or asset thresholds, he will still be a covered expatriate solely because of the failure to certify tax compliance? This case does not squarely answer that question, because the taxpayer could not have made the certification due to his noncompliance. However, the Code tells us that such failure to certify effectively makes one a covered expatriate (Code Section 877(a)(2)(C), which is part of the definition of a covered expatriate under Code Section 877A(g)(1)). So it appears clear that failing to certify is enough be a covered expatriate.

Okay, but Code Section 877(a)(2)(C) does not tell us WHEN the certification has to be given. So if the certification is given late, can one avoid covered expatriate status (assuming the income and asset thresholds are not exceeded)? This case does not answer that question because a late certification was not made.

What if a certification is given, but it is false or erroneous? That should not keep one out of covered expatriate status, per the Code’s other criteria of “fails to submit such evidence of such compliance [of five years of tax compliance] as the Secretary may require.”

The second issue involves whether the deemed sale of assets rule of Code Section 877A that applies to expatriates (and this particular expatriate) triggers the deferred gain on an installment sale obligation held by the expatriate under Code Section 453B. Yes, says the Tax Court, with the deemed selling of the price of the obligation being its face amount.

Gerd Topsnik, 146 TC No. 1 (January 20, 2016)

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