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Internal Revenue Code - Section 877:
Section 877 generally provides that a citizen who loses U.S. citizenship or a long-term resident who ceases to be taxed as a U.S. resident (collectively, individuals who
"expatriate") within the 10-year period immediately preceding the close of the taxable year will be taxed on all of his or her U.S. source income (as modified by section 877(d)) for such taxable year,
unless such loss or cessation did not have for one of its principal purposes the avoidance of U.S. taxes.
Section 877(a)(2) provides that a former citizen is considered to have lost U.S. citizenship with a principal purpose to avoid U.S. taxes if the former citizen's tax liability
or net worth exceeded certain amounts on the date of expatriation.
Specifically:
"§ 877Expatriation to avoid tax.
(1) In general.
Any long-term resident of the United States who—
(A) ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or
(B) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States
and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country,
shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a
citizen of the United States who lost United States citizenship on the date of such cessation or commencement."
Section 2107(a)(1) (dealing with estate tax issues) generally provides that U.S. estate tax will be imposed on the transfer of the taxable estate of every nonresident decedent if,
within the 10-year period ending with the date of death, the decedent lost U.S. citizenship, unless such loss did not have for one of its principal purposes the avoidance of U.S. taxes.
Section 877(e)(1) defines a long-term resident as a non- U.S. citizen who was a lawful permanent resident of the United States in at least 8 taxable years during the period of 15
taxable years, ending with the taxable year in which such individual ceases to be a lawful permanent resident of the United States or commences to be treated as a resident of another country under an income tax
treaty and does not waive the benefits of such treaty applicable to residents of the foreign country. For purposes of section 877, an individual is considered a lawful permanent resident in a taxable year if he or
she is a lawful permanent resident during any portion of that year.
Accordingly, if a former citizen or resident does not waive the benefits of the Treaty, he shall be treated under U.S. law in the same manner as a U.S. citizen who expatriates to
avoid income tax, and shall be required to file a statement this year, with IRS as outlined in IRC 6039G:
§ 6039GInformation on individuals losing United States citizenship.
(b) Information to be provided.
Information required under subsection (a) shall include—
(1) the taxpayer's TIN,
(2) the mailing address of such individual's principal foreign residence,
(3) the foreign country in which such individual is residing,
(4) the foreign country of which such individual is a citizen,
(5) in the case of an individual having a net worth of at least the dollar amount applicable under section 877(a)(2)(B),
information detailing the assets and liabilities of such individual, and
(6) such other information as the Secretary may prescribe.
If a former citizen fails to provide the required information statement, section 6039F(d) generally provides that the individual will be
subject to a penalty equal to the greater of (1) five percent of the tax required to be paid under section 877 for the taxable year ending during such year, or (2) $1,000. The penalty will be assessed for each year
during which such failure continues for the 10-year period beginning on the date of loss of citizenship. The penalty will not be imposed if it is shown that such failure is due to reasonable cause and not willful
neglect. Section 6039F(f) also applies this penalty to former long-term residents.
Tax Liability and Net Worth Tests
Section 877(a)(2) provides that a former citizen is considered to have expatriated with a principal purpose to avoid U.S. taxes if (i) the individual's average annual net U.S. income tax for the five taxable
years prior to expatriation is greater than $124,000 (the "tax liability test"), or (ii) the individual's net worth on the date of expatriation is $2 Million or more (the "net worth test"). (Figures as amended by the American Jobs Creation Act, 2004)
Exchanges and Gain Recognition Agreements
Section 877(d)(1)(B) provides that gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons, or of the United States, a
State, a political subdivision thereof, or the District of Columbia, shall be treated as from sources within the United States. Section 877(d)(2) generally provides that certain property transferred in
nonrecognition exchanges by an individual subject to section 877 during the 10-year period referred to in section 877(a) will be treated as sold for its fair market value on the date of the exchange. Thus, any gain
must be recognized by the individual in the taxable year of the exchange, and therefore a "roll" into a Canadian corporation would trigger the gain.
Contributions to Controlled Foreign Corporations
Section 877(d)(4) generally provides that when an expatriate contributes U.S. source property ("contributed property") to a corporation that would be a controlled foreign
corporation (as defined in section 957) and the individual would be a United States shareholder (as defined in section 951(b)) but for the individual's expatriation, then any income or gain on such property (or
any other property that has a basis determined in whole or in part by reference to such property) received or accrued by the corporation during the 10-year period following expatriation shall be treated as received
or accrued directly by the individual and not by the corporation. If the individual disposes of any stock in the corporation (or other stock that has a basis determined in whole or part by reference to such stock)
during the 10-year period referred to in section 877(a) and while the contributed property is held by the corporation, the individual is taxable on the gain that would have been recognized by the corporation had it
sold a pro rata share of the property (determined by comparing the value of the stock disposed of to the value of the stock held by the individual immediately prior to the disposition) immediately before the
disposition.
Treasury and the Service intend to issue regulations under sections 877(d)(4)(D) and (E) that extend the 10-year period referred to in section 877(d)(4), set forth reporting
requirements, and provide anti-abuse rules intended to prevent individuals from utilizing controlled foreign corporations to hold or dispose of property that would otherwise produce income or gain from sources
within the United States. The regulations will provide that if an individual acts with a principal purpose to avoid section 877(d)(4), then the Commissioner may redetermine the U.S. tax consequences of that action
as appropriate to achieve the purposes of section 877(d)(4).
Return for Year of Expatriation:
A specially modified return must be filed for the year of expatriation. The return must bear the statement "Expatriation Return" across the top of page 1 of Form
1040NR. In addition, a statement must be attached to the return that sets forth by category (e.g., dividends, interest, etc.) all items of U.S. and foreign source gross income (whether or not taxable in the United
States). The statement must identify the source of such income and those items of income subject to tax under section 877.
In addition, any expatriate who has not previously filed an information statement under section 6039F should also attach this statement to his or her first nonresident return.
An expatriate who fails to furnish a complete statement in any year for which he or she is liable for any U.S. taxes will not be considered to have filed a true and accurate
return. Therefore, such an individual will not be entitled to the benefit of any deductions or credits if the individual's tax liability for that year is later adjusted.
Coordination with Tax Treaties:
In accordance with Congressional intent, Treasury and the Service will interpret section 877 as consistent with U.S. income tax treaties. To the extent that there is a conflict,
however, all provisions of section 877, as amended, prevail over treaty provisions in effect on August 21, 1996. This coordination rule is effective until August 21, 2006, and applies to those provisions of section
877 that were amended by the Act as well as those that were not amended by the Act. In addition, Treasury and the Service will interpret all treaties, whether or not in force on August 21, 1996, that preserve U.S.
taxing jurisdiction with respect to former U.S. citizens or former U.S. long-term residents who expatriate with a principal purpose to avoid U.S. taxes as consistent with the provisions of section 877, as amended.
See Changes introduced in the American Jobs Creation Act, 2004.
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