Checkpoint Contents

  International Tax Library

    WG&L International Treatises

      Lowell, Martin, Donohue & Wells: U.S. International Taxation: Agreements, Checklists & Commentary

        Part VI Individual Matters

          Chapter 21: International Trust and Estate Planning

            ¶21.05. International Estate Planning Considerations for U.S. Citizens

¶ 21.05 International Estate Planning Considerations for U.S. Citizens

A variety of international estate-planning considerations can be of relevance to U.S. citizens. A U.S. citizen is subject to U.S. estate

and gift taxation on a worldwide basis, so that the location of assets in or transfer of assets to offshore locations, where the U.S.

citizen retains or is deemed to retain control of the assets, generally does not alter the normal regime of U.S. tax provisions, which

will include the assets in the U.S. transfer tax base. 248 Other considerations may, however, make the use of offshore arrangements

beneficial in particular circumstances.

Where a U.S. citizen contemplates becoming a resident in a foreign country, considerations similar to those previously noted

regarding a nonresident emigrating to the United States to become a resident 249 may be appropriate.

A U.S. citizen may also find that the transfer and income tax systems of the United States are burdensome and may consider

renouncing U.S. citizenship and becoming a citizen of another country that may have a more attractive tax system. 250

In other situations, a U.S. citizen may be the beneficiary of a foreign trust created by other persons, related or unrelated.

Tax base considerations have caused the U.S. Congress over the years to enact a variety of regimes in the tax law to deal with the

expatriation of economic activity. Matters pertinent for international estate and gift tax planning relating to U.S. citizens are set out as

Checklist 21-4.

Checklist 21-4. International Estate and Gift Tax Planning for U.S. Citizens

□  For a U.S. citizens considering establishing an offshore trust, but maintaining U.S. citizenship, determine the nature of the

objectives with respect to U.S. estate and gift tax matters.

● Minimizing U.S. estate and gift taxation consequences of proposed transaction

● Determining any change in U.S. income tax treatment relating to assets to be included in the proposed trust arrangement

● Determining any desire for anonymity of existence of trust for U.S. tax purposes in light of tax return disclosure and

information return requirements

● Establishing anonymity for U.S. tax and legal purposes

● Utilizing offshore trust or corporate structures already in place

● Utilizing offshore trust or corporate structures to be established

● Ascertaining whether there is an basis for concern in the planner or other advisor concerning fraudulent conveyances under

applicable U.S. creditor rights laws

● Determining the nature of the property to be transferred to the trust

□  For U.S. citizens considering immigration from the United States (renunciation of citizenship) to become a citizen of a foreign

country, determine the nature of the objectives with respect to U.S. estate and gift tax matters.

● Minimizing U.S. estate and gift taxation and the application of the 10-year provision in Section 2107

● Minimizing U.S. income taxation and the application of the 10-year provision in Section 877

● Minimizing estate and gift taxation in new home country

● Minimizing income taxation in new home country

● Avoiding international double or multiple estate and gift taxation

● Establishing anonymity for new home country tax and legal purposes

● Establishing anonymity for U.S. tax and legal purposes

● Utilizing offshore trust or corporate structures already in place

● Utilizing offshore trust or corporate structures to be established

● Ascertaining whether there is a basis for concern in the planner or other advisor concerning fraudulent conveyances under

applicable U.S. creditor rights laws

□  For U.S. citizens who are beneficiaries of a foreign trust created by other persons, determining the nature of the objectives with

respect to U.S. taxation matters

● Minimizing U.S. income, estate and gift taxation consequences of the trust and distributions from it

● Understanding the U.S. income tax consequences of principal and income distributions from the trust

● Determining whether the trust could be considered a foreign grantor trust due to indirect or constructive transactions involving

the beneficiary

● Determining the relevance to the beneficiary of the circumstances surrounding formation of the trust

● Determining whether there are any potential transferee liability issues for U.S. or foreign tax purposes

● Determining whether there are contributions to the trust by the beneficiary potentially beneficial with respect to tax or

personal planning considerations

● Evaluating potential U.S. or foreign income tax planning considerations

● Determining whether renunciation or waiver of interest in the trust is beneficial from personal or tax planning perspectives

● Minimizing U.S. gift or estate tax consequences of transfer of interests in the trust

¶ 21.05[1] Applicable Provisions of the Code

The Code contains several provisions intended to limit the U.S. tax benefits that a U.S. citizen can derive from moving income or

assets offshore. The normal provisions of the Code are also equally applicable.

¶ 21.05[1][a] Section 679

Section 679 provides that any U.S. person who transfers property to a foreign trust that has a U.S. beneficiary is treated as the owner

of the portion of the trust that is attributable to the property transferred by the U.S. person. 251

In 2001, the Service issued final Regulations relating to the circumstances in which a foreign trust will be deemed to have U.S.

beneficiaries under Section 679. 252 In order to avoid having U.S. beneficiaries, the trust instrument would, in effect, need to provide

that no U.S. person may ever be an actual or potential beneficiary, or even a potential appointee or a member of a class of

beneficiaries, and that the trust instrument cannot be amended to include such persons. 253

The Regulations also address the consequences of changes in the status of a beneficiary, 254 indirect beneficiaries, 255 indirect

transfers of property to a foreign trust where a principal purpose of the transfer is the avoidance of U.S. tax, 256 and constructive

transfers via assumption of trust obligations or otherwise. 257

Congress significantly expanded the provisions relating to foreign trusts in 1997 with the addition of Section 684, which provides that

the transfer of property by a U.S. person 258 to a foreign trust or estate will be treated as a sale or exchange of such property for an

amount “equal to the fair market value of the property transferred.” 259

¶ 21.05[1][b] Section 1491

Prior to its repeal, Section 1491 imposed a nondeductible excise tax on transfers of appreciated property by U.S. citizens or residents

to foreign trusts, as well on some other transfers. 260 The amount of such excise tax was equal to 35 percent of the excess of the fair

market value of the property transferred over the sum of the adjusted basis of such property in the hands of the transferor plus the

amount of the gain recognized to the transferor at the time of the transfer. 261 Any such excise tax was due and payable by the

transferor at the time of the transfer, and was to be assessed, collected, and paid as provided in Regulations. The Regulations

provide, among other things, that every person making a transfer to a foreign trust shall file a return on the day on which the transfer is

made and pay the tax due on the transfer. 262

Because of the adverse impact of the excise tax in former Section 1491, transfers to foreign trusts were typically structured as cash

transactions, unless there was little or no inherent gain in the assets transferred. The excise tax was not applicable if, at the time of

transfer, the foreign trust was a grantor trust, because the grantor was deemed for U.S. tax purposes to continue to own the property.

263

In circumstances where a domestic trust became a foreign trust—for example, on the failure of a domestic trust under prior law to

satisfy the conditions of the 1996 legislation 264 —the Service stated that former Section 1491 applied, including the reporting

obligations of former Section 1494. 265

¶ 21.05[1][c] Section 367

In the case of transfers to foreign corporations, sometimes structured as holding companies, Section 367(a) generally provides that if,

in connection with any exchange described in certain of the corporate provisions of the Code, 266 a U.S. person transfers property to a

foreign corporation, the foreign corporation will not be treated as a “corporation” for purposes of determining the extent to which gain or

loss is recognized on such transfer. The purpose of Section 367(a) is a tax base protection mechanism, which is intended to ensure

that the inherent gain in assets transferred offshore is taxed unless one of the exceptions in the statute or Regulations is satisfied.

There are two principal exceptions. One is for the transfer of property to be used in the active conduct of a trade or business by the

foreign corporate transferee. 267 This exception does not apply to certain types of property, 268 but is not likely to be pertinent in the

estate-planning context. A second exception applies if the ownership of the U.S. transferor in the foreign transferee is less than 50

percent and the transferor executes a so-called gain recognition agreement, unless the ownership is less than 5 percent. 269

¶ 21.05[1][d] Section 877

The Code also contains a provision to protect the U.S. income tax base from erosion by citizens who expatriate in order to avoid the

U.S. tax base. 270 The purpose of Section 877 is protection of the U.S. income tax base through imposition of U.S. tax on U.S.

citizens or certain long-term residents who expatriate from the United States. In its pre-1995 form, Section 877(a) was largely a

toothless tiger, because it imposed upon the Service an obligation to prove that an expatriation was undertaken for the principal

purpose of avoiding U.S. tax. For post-February 6, 1995, expatriations, however, the situation is reversed. Section 877(a) subjects

certain individuals to an expatriation tax without inquiry as their motive for losing their citizenship or residency, but allows certain

categories of persons to demonstrate to the Service, through a ruling process. 271

¶ 21.05[1][e] Section 6048

Where a U.S. citizen or resident creates or transfers money or property to a foreign trust, there is an information return requirement. 272 On or before the 90th day (or such later day as prescribed in Regulations), after any reportable event, the responsible party shall

provide written notice of such event to the Service. 273 The notice shall include

1. The amount of money or other property transferred to the trust in connection with the reportable event; and

2. The identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust. 274

The term “reportable event” includes the following: 275

1. The creation of any foreign trust by a U.S. person;

2. The transfer of any money or property (directly or indirectly) to a foreign trust by a U.S. person, including a transfer by reason

of death (other than a transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred

property); and

3. The death of a citizen or resident of the United States if

● The decedent was treated as the owner of any portion of a foreign trust under the grantor trust provisions (Sections 671

through 679); or

● Any portion of a foreign trust was included in the gross estate of the decedent.

The reporting requirements do not apply to deferred compensation or charitable trusts. 276

The term “responsible party” means

1. The grantor in the case of the creation of an inter vivos trust;

2. The transferor in the case of money or property to a foreign trust other than a transfer by reason of death; and

3. The executor of the decedent's estate in any other case. 277

Where there is a U.S. person who is treated as the grantor of a foreign trust under Sections 671 through 679, such U.S. person is

responsible for ensuring the following:

1. Filing a return which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the

U.S. agent for such trust, and such other information as the Service may prescribe; and

2. Such information as required by Regulations to each U.S. person who is treated as the owner of any portion of such trust or

who receives (directly or indirectly) any distribution from the trust. 278

In the case of a foreign trust that does not have a U.S. agent, the Service is granted authority to determine the amounts required to be

taken into account with respect to such trust by U.S. persons for U.S. tax purposes, 279 unless such trust agrees to authorize a U.S.

person to act as such trust's agent with respect to request or summons by the Service to examine records or produce testimony

relating to the proper amounts required to be taken into by U.S. persons with respect to such trust. 280

In addition to reporting by the transferor, or deemed grantor, of a foreign trust, there is also a reporting obligation by beneficiaries. A

U.S. person who receives (directly or indirectly) any distribution from a foreign trust must make a return with respect to such trust for

such year that includes:

1. The name of such trust;

2. The aggregate amount of the distributions so received from such trust during such taxable year; and

3. Such other information as the Secretary may prescribe. 281

If adequate records are not provided to enable the Service to determine the proper treatment of any distribution from a foreign trust,

such distribution shall be treated as an accumulation distribution. 282

For purposes of these reporting requirements, a trust that is a U.S. person is treated as a foreign trust for purposes of the reporting

requirements in Section 6048 if such trust has substantial activities, or holds substantial property, outside the United States. 283

In addition, any U.S. person (other than certain tax-exempt organizations) who receives purported gifts or bequests from foreign

sources totaling more than $10,000 during the taxable year must report them to the Service. 284 The threshold for this reporting

requirement is indexed for inflation. If the U.S. person fails, without reasonable cause, to report foreign gifts as required, the Service is

authorized to determine the tax treatment of the unreported gifts. 285 In addition, the U.S. person is subject to a penalty equal to 5

percent of the amount of the gift for each month that the failure continues, with the total penalty not to exceed 25 percent of such

amount. 286

¶ 21.05[2] Offshore Protection of Asset Trusts

One type of arrangement that is useful in a variety of circumstances is an offshore trust that is designed to protect assets from the

claims of future creditors. One of the essential traditional functions of all trust arrangements is to protect, conserve, and invest trust

assets.

Illustration  21-13

The situation is the same as in Illustration 21-3, 287 where John Forto is a U.S. citizen who has accumulated a significant

net worth through his ownership of the stock of USCo, a U.S. corporation. USCo is in the business of manufacturing

optical devices. One of these devices has been evolved into a line of cameras with the trade name Super Camera. The

Super Camera has become the runaway best-selling camera in the world.

Mr. Forto has accumulated a significant estate, and is concerned that some, presently unforeseen and unknown,

claimant could sue him in the U.S. courts for an amount that would put his entire net worth in jeopardy. He desires to

hold at least a portion of his net worth in an environment that is as safe from any such creditors as possible.

In this type of situation, a foreign trust may provide the safest means of structuring the ownership of assets so that the claims of

future creditors cannot reach the assets. Such uses of trusts have received significant publicity over the years, including the attention

of U.S. courts in actions seeking recovery of assets placed in offshore trusts. 288 It may also be beneficial in some circumstances to

consider the use of offshore partnerships or limited liability companies. 289

¶ 21.05[2][a] Typical Transaction

If Mr. Forto decided to form such a trust, the transaction could be along the following lines. Mr. Forto, and his spouse if appropriate,

could transfer certain assets to an offshore financial institution as trustee of an irrevocable trust organized under the laws of the

offshore country. While Mr. Forto and his spouse are both living, the trustee will have discretion to distribute income and/or principal to

them for their health, support, and maintenance in their accustomed manner of living. The trustee may also distribute net income

and/or principal to them for any other purpose, including for their welfare, comfort, happiness, and entrepreneurial ventures or

investments.

The trustee is also permitted to distribute income and/or principal of the irrevocable trust to any of the Forto children to provide for their

health, support, maintenance, and education.

Upon the death of either Mr. or Mrs. Forto, the portion of the irrevocable trust attributable to assets contributed to the trust by the

deceased spouse will be distributed to a marital trust for the benefit of the surviving spouse (reduced by amounts distributed pursuant

to the exercise of a special power of appointment by the deceased spouse). The remaining irrevocable trust assets will be retained by

the trustee. The trustee is authorized to distribute income and/or principal to the surviving spouse for his or her health, support, and

maintenance in his or her accustomed manner of living, or for any other purpose, including his or her welfare, comfort, happiness, and

entrepreneurial ventures or investments. The trustee may also distribute income and/or principal of the irrevocable trust to any of the

children to provide for their health, support, maintenance and education.

Upon the death of the surviving spouse, the remaining assets in the irrevocable trust and the marital trust are to be distributed to the

children or their descendants, or, if none of the children nor their descendants are living upon the death of the surviving spouse, to a

contingent remainder beneficiary.

The trustee is empowered to terminate the irrevocable trust at any time in its sole discretion. A committee (the protector) created by

the trust agreement may have the same power. Upon such termination, all assets of the irrevocable trust are to be distributed to Mr.

or Mrs. Forto, if then living (or to the survivor if only one is then living), or, if neither is then living, to the primary beneficiary of the

irrevocable trust.

¶ 21.05[2][b] U.S. Tax Consequences

A trust is generally treated as a separate taxable entity and is taxed on its net income. If, however, the grantor or another person is

regarded as the owner of any portion of a trust, such grantor or other person must include, in computing taxable income and credit,

those items of income, deduction, and credit of the trust that are attributable to the portion of the trust owned by the grantor or other

person. 290 Sections 673 through 677 of the Code, the so-called grantor trust rules, determine when trust income is to be taxed to the

grantor.

Section 672 provides definitions and special rules. Many of the grantor trust provisions hinge on whether certain rights are exercisable

by the grantor or a “nonadverse” party or are exercisable without the consent of an “adverse” party. A nonadverse party is defined as

any person who is not an adverse party. 291 The term “adverse party” is defined as any person having a substantial beneficial interest in

the trust that would be adversely affected by the exercise or nonexercise of the power that he possesses respecting the trust. 292 A

trustee is not an adverse party merely because of his interest as trustee. 293

Accordingly, notwithstanding that the trustee is an unrelated party to the settlors, Mr. and Mrs. Forto in Illustration 21-13, the trustee

will not be an adverse party for purposes of Section 672, but will be treated as a nonadverse party.

Section 672(e) provides that a grantor will be treated as holding any power or interest held by his or her spouse if, at the time of the

creation of such power or interest, the spouse is living with the grantor. Accordingly, any reference herein to a power held by the

grantor will also refer to a power held by his or her spouse.

Sections 673 through 677 provide that the grantor or another person will be taxed on income of a trust under the following

circumstances:

1. If the grantor has retained a reversionary interest in the trust corpus or income with a value greater than 5 percent of the value

of the trust; 294

2. If the grantor or a nonadverse party has certain powers over the beneficial interest under the trust; 295

3. If certain administrative powers over the trust exist under which the grantor can or does benefit; 296

4. If the grantor or a nonadverse party has a power to revoke the trust or return the corpus to the grantor; 297 or

5. If the grantor or a nonadverse party has the power to distribute income to or for the benefit of the grantor or the grantor's

spouse. 298

In the situation in Illustration 21-13, the settlors (Mr. and Mrs. Forto) will not retain a reversionary interest within the meaning of

Section 673(assuming the value of the reversionary interest upon termination of the trust in the discretion of the trustee is equal to or

less than 5 percent of the value of the trust), nor will they possess any administrative power over the trust within the meaning of

Section 675. Further, it appears that the powers of the trustee to control the beneficial enjoyment of the trust income and corpus

should not cause Mr. Forto to be treated as the owner of the trust under Section 674. It appears, however, that the trust may be

treated as a grantor trust under Section 676 or Section 677. In any event, the transfer of property to the trust should also come within

the provisions of Section 679, pursuant to which the grantor will be treated as the owner of the trust for U.S. tax purposes.

¶ 21.05[2][b][i] Power to control beneficial enjoyment—Section 674.

Section 674 provides that the income of a trust will be taxable to the grantor if the grantor or a nonadverse party or both can exercise

a power of disposition over the beneficial enjoyment of the trust income or corpus.

Section 674(b) sets forth certain exceptions to the general rule. One is that a power to distribute corpus to or for beneficiaries

(whether or not income beneficiaries) will not cause the grantor to be taxed on the trust income if the power to distribute is limited by

a reasonably definite standard that is set forth in the trust instrument. 299

Section 674(c) provides, however, that the power to distribute, apportion, or accumulate income or to pay out corpus will not be a

proscribed power if such power is exercisable, without the consent of any other person, by an independent trustee—that is, if the

grantor is not a trustee and no more than half of the trustees are related or subordinate parties who are subservient to the wishes of

the grantor, as defined in Section 672(c).

Accordingly, the power of the trustee to distribute irrevocable trust corpus to Mr. or Mrs. Forto for their “health, support, and

maintenance in [their] accustomed manner of living” or to the children for their “health, support, maintenance, and education” should

be treated as being subject to a reasonably definite standard and not a proscribed power under Section 674.

The power of the Trustee to distribute Trust corpus to Mr. or Mrs. Forto “for any other purpose including, without limitation,

distributions for [their] welfare, comfort, happiness, and entrepreneurial ventures or investments,” however, will likely not be treated as

limited by a reasonably definite standard. However, because such power is exercisable solely by the trustee, who is not a related

party nor a subordinate party who is subservient to the wishes of the grantor, such power of the trustee should not cause Mr. and Mrs.

Forto to be treated as the owners of the trust pursuant to Section 674.

¶ 21.05[2][b][ii] Revocable trusts—Section 676.

Under Section 676, the grantor of a trust will be treated as the owner of a portion of a trust if the grantor or a nonadverse party has the

power, without the consent of an adverse party, to revest title to such portion in the grantor. If the grantor or a nonadverse party has

such a power, the grantor will be treated as the owner whether the power is a power to revoke, to terminate, to alter, or amend. 300

The trustee, a nonadverse party, has the power, in its absolute discretion, to terminate the irrevocable trust at any time, upon which

termination the trust assets will be distributed to Mr. or Mrs. Forto if they are then living. Accordingly, Mr. and Mrs. ForTo should be

treated as the owners of the irrevocable trust under Section 676. To the extent that a committee is composed of only nonadverse

parties, the same would be true with respect to the power of the committee to terminate the irrevocable trust.

¶ 21.05[2][b][iii] Income for benefit of grantor—Section 677.

Section 677(a) provides that income from a trust will be taxable to the grantor when the income is or may be (in the discretion of the

grantor, the grantor's spouse, or a nonadverse party) (1) distributed to the grantor, (2) held or accumulated for future distribution to the

grantor, or (3) applied to payment of premiums on insurance on the life of the grantor (except policies irrevocably payable to charities).

The grantor is taxed as the owner of the trust whether or not the grantor or the grantor's spouse actually receives any distributions

from the trust. The mere possibility of such distributions or accumulations is sufficient to trigger Section 677. Further, if income of a

trust may be used to any extent in satisfaction of the parental obligations of the grantor, if the discretion to so use the income is not

in the grantor or his spouse, acting as such, but in another person, the trustee, or in the grantor acting as trustee or cotrustee, such

income will be includable in the grantor's gross income to the extent it is actually so used. 301

The trustee is given broad discretionary authority to distribute or accumulate income of the irrevocable trust. Further, in the discretion

of the trustee, such income may be distributed to Mr. or Mrs. Forto. Accordingly, the income of the irrevocable trust should also be

taxable to Mr. or Mrs. Forto under Section 677.

¶ 21.05[2][b][iv] Foreign trusts with U.S. beneficiary—Section 679.

As noted above, Section 679 provides that any U.S. person who transfers property to a foreign trust that has a U.S. beneficiary is

treated as the owner of the portion of the trust that is attributable to the property transferred by the U.S. person. Accordingly, the trust

income attributable to such property is taxable to the transferor under the “grantor trust” rules.

Several elements are pertinent in order for Section 679 to apply:

1. The transferor must be a U.S. person. A U.S. person includes a citizen or resident, domestic partnerships, domestic

corporations, and estates or trust that are not foreign estates or trusts. 302

2. Property must be transferred to the trust by the U.S. person. Indirect, as well as direct, transfers are covered. 303

3. The trust must be a foreign trust. Although Section 679 does not expressly refer to Section 7701(a)(31), such provision will

presumably apply to define the term “foreign trust.” 304

4. The trust must have a U.S. beneficiary. In general, if a U.S. person transfers property to a foreign trust, the trust is presumed

to have a U.S. beneficiary for the taxable year unless (1) under the terms of the trust, no part of the income or corpus of the trust

may be paid or accumulated during the taxable year to or for the benefit of a U.S. person, and (2) if the trust is terminated at any

time during the taxable year, no part of the income or corpus of the trust could be paid to or for the benefit of a U.S. person. 305

5. There are also several exceptions to the application of Section 679:

● A transfer by reason of the death of the transferor. 306

In Revenue Ruling 87-61, 307 the Service ruled that a transfer of appreciated property to a foreign trust by a U.S.

citizen with respect to which the transferor would be treated as the owner of the trust within the meaning of

Section 671 was not treated as a transfer to a foreign trust for purposes of Section 1491 because the grantor

continued as the owner of the property for federal income tax purposes. The grantor was not treated as having

transferred the property for purposes of Section 1491 until the grantor renounced the powers previously retained

that had caused him to be treated as the owner for purposes of section 671. If the rationale of Revenue Ruling

87-61 were applied to Section 679, a grantor treated as the owner of a trust under Section 671 would not be

treated as the owner under Section 679, but if he were not treated as the owner under Section 671 he would be

so treated under Section 679. Although this reasoning appears circuitous, the bottom line is that the grantor of

property to a foreign trust meeting all of the requirements of Section 679, as well as qualifying as a “grantor

trust” under Sections 671 through 677, should be treated as the owner of the trust under either Section 671 or

Section 679.

● A transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. 308

Consideration other than cash is taken into account at its fair market value for this purpose, any obligation of the trust, 309 any

grantor or beneficiary of the trust, and any person related to any grantor or beneficiary of the trust, obligation or guaranteed

by such person, will not be taken into account, except as provided in Regulations. 310 Principal payments by the trust on any

such obligation referred will be taken into account in determining the portion of the trust attributable to the property

transferred. 311

6. If a domestic trust is formed by a citizen or resident, and such trust becomes a foreign trust while such individual is alive, then

the trust shall become subject to Section 679 as if such individual transferred to the trust on the date it became a foreign trust an

amount equal to the portion of such trust attributable to the property previously transferred by such individual to the trust. 312

7. Where a foreign person is treated as the owner of any portion of a trust, and such trust has a beneficiary who is a U.S. person,

such beneficiary will be treated as the grantor of such portion to the extent that the beneficiary has made a direct or indirect

transfer of property (other than in sale for full and adequate consideration) to such foreign person. 313 If a transferee receives a

transfer from a foreign corporation or partnership and treats such transfer as a gift or bequest for U.S. tax purposes, the Service

may recharacterize such transfer as is determined necessary to prevent the avoidance of Section 672(f). 314

8. The Service has specific authority to prescribe such Regulations as may be necessary or appropriate to carry out the purposes

of Section 679. 315

Accordingly, to the extent the transfer of assets by Mr. and Mrs. Forto in Illustration 21-13 is treated as a transfer to a foreign trust,

they will be treated as the owner of the portion of the irrevocable trust attributable to such transfer.

¶ 21.05[2][b][v] Transfer of property to a foreign trust.

When a U.S. person 316 transfers property to a foreign trust or estate before January 1, 2010, Section 684(a) generally provides that

the transfer will be treated as a sale or exchange of the property for an amount equal to the fair market value of property transferred,

and the transferor will recognize gain (but not loss) equal to the excess of the fair market value of the property over its adjusted basis

in the hands of the transferor. 317 Section 684(a) is inapplicable to a transfer to a grantor trust as defined in Section 671, including the

foreign grantor trust provisions of Section 679. 318 If a domestic trust becomes a foreign trust, the trust is treated as having transferred

its assets to a foreign trust immediately before it becomes a foreign trust. 319

Regulations under Section 684 address indirect or constructive transfers to foreign trusts. 320

¶ 21.05[2][c] Transfers of Property Subject to Section 1491

Prior to the repeal of Section 1491, in a transfer of assets to a foreign trust, a 35 percent excise tax potentially applied. 321 Cash and

nonappreciated property were obviously not subject to Section 1491, because there was no spread between basis and fair market

value. 322

In Revenue Ruling 87-61, 323 the Service discussed whether a trust was to be treated as a foreign trust under Section 7701(a)(31)

(which defines “foreign trust” as a trust whose foreign-source income is not includable in gross income). 324 Such trust was established

in, and was administered under, the laws of a foreign country, and the trustee was a foreign entity. Further, the trust corpus was

located in the foreign country. Based on those facts, the Service ruled that the trust was a foreign trust.

In Revenue Ruling 69-450, 325 the Service ruled that the transfer of appreciated stock to a Bermuda banking corporation as trustee of a

Bermuda trust was a transfer subject to the excise tax of Section 1491 even though the grantor was treated as the owner of the entire

trust under Sections 671 through 677. Such ruling was revoked by Revenue Ruling 87-61, in which the Service reasoned that because

a grantor who was treated as the owner of an entire trust is considered to continue to own the trust assets, a transfer of property to a

foreign “grantor trust” was not a transfer subject to the excise tax imposed by Section 1491.

However, the grantor will be treated as having transferred property to the foreign grantor trust at the time the grantor ceases to be the

owner of the trust. Thus, when the grantor renounces the powers previously retained that causes him to be treated as the owner of the

trust corpus, or upon the expiration or lapse of such powers, the grantor will be treated as having made a transfer that was subject to

the excise tax imposed by Section 1491 of the Codeand to the reporting requirements of Section 1494 and Regulations thereunder.

¶ 21.05[2][d] Other U.S. Tax Consequences

Where the grantor trust rules do not apply to a foreign trust, its U.S. beneficiaries generally are taxable on their respective shares of

the income of the trust that is required to be distributed, as well as any other income of the trust that is paid, credited or distributed to

them. 326 Distributions from a trust in excess of the trust's distributable net income for the taxable year generally are treated as

“accumulation distribution” rules. Under these rules, a distribution by a foreign trust of previously accumulated income is generally

taxed at the beneficiary's average top marginal rate for the prior five years, plus interest. 327 Interest is computed at a fixed annual rate

of 6 percent, with no compounding. 328

If adequate records of the trust are not available to determine the proper application of the rules relating to accumulation distributions

to any distribution from a trust, the distribution is treated as an accumulation distribution out of income earned during the first year of

the trust. 329

The tax consequences of the use of trust assets by beneficiaries are somewhat uncertain under present law. 330

Any U.S. person who creates a foreign trust or transfers money or property to a foreign trust is required to report that event to the

Service on IRS Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, which is

set out in Figure 21-1. 331 The form requires reporting of, among other things, the name, address, and identification number (if any) of

the transferor, the trust, the fiduciary and trust beneficiaries; the interest of each beneficiary; the location of the trust records; and the

value of each item transferred.

Any person who fails to file a required report of the creation of or transfer to a foreign trust may be subjected to a penalty of 5 percent

of the amount transferred to the foreign trust. 332 Similarly, any person who fails to file a required annual report with respect to a foreign

trust with U.S. beneficiaries (on IRS Form 3520-A, Annual Return of Foreign Trust With a U.S. Owner; see Figure 21-2) may be

subjected to a penalty of 5 percent of the value of the corpus of the trust at the close of the taxable year. The maximum amount of the

penalty imposed under either case may not exceed $1,000. A reasonable cause exception is available. These civil penalties are

determined separately from any applicable criminal penalties.

The formation of such a foreign trust may also require “checking the box” on the grantor's U.S. income tax return and satisfying the

pertinent disclosure requirements with respect to offshore bank accounts and trusts. 333

A common means of structuring offshore trusts, for both U.S. and foreign persons, is the use of corporate trustees with an individual

or, in some situations, corporate “protector” to direct the trustee in the exercise of discretion, as in Form 21.01. Interestingly, the

Service has stated that a U.S. person who is both protector and a potential beneficiary of such a trust is a U.S. shareholder for

purposes of applying the controlled foreign corporation provisions in subpart F of the Code (Section 951 through Section 959), 334 even

though the trust is not a grantor trust as relates to such U.S. person. 335

¶ 21.05[2][e] Creditor Rights Issues

The use of offshore trusts for the purpose of protecting assets from the claims of future creditors can raise difficult fraudulent transfer

issues under pertinent U.S. law for the grantor, as well as the grantor's advisors, if there are existing creditors whose interests are

adversely affected by the transfer. 336

¶ 21.05[2][f] Documentation of Foreign Trust

In order to form an offshore trust on behalf of a U.S. citizen, a variety of documents must be prepared. A form of offshore trust

agreement that would be appropriate to be adapted in the circumstances of Illustration 21-13 337 is set out as Form 21.02. The transfer

of property to a foreign trust must also be reported on a return of the transferor, 338 information return with respect to the formation of a

foreign trust (filed by the person directly or indirectly creating the trust or transferring assets to it), 339 as well as an annual return of a

foreign trust with U.S. beneficiaries (also filed by the person directly or indirectly creating the trust or transferring assets to it). 340

¶ 21.05[3] Expatriation of U.S. Citizens

An interesting range of U.S. tax issues develop when a U.S. citizen determines, for one reason or another, to renounce U.S.

citizenship and residence, so that the U.S. transfer tax laws would no longer be applicable, assuming that after expatriation the former

citizen, now a nonresident, had no assets that would be subject to U.S. estate or gift tax. 341

Figure 21-1. Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts—IRS Form 3520

Figure 21-2. Annual Return of Foreign Trust with a U.S. Owner—IRS Form 3520-A

An often-cited reason a U.S. citizen may desire to renounce U.S. citizenship concerns avoiding the U.S. tax system. 342 But there are

any number of other reasons as well.

Illustration  21-14

The situation is the same as in Illustration 21-3, 343 where John Forto is a U.S. citizen who has accumulated a significant

net worth through his ownership of the stock of USCo, a U.S. corporation. USCo manufactures optical devices, one of

which has been evolved into a line of cameras with the trade name Super Camera. The Super Camera has become the

runaway best-selling camera in the world.

The manufacturing facilities are located in Foronia, which has provided USCo with an extremely beneficial incentive

package. The business in Foronia has expanded and Mr. Forto is contemplating moving his family to Foronia to

concentrate on the worldwide development of this business without having to make the arduous trips to Foronia, located

on the other side of the world.

One of the elements of the incentive package provided by Foronia is a complete tax amnesty for income, estate, gift,

and other taxes in Foronia for Mr. Forto and his family if they became citizens of Foronia.

Mr. Forto's family has tired of his long absence from their home in the United States and have decided to move to

Foronia. Mr. Forto also desires to take advantage of the tax amnesty.

In this illustration, Mr. Forto needs to carefully address the U.S. tax consequences of a relinquishment of his U.S. citizenship, as well

as the practical difficulties that may occur in the future if the political situation in Foronia were to deteriorate.

Checklist 21-5 itemizes issues concerning U.S. citizens considering expatriation.

Checklist 21-5. Preemigration Planning for U.S. Citizens

□  Determine the country in which the current U.S. citizen desires to seek citizenship and consider the requirements of acquiring

in citizenship in such country.

□  Determine the country in which the current U.S. citizen desires to seek residency and consider the requirements of acquiring

residence in such country.

□  Does the United States have an estate and gift tax treaty with the potential foreign country of citizenship or residency?

● If so, review the pertinent terms.

□  Determine the objectives of the person planning to emigrate.

● Minimizing U.S. estate and gift taxation and the application of the 10-year provision in Section 2107

● Minimizing U.S. income taxation and the application of the 10-year provision in Section 877

● Minimizing estate and gift taxation in new country of citizenship or residence

● Minimizing income taxation in new country of citizenship or residence

● Avoiding international double or multiple estate and gift taxation

● Establishing anonymity for new home country tax and legal purposes

● Establishing anonymity for U.S. tax and legal purposes

● Utilizing offshore trust or corporate structures already in place

● Utilizing offshore trust or corporate structures to be established

□  Ascertain whether the planner or other advisor should be concerned about fraudulent conveyances under applicable U.S.

creditor rights laws.

□  Consider the U.S. income tax impact of the expatriation provisions in Section 877.

● Potential income tax impact

● Possible deferring of the tax's impact

● Possible offsetting of losses on other deductions

● Consequences of any existing trusts.

● Planning for controlled foreign corporations.

¶ 21.05[3][a] Income Tax Considerations

Under the pre-1996 provisions of the Code, the principal U.S. income tax issue posed by expatriation was avoidance of the relatively

weak provisions of Section 877, which could cause an expatriate to be subject to U.S. income tax for a period of 10 years if the

principal purpose of the expatriation was avoidance of U.S. income tax. 344 The U.S. estate and gift tax concern in renouncing U.S.

citizenship was whether the movement would be subject to the limited U.S. tax base defense provisions, contained in Section 2107

for transfer tax purposes. 345 As noted previously, Section 2107 provides special estate tax rules applicable to expatriates who lose

U.S. citizenship within 10 years of death unless such loss “did not have for one of its principal purposes the avoidance of [estate, gift,

GST, or income] taxes.” 346

The U.S. Congress became concerned about the ability of U.S. citizens to expatriate by renouncing their U.S. citizenship and

becoming citizens in a country with a more favorable tax environment. The essential concern was defense of the tax base of the

United States. The round of concern with respect to expatriation that resulted in legislation was triggered by the 1996 U.S. budget

proposals of the Clinton Administration. 347 The Clinton Administration proposals were included in bills introduced in both houses of the

U.S. Congress. 348 The proposals attracted a veritable flood of harsh criticism from commentators, including respected bar groups. 349

An intense political debate in Congress 350 included hearings held by both tax writing Committees 351 and the introduction of alternate

proposals. 352

The expatriation provisions of the Code were dramatically changed by the Health Insurance Portability and Accountability Act of 1996. 353 The purpose of the new provisions was to prevent U.S. tax base erosion from the expatriation of U.S. citizens and certain long-term

residents. Specifically, the legislative history notes that some very wealthy individuals each year relinquish their U.S. citizenship for

the purpose of avoiding U.S. income, estate, and gift tax. The legislative history also recognizes that citizens of the United States

clearly have a basic right under both U.S. and international law not only to leave the United States to live elsewhere, but

also to relinquish their U.S. citizenship. The Committee does not believe that the Internal Revenue Code should be used

to stop U.S. citizens or residents from expatriating; however, the Committee also does not believe that the Code should

provide a tax incentive for expatriating. 354

¶ 21.05[3][b] Income Taxation of Expatriates—Section 877

The purpose of Section 877 is protection of the U.S. income tax base through imposition of U.S. tax on U.S. citizens or certain long-

term residents who expatriate from the United States. In its pre-1995 form, Section 877(a) was largely a toothless tiger, because it

imposed upon the Service an obligation to prove that an expatriation was undertaken for the principal purpose of avoiding U.S. tax. 355

tax.TM For expatriations after February 6, 1995, however, the situation is reversed. Section 877(a) subjects certain individuals to an

expatriation tax without inquiry as their motive for losing their citizenship or residency, but allows certain categories of persons to

demonstrate to the Service, through a ruling process.

The provisions of Section 877 do not provide any exclusion for assets or income acquired before the 10-year period, as in the case of

residents who expatriate, 356 or for property or income received via gift within the 10-year period. 357

¶ 21.05[3][b][i] General application.

In general, Section 877(a) now provides in general that every nonresident who, within the 10-year period immediately preceding the

close of the taxable year, lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance

of U.S. income taxes, 358 shall be taxable for such taxable year in the manner provided in Section 877(b) if the tax imposed thereunder

exceeds the tax that would otherwise be applicable under Section 871. 359 For this purpose, an individual is treated as having a

principal purpose to avoid such taxes if

1. The average annual net income tax of such individual for the period of five taxable years ending before the date of the loss of

U.S. citizenship is greater than $100,000; or

2. The net worth of the individual as of such date is $500,000 or more. In the case of the loss of U.S. citizenship in any calendar

year after 1996, such $100,000 and $500,000 amounts shall be increased by cost-of-living adjustment. 360

This subjective tax standard was eliminated in 2004 361 in favor of specific rules for determining the date of expatriation. In addition, the

scope of taxation of certain expatriates maintaining significant contacts with the United States was expanded and new reporting

requirements were imposed. The expatriation provisions were further revised in 2008 in the Heroes Earnings Assistance and Relief Tax

Act of 2008 (the HEART Act). 362 These provisions apply to a citizen who relinquishes citizenship or a permanent resident terminating

U.S. residency after June 16, 2008, if such person:

1. Has an average annual net income tax liability for the five preceding years ending before the date of loss of citizenship or

residency of $124,000;

2. Has a net worth of $2 million or more on date of expatriation; or

3. Fails to certify, under penalties of perjury, that he has complied with all U.S. federal tax obligations for the five preceding years. 363

The HEART Act enacted a deemed market-to-market exit tax that applies to net unrealized gain if assets were sold at fair market

value on the day prior to expatriation and the gain exceeds $600,000, indexed for inflation. 364 The tax may be deferred on posting

adequate security. 365 The Service has provided guidance on the treatment of specific items, including deferred compensation, services

performed outside the United States, tax deferred accounts, and interests in non-grantor trusts. 366

¶ 21.05[3][b][ii] Special sourcing provisions.

For purposes of applying the provisions of Section 877(b), special sourcing provisions are embraced. The following types of income

are treated as U.S. sources:

1. Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States. 367

2. Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of U.S. persons or of the United

States, a state or political subdivision thereof, or the District of Columbia; 368

3. Income or gain derived from a controlled foreign corporation

● If the individual losing U.S. citizenship owned or is considered as owning 369 at any time during the two-year period ending on

the date of the loss of U.S. citizenship, more than 50 percent of the total combined voting power of all classes of stock

entitled to vote of such corporation, or the total value of the stock of such corporation, and

● To the extent such income or gain does not exceed the earnings and profits attributable to such stock that were earned or

accumulated before the loss of citizenship and during periods that such ownership requirements are met. 370

¶ 21.05[3][b][iii] Exchanges of property.

In the case of exchanges of property, notwithstanding any other provision in the Code, 371 such property is treated as if it had been

sold for its fair market value and any gain recognized, 372 unless the individual enters a gain recognition agreement with the Service as

to the sourcing of income from property acquired in the exchange. 373 The Service may also require recognition of gain, in Regulations

to be issued, where the removal of appreciated tangible property from the United States or any other occurrence could result in a

change in the source of income or gain from within to without the United States. 374

Illustration  21-15

This situation 375 is the same as in Illustration 21-14, except that Mr. Forto loses his U.S. citizenship on January 1,

1996, and is subject to Section 877. On June 30, 1997, Mr. Forto transfers the stock he owns in a U.S. corporation,

USCo, to a wholly owned foreign corporation, ForCo, in a transaction that qualifies for tax-free treatment under Section

351. 376 At the time of such transfer, Mr. Forto's basis in the stock of USCo is $100,000 and the fair market value of the

stock is $150,000. If Mr. Forto does not enter into a gain recognition agreement with the Service, he will be deemed to

have sold the USCo stock for $150,000 on the date of the transfer, and would be subject to U.S. tax in 1997 on the

$50,000 of gain realized. Alternatively, if Mr. Forto enters into a gain recognition agreement, he would not be required to

recognize for U.S. tax purposes in 1997 the $50,000 of gain realized upon the transfer of the USCo stock to ForCo.

However, under the gain recognition agreement, for the 10-year period ending on December 31, 2005, any income (e.g.,

dividends) or gain with respect to the ForCo stock would be treated as U.S. source, and therefore Mr. Forto would be

subject to tax on such income or gain under Section 877. If Mr. Forto disposes of the USCo stock on January 1, 2002,

Mr. Forto's gain recognition agreement would terminate on such date, and Mr. Forto would be required to recognize as

U.S.-source income at that time the $50,000 of gain that he previously deferred under the gain recognition agreement.

(The amount of gain required to be recognized by Mr. Forto in this situation would not be affected by any changes in the

value of the USCo stock since his June 30, 1997, transfer of such stock to ForCo.)

¶ 21.05[3][b][iv] Tolling of 10-year period where “risk of loss” eliminated.

For purposes of applying the 10-year period of Section 877(a), the period is suspended for any period during which the individual's risk

of loss with the respect to the property is substantially diminished by

1. The holding of a put with respect to such property (or similar property);

2. The holding by another person of a right to acquire the property; or

3. A short sale or other transaction. 377

Illustration  21-16

The situation is the same as in Illustration 21-14. Forto loses his citizenship on January 1, 1996, and is subject to

Section 877. On that date Mr. Forto owns 10,000 shares of stock of a U.S. corporation, USCo, with a value of $1

million. On the same date, Mr. Forto enters into an equity swap with respect to such USCo stock with a five-year term.

Under the transaction, Mr. Forto will transfer to the counter-party an amount equal to the dividends on the USCo stock

and any increase in the value of the USCo stock for the five-year period. The counter-party will transfer to Mr. Forto an

amount equal to a market rate of interest on $1 million and any decrease in the value of the USCo stock for the same

period. Mr. Forto's risk of loss with respect to the USCo stock is substantially diminished during the five-year period in

which the equity swap is in effect, and therefore, the 10-year period under Section 877 is suspended during such period.

Accordingly, if Mr. Forto sells his USCo stock for a gain on January 1, 2010, such gain would be treated as U.S.-source

income taxable to Mr. Forto under Section 877. 378

¶ 21.05[3][b][v] Transfers of property.

In addition, Section 877 contains a broad series of provisions intended to prevent an individual from transferring property that did or

would have produced U.S.-source income. In the case of transfers of property to a foreign corporation that would be a controlled

foreign corporation if the individual were a U.S. citizen, any income or gain on such property (or any other property that has a basis

determined in whole or part by reference to such property) received or accrued by the foreign corporation will be treated as received or

accrued directly by such individual and not by such corporation. 379 If stock in such corporation or any other stock that has a basis

determined in whole or part by reference to such stock is disposed of during the 10-year period and while such property is held by

such corporation, a pro rata share of such property (determined on the basis of the value of such stock) will be treated as sold by the

corporation immediately before such disposition. 380

Predictably, a set of anti-abuse rules authorize the Service to prescribe such Regulations as may be necessary to prevent the

avoidance of the purposes of these provisions by transfer of property to foreign corporations, including where the property is sold to the

corporation and the property taken into account is sold by the corporation. 381 The Service will also require such information reporting

as is deemed necessary to carry out the purposes of this provision. 382

¶ 21.05[3][b][vi] Relationship to treaties.

In enacting the changes to Section 877, the legislative history notes that issues may arise with respect to the consistency of the

amendments to existing treaty provisions. While the legislative history indicates that it is believed that the expatriation tax provisions

are “generally consistent with the underlying principles of income tax treaties” to the extent [that] a foreign tax credit [is provided] for

items taxed by another country, it is intended that the purpose of the expatriation tax provisions not be defeated by any treaty

provision. Accordingly, the Treasury Department is to review all outstanding treaties to determine whether the expatriation tax

provisions, as revised, potentially conflict with treaty provisions and to “eliminate any such potentially conflicts through renegotiation of

the affected treaties as necessary.” Beginning on the tenth anniversary of enactment, any conflicting treaty provisions that remain in

force will take precedence over the expatriation tax provisions as revised. 383

¶ 21.05[3][b][vii] Burden of proof.

As a further means of mitigating the adverse consequences to the fisc of prior law, Congress also included in Section 877 a provision

placing the burden of proof on the principal purpose issue on the expatriate. Section 877(f) provides that if the Service establishes that

it is “reasonable to believe” that an individual's loss of U.S. citizenship would, but for Section 877, result in a substantial reduction for

the taxable year in the taxes on his probable income for such year, the burden of proving that such loss of citizenship did not have for

one of its principal purposes the avoidance of taxes is on the individual. 384

¶ 21.05[3][b][viii] Information reporting.

A U.S. citizen who loses his or her citizenship is required to provide a statement to the State Department (or other designated

government entity) that includes the individual's Social Security number, forwarding foreign address, new country of residence and

citizenship and, in the case of individuals with a net worth of at least $500,000, a balance sheet. 385 The entity to which this statement

is to be provided is required to provide to the Treasury copies of all statements received and the names of individuals who refuse to

provide such statements. 386 An individual's failure to provide the required statement results in the imposition of a penalty for each year

the failure continues equal to the greater of (1) 5 percent of the individual's expatriation tax liability for such year, or (2) $1,000. 387

The State Department is required to provide the Treasury with a copy of each certificate of loss of nationality (CLN) approved by the

State Department. Similarly, the agency administering the immigration laws is to provide the Treasury with the name of each individual

whose status as a lawful permanent resident has been revoked or has been determined to have been abandoned. The Treasury must

also publish in the Federal Register the names of all former U.S. citizens from whom it receives the required statements or whose

names it receives under the foregoing information-sharing provisions.

Section 6039C authorizes the Service to publish the names of individuals who gave up their citizenship during each fiscal quarter of

the government. Such a list is published quarterly. For example, the list for the quarter ending June 30, 1998, contains a list of about

100 individuals. 388 There may be a variety of troublesome, practical consequences of a person's name appearing on the expatriation

list aside from the obvious tax matters. 389

¶ 21.05[3][b][ix] Ruling as to principal purpose.

In order to minimize the burdens of Section 877 and related provisions in situations where the taxpayer believes that he or she does

not have a principal purpose of tax avoidance, the Service has promulgated procedures for obtaining an appropriate ruling.

The ruling requirements were modified in Notice 98-34 390 to facilitate a procedure whereby the taxpayer need not obtain a substantive

ruling that he or she did not have a principal purpose of tax avoidance. Under the modified ruling practice, an individual may overcome

the presumption of tax avoidance by submitting a request for a ruling as to whether the individual's expatriation had as its principal

purpose the avoidance of U.S. taxes, provided that the ruling request is complete and in good faith. Notice 98-34 spells out 24

categories of information that must be submitted in order to be considered a “complete and good faith submission.” 391

¶ 21.05[3][c] Estate Taxation of Expatriates—Section 2107

As was the case with Section 877 prior to amendment, 392 its estate tax counterpart, Section 2107, was applicable in the case of

expatriations found to involve a principal purpose to avoid U.S. estate tax. 393 Section 2107 was also amended in 1996 to replace this

subjective test with an objective test in the absence of the individual obtaining an appropriate ruling from the Service. 394

In the case of individuals losing their U.S. citizenship after February 6, 1995, Section 2107(a) provides that a tax computed in

accordance with the table contained in Section 2001 is imposed on the transfer of the taxable estate (determined as provided in

Section 2106) of every decedent nonresident not a U.S. citizen if the date of death occurs during a tax year with respect to which the

decedent is subject to tax under Section 877(b). 395 The tax imposed is credited with the amount of any estate, inheritance, legacy, or

succession taxes actually paid to any foreign country. 396

As is the case with Section 877, if the Service establishes that it is reasonable to believe that an individual's loss of United States

citizenship would, but for Section 2107, result in a substantial reduction in the estate, inheritance, legacy, and succession taxes in

respect of the transfer of his estate, the burden of proving that such loss of citizenship did not have for one of its principal purposes

the avoidance of taxes is on the executor of such individual's estate. 397

¶ 21.05[4] Estate and Gift Tax Considerations for U.S. Citizens Residing in or Moving to Offshore Jurisdictions

When a U.S. citizen resides in an offshore jurisdiction, there are also a variety of estate and gift tax considerations that must be taken

into account. In order to coordinate planning between the offshore jurisdiction and the United States, there are a number of issues that

will need to be considered, including the following:

1. What property is subject to tax in the offshore jurisdiction?

2. Are employee benefit plan benefits applicable to the U.S. citizen subject to transfer tax in the offshore jurisdiction?

3. What planning techniques are available to minimize the assets that are potentially subject to tax in the offshore jurisdiction?

4. Do employee benefit plans allow sufficient flexibility for appropriate planning arrangements?

Another initial consideration will be whether the United States has an estate and gift tax treaty with the jurisdiction. If so, the treaty

will provide considerable guidance with respect to double taxation issues. The length of the period of residence in the offshore

jurisdiction may be important.

¶ 21.05[5] Repatriation by Former U.S. Citizens

Where a U.S. citizen has expatriated and avoided the restrictions in the Code on expatriation for the purpose of avoiding U.S. taxes, 398 the time may come when the former citizen (now nonresident) seeks to reacquire U.S. citizenship. In such a situation, the planning

context will be similar to that of a nonresident emigrating to the United States for the first time 399 with the interesting overlay of the

U.S. expatriation provisions.

Illustration  21-17

The situation is the same as in Illustration 21-3, 400 where John Forto has decided to emigrate to Foronia. It is now

several years later and Mr. Forto and his family have decided to return to the United States. Over the years, Mr. Forto's

company, once a U.S. corporation named USCo, also became a Foronian company, by the name of ForonCo. Mr. Forto

owns all the stock in ForonCo.

In such a situation, the former citizen, now nonresident, Mr. Forto would have a significant incentive to restructure his asset holdings

before once again becoming a U.S. citizen. For example, he could consider forming a foreign trust before renouncing Foronian

citizenship and accepting U.S. citizenship. Such a transaction would be subject to the provisions noted previously with respect to

nonresidents. 401 It may also be subject to the provisions of the Code designed to protect the U.S. tax base from expatriation of its

citizens. 402 As part of its efforts to deter tax-motivated expatriations, 403 Congress, in 1996, also classified as excludable for reentry

into the United States any former U.S. citizen who is found by the Attorney General to have renounced U.S. citizenship for tax

avoidance purposes. 404

¶ 21.05[6] Planning Where the Decedent Had Undisclosed, and Unreported, Foreign Assets (Including Trust Accounts)

An entirely different type of planning may be required where a U.S. decedent is discovered to have owned foreign assets, often as a

grantor of a foreign trust, but has never satisfied U.S. reporting obligations. 405 248

  See supra ¶ 21.02[6]. 249

  See supra ¶ 21.03[3]. 250

  See infra ¶ 21.05[3]. 251

  IRC § 679(a), which is discussed at infra ¶ 21.05[2][b][iv]. 252

  TD 8955, 66 Fed. Reg. 37886 (July 20, 2001). See “U.S. IRS Issues Final Regulations on Foreign Trusts with U.S. Beneficiaries,

”2001 WTD 140-39 (July 19, 2001). Rules relating to Section 501(c)(3) tax-exempt status of foreign trusts were modified in response

to commentaters to not require rulings, though there will be U.S. transferor notice filing requirements.253

  See generally Harrington, “Planning for U.S. Beneficiaries of Foreign Trusts Under Recent Regs.,” 28 Est. Plan. 258 (June 2001). 254

  Treas. Reg. § 1.679-2(a)(3). 255

  Treas. Reg. § 1.679-2(b). 256

  Treas. Reg. § 1.679-3(c). The related subject of gain recognition on deemed transfers of assets to a foreign trust is addressed in the

Regulations under Section 684. See ¶ 21.05[3][b][ix]. 257

  Treas. Reg. § 1.679-3(d). 258

  The term “U.S. person” is defined in Section 7701(a)(30) to include a citizen or resident, and a domestic partnership, corporation,

estate or trust, or nonresident alien electing to be treated as a resident under Section 6013(g). 259

  IRC § 684(a). Section 684 was enacted in the Small Business Job Protection Act of 1996. 260

  The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 983 (1997), repealed the excise tax in Sections 1491 through 1494

with respect to transfers of property to foreign partnerships, replacing it with a notice requirement with respect to such transfers

occurring after August 5, 1997. See ¶ 5.04[1]. 261

  Former IRC § 1491(a). See ¶ 3.04[2][f]. Former IRC § 1492 provided an exception for, among other things, taxpayers who elected

under former IRC § 1057 to treat such a transfer as a sale or exchange of property for an amount equal to the fair market value of the

property transferred and to currently recognize the gain.262

  Treas. Reg. § 1.1494-1(a). 263

  Rev. Rul. 87-61, 1987-2 CB 219, discussed at infra ¶ 21.05[2][b][iv]. 264

  See supra ¶ 21.03[1][d]. 265

  See Notice 96-65, 1996-2 CB 232; IRS Notice 96-60, 1996-2 CB 227. 266

  In this context, such provisions are principally IRC §§ 354 (transfer to controlled corporation) and 361 (reorganization). See U.S.

International Transfer Pricing ¶ 17.06. 267

  IRC § 367(a)(3). 268

  These types of property include property described in IRC §§ 1221(a)(1) or 1221(a)(3) (relating to inventory and copyrights, and the

like); installment obligations, accounts receivable, or similar property; foreign currency or other property denominated in foreign

currency; intangible property; or property with respect to which the transferor is a lessor at the time of the transfer, except that this

clause shall not apply if the transferee was the lessee. IRC§ 367(a)(3)(B). 269

  See ¶ 19.03. 270

  IRC § 877. These provisions are discussed in detail at infra ¶ 21.05[3]. 271

  See Notice 97-19, 1997-1 CB 227 (providing detailed guidance with respect to IRC §§ 877, 2501, and 2107 pending issuance of

Regulations); Notice 96-60, 1996-2 CB 227 (setting out, inter alia, initial guidance on ruling requests under IRC § 877). 272

  IRC § 6048(a). 273

  IRC § 6048(a)(1), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996). See generally

Bruce, “Foreign Trust Tax Compliance: Don't Panic,” 9 J. Int'l Tax'n 24 (Jan. 1998); Lederman & Hirsh, “New Tax Liabilities and

Reporting Obligations Imposed on Expatriates,” 84 J. Tax'n 325 (1996); Perry, “New Law Changes Rules on Cross-Border Trusts,

Toughens Reporting,” 7 J. Int'l Tax'n 436 (1996).

Prior to amendment, IRC § 6048(a) required the grantor in the case of an inter vivos trust, the fiduciary in the case of a testamentary

trust, or the transferor, as the case may be, to file an information return as required by the Regulations. IRC § 6048(b). The civil

penalty for nonfiling of the required return was 5 percent of the transfer to the trust, but not more than $1,000, unless it was shown

that the failure was due to reasonable cause. The criminal penalty for failure to file was set out in IRC § 7203.

In addition, any trust subject to IRC § 679—formed by a U.S. citizen or resident and having U.S. beneficiaries—had to file a return as

required by Regulations. IRC § 6048(c). The civil penalty for nonfiling of the required return was 5 percent of the value of the corpus of

the trust at the end of the taxable year, but not more than $1,000, unless it was shown that the failure was due to reasonable cause.

The criminal penalty for failure to file was set out in IRC § 7203. 274

  IRC § 6048(a)(2). 275

  IRC § 6048(a)(3)(A). 276

  IRC § 6048(a)(3)(B). 277

  IRC § 6048(a)(4). 278

  IRC § 6048(b)(1). 279

  IRC § 6048(b)(2)(A). 280

  IRC § 6048(b)(2)(B). The appointment of such an agent is not, alone, to be considered as a U.S. trade or business of the trust. Id. 281

  IRC § 6048(c)(1). 282

  IRC § 6048(c)(2). 283

  IRC § 6048(d)(4). 284

  IRC § 6039F(a). The definition of a gift to a U.S. person for this purpose excludes amounts that are qualified tuition or medical

payments made on behalf of the U.S. person, as defined for gift tax purposes (IRC § 2503(e)(2)), and amounts that are distributions to

a U.S. beneficiary of a foreign trust if such amounts are properly disclosed under the reporting requirements. IRC § 6039F(b). 285

  IRC § 6039F(c)(1)(A). It is intended that the Treasury secretary's exercise of its authority to make such a determination will be

subject to judicial review under an arbitrary or capricious standard, which provides a high degree of deference to such determination. 286

  IRC § 6039F(c)(1)(A). 287

  See supra ¶ 21.01. 288

  See FTC v. Affordable Media LLC, 179 F3d 1228 (9th Cir. 1999) (married couple held in contempt of court for failing to return assets

held in a foreign asset protection trust located in the Cook Islands). 289

  See generally Azad, “Asset Protection Planning with Offshore Trusts and Offshore Corporations,” 12 Tax Notes Int'l 500 (Feb. 12,

1996); Bruce & Gray, “Offshore Protection-of-Assets Trusts,” U.S. Taxation of International Operations: Tax Ideas (P-H) ¶ 13,518

(1988); Marty-Nelson, “Offshore Asset Protection Trusts: Are They Tax Neutral?” 7 J. Int'l Tax'n 107 (1966). 290

  IRC § 671. 291

  IRC § 672(b). 292

  IRC § 672(a). 293

  Treas. Reg. § 1.672(a)-1(a). 294

  IRC § 673. 295

  IRC § 674. 296

  IRC § 675. 297

  IRC § 676. 298

  IRC § 677. 299

  IRC § 674(b)(5). The Regulations provide that “a power to distribute corpus for the education, support, maintenance, or health of the

beneficiary; for his reasonable support and comfort; or to enable him to maintain his accustomed standard of living; or to meet an

emergency, would be limited to a reasonably definite standard.” Treas. Reg. § 1.674(b)-1(b)(5)(i). The Regulations further provide,

however, that “a power to distribute corpus for the pleasure, desire, or happiness of the beneficiary is not limited by a reasonably

definite standard.” Id. 300

  Treas. Reg. § 1.676(a)-1. 301

  IRC § 677(b); Treas. Reg. § 1.677(b)-1(a). 302

  IRC § 7701(a)(30). The definition of a foreign trust is discussed at supra ¶ 21.03[1][d]. 303

  IRC § 679(a)(1). 304

  IRC § 7701(a)(31) defines “foreign trust” as a trust whose foreign source income is not includable in gross income. See supra

¶ 21.03[1][d]. It appears that if a trust is established in, and administered under, the laws of a foreign country, the trustee is a foreign

entity, and the trust corpus is located in the foreign country, the trust will be a foreign trust. See Rev. Rul. 87-61, 1987-2 CB 219. 305

  IRC § 679(c)(1). 306

  IRC § 679(a)(2)(A). 307

  Rev. Rul. 87-61, 1987-2 CB 219. 308

  IRC § 679(a)(2)(B), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996), effective in

the case of transfers after February 6, 1995.309

  IRC §§ 679(a)(3)(A)(i), 679(a)(3)(C). For this purpose, the term “related” is as defined in IRC § 643(i)(2)(B). 310

  IRC § 679(a)(3)(A). 311

  IRC § 679(a)(3)(B). 312

  IRC § 679(a)(5). 313

  IRC § 672(f)(5), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996). 314

  IRC § 672(f)(4). 315

  IRC § 679(d).

316

  See ¶ 21.02. 317

  IRC § 684(a). In the case of transfers after December 31, 2009, the statutory language is similar except that it includes a

nonresident alien as a transferee. The provisions of Section 684 are expanded in Treas. Reg. § 1.684-1, TD 8956, 65 Fed. Reg. 48198

(Aug. 7, 2000). See “IRS Issues Final Regs on Gain Recognition Rules for Transfers to Foreign Trusts,” 2001 WTD 140-40 (July 19,

2001). See generally Harrington, “Planning for U.S. Beneficiaries of Foreign Trusts under Recent Regs,” 28 Est. Plan. 258 (June

2001).318

  IRC § 684(b). See ¶ 21.05[2][b]. 319

  IRC § 684(c). 320

  Treas. Reg. §§ 1.684-2(a) and 1.684-2(c). 321

  The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 983 (1997), repealed the excise tax in Sections 1491 through 1494

with respect to transfers of property to foreign partnerships, replacing it with a notice requirement with respect to such transfers

occurring after August 5, 1997. See ¶ 21.05[1][b]. 322

  This could occur, however, if non-U.S. currency were transferred to the trust because of exchange rate fluctuations over time.323

  Rev. Rul. 87-61, 1987-2 CB 219. 324

  See supra ¶ 21.03[1][d]. 325

  Rev. Rul. 69-450, 1969-2 CB 168. 326

  IRC §§ 652, 662. 327

  IRC §§ 666, 667. 328

  IRC § 668. 329

  Treas. Reg. § 1.666(d)-1A(b)(1). 330

  Compare HB Plant v. Comm'r, 30 BTA 133 (1934), aff'd, 76 F2d 8 (2d Cir. 1935) (holding that a beneficiary's mere right to occupy

trust property did not mean that the trust's payment of maintenance expenses should be treated as distributions to the beneficiary)

with Alfred I. DuPont Test. Tr. v. Comm'r, 66 TC 761 (1976), aff'd, 574 F2d 1332 (5th Cir. 1978) (calling into question the rationale of

Plant, while reaching a similar conclusion).331

  IRC § 6048(a). 332

  IRC § 6677. 333

  Schedule B, Line 11 of Form 1040, and the filing of Forms 3520, 3520-A, or 926.334

  See ¶ 7.02[4]. 335

  FSA 199952014 (Dec. 29, 1999). Income of a trust established to hold stock of an acquired company, in order to meet regulatory

requirements, is attributed to the grantor, the beneficiary of the trust for subpart F purposes (controlled foreign corporation purposes).

Textron Inc. v. Comm'r, 117 TC 67 (2001) . See ¶ 7.02[4]. 336

  F.T.C. v. Affordable Media, LLC, 179 F3d 1228 (9th Cir. 1999) (upholding contempt imposed on grantors of foreign trust for failure to

turn over assets as ordered by court), discussed in Asinoff, “Ruling in West May Chill Use of Offshore Trusts,” Wall St. J., July 12,

1999, at A24.337

  See supra ¶ 21.05[2]. 338

  IRS Form 926, which is set out as Figure 3-1. 339

  IRS Form 3520, set out as Figure 21-1. 340

  IRS Form 3520-A, set out as Figure 21-2. 341

  See supra ¶ 21.02[3][b]. 342

  This is discussed in detail at infra ¶ 21.05[3][a]. 343

  See supra ¶ 21.01. 344

  See ¶¶ 21.05[1][d] supra and 21.05[1][b] infra. 345

  See generally McCaffrey, “Tax Advantaged Traveling for You and Your Money: Expatriation and Foreign Trusts,” 1996 U. Miami Inst.

on Est. Planning ch. 5.346

  See supra ¶ 21.02[5]. 347

  For background on the evolution of the issues, see Turro, “Clinton Administration Proposes Anti-Abuse Provisions for Foreign Trusts,

Expatriates,” 10 Tax Notes Int'l 511 (Feb. 13, 1995). 348

  HR 980 and 981, 104th Cong., 1st Sess (1995); S. 452 and 453, 104th Cong., 1st Sess. (1995). An extensive background document

was prepared by the Joint Committee on Taxation. Joint Committee on Taxation, “Issues Presented by Proposals to Modify the Tax

Treatment of Expatriation,” Staff, Joint Committee on Taxation (June 2, 1995). 349

  See “Preliminary Comments on Expatriation, Foreign Trust Proposals—Comments of the American Bar Ass'n, Section of Taxation,”

95 TNT 59-49 (Mar. 27, 1995); “New York State Bar Ass'n Reports on Expatriate Tax Proposals,” 95 TNT 118-6 (June 19, 1995). 350

  See Loube, “Expatriate Taxation: Politics Obscures Technical Issues,” 10 Tax Notes Int'l 1377 (Apr. 17, 1995). 351

  Background documents for the hearings were extensive. See Joint Committee on Taxation, “Description of Background and Issues

Relating to Taxation of U.S. Citizens Who Relinquish Citizenship and Long-Term Resident Aliens Who Relinquish U.S. Residency,”

Staff, Joint Committee on Tax'n (Mar. 27, 1995), reprinted at BNA Daily Tax Rep., Mar. 27, 1995, at L-2. The background of the

legislation is discussed in Abreu, “Taxing Exits,” 73 Tax Notes 359 (Oct. 21, 1996). 352

  See HR 1812, 104th Cong., 1st Sess. (1995) (Rep. Archer); S. 700, 104th Cong, 1st Sess. (1995) (by Sen. Moynihan).353

  Pub. L. No. 104-191 (HR 3103). 354

  HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and

Welfare Reform Acts of 1996 at 1542 (Research Institute of America 1996). The modifications of IRC § 877 are effective in the case of

individuals losing U.S. citizenship on or after February 6, 1995.355

  See supra ¶ 21.05[1][d]. 356

  See supra ¶ 21.05[3]. 357

  See HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance

and Welfare Reform Acts of 1996 at 1544–1545 (Research Institute of America 1996). 358

  Specifically, IRC § 877(a) is applicable to Subtitle A of the Code, which is the income tax, and Subtitle B, which is the estate and

gift tax. IRC § 877(a)(1). 359

  IRC § 877(a)(1). IRC §871 is discussed at supra ¶ 21.02. 360

  IRC § 877(a)(2) (flush language). The cost-of-living adjustment is as provided in IRC § 1(f)(3), rounded to the nearest $1,000. 361

  See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004). 362

  Pub. L. No. 110-245, 122 Stat. 1624 (2008). See generally Arsenault, “Surviving a HEART Attack: Expatriation and the Tax Policy

Implications of the New Exit Tax,” 24 Akron Tax L. J. 37, 48-50 (2009). 363

  IRC § 877A(g)(1)(A), referring to IRC § 877(a)(2). There are exceptions for citizens with dual citizenship or persons renouncing

citizenship prior to age 18.5. IRC § 877A(g)(1)(B). 364

  IRC § 877A(a)(1). 365

  IRC § 877A(b). 366

  See Notice 2009-85, 2009-45 IRB ; “IRS Releases Guidance on Expatriates Covered Pursuant to HEART Act of 2008,” BNA Daily

Tax Rep., Oct. 16, 2009, at G-3.367

  IRC § 877(d)(1)(A). 368

  IRC § 877(d)(1)(B). 369

  Using the stock attribution provisions of IRC § 958. See ¶ 7.02[2]. 370

  IRC § 877(d)(1)(C). 371

  For example, like-kind exchanges (IRC § 1031), reorganizations (IRC § 368(a)), or transfers to controlled corporations (IRC § 351) or

partnerships (IRC § 721). 372

  IRC § 877(d)(2)(A). In order for this provision to be applicable to property exchanged within the 10-year period (or 15 years under

Regulations to be issued), the gain would otherwise have not been recognized, income from the property exchanged would have been

U.S. source, and income derived from the property acquired would be from sources outside the United States. IRC § 877(d)(2)(B). 373

  IRC § 877(d)(2)(C). 374

  IRC § 877(d)(2)(E). The legislative history notes, for example, that this provision could apply to a former U.S. citizen who removes

appreciated artwork from the United States. HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of

the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1545 (Research Institute of America 1996).375

  HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and

Welfare Reform Acts of 1996 at 1545-1546 (Research Institute of America 1996).376

  See ¶ 12.03[1]. 377

  IRC § 877(d)(3). 378

  HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and

Welfare Reform Acts of 1996 at 1546 (Research Institute of America 1996).379

  IRC § 877(d)(4)(a)(ii). 380

  IRC § 877(d)(4)(C). 381

  IRC § 877(d)(4)(D). 382

  IRC § 877(d)(4)(E). 383

  HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and

Welfare Reform Acts of 1996 at 1547 (Research Institute of America 1996).384

  IRC § 877(f). 385

  IRC §§ 6039F(a) and 6039F(b). 386

  IRC § 6039F(c). 387

  IRC § 6039F(d). 388

  See “Quarterly Publication of Individuals Who Have Chosen to Expatriate as Required by Section 6039G,” Tax Analysts Doc. 98-

25350 (Aug. 10, 1998).389

  Newman, “How Do You Quit Being an American? With Great Difficulty,” Wall St. J., Dec. 28, 1998, at A2. 390

  Notice 98-34, 1998-2 CB 29. 391

  The Service has also issued several private letter rulings. See Priv. Ltr. Ruls. 199927032 (July 19, 1999); 200219033 (Feb. 12, 2002)

(principal purpose to evade U.S. tax not presumed); 200217043 (Jan. 24, 2002) (loss of long-term resident status); 200210005 (Mar. 8,

2002) (loss of U.S. citizenship by naturalized citizen); (definitive ruling that expatriation following employer transfer did not have a tax

avoidance motive under Section 877); 199927013 (July 19, 1999) (no tax-avoidance motive under Section 877 where person who

always lived in foreign country renounces U.S. citizenship and citizenship was by virtue of having U.S. citizen mother); 199926031

(July 19, 1999) (no tax-avoidance motive under Section 877 where dual citizen living in foreign country renounces U.S. citizenship).

See also Priv. Ltr. Ruls. 9752007 (Sept. 19, 1997), 9735014 (May 29, 1997), and 9724021 (Mar. 18, 1997).

In FSA 199947009 (Nov. 26, 1999), an examination team was advised that survivor benefits received by a German-born taxpayer after

she renounced U.S. citizenship would be exempt from federal income tax under the U.S.–German treaty provided that her

renunciation did not have a tax-avoidance purpose.392

  See supra ¶ 21.05[3][b]. 393

  The preamendment version of IRC § 2107 is discussed at supra ¶ 21.02[5]. 394

  See HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance

and Welfare Reform Acts of 1996 at 1542–1543 (Research Institute of America 1996). 395

  IRC § 2107(a). 396

  IRC § 2107(c)(2). 397

  IRC § 2107(e). See Notice 97-19, 1997-1 CB 394 (providing detailed guidance with respect to IRC §§ 877, 2501, and 2107 pending

issuance of Regulations). See generally Lederman & Hirsh, “New Reporting Rules for Departing U.S. Persons and Property After IRS

Guidance and TRA '97,” 87 J. Tax'n 149 (1997). 398

  See supra ¶ 21.05[3][a]. 399

  See supra ¶ 21.03[3]. 400

  See supra ¶ 21.01. 401

  See supra ¶ 21.03[1]. 402

  See supra ¶ 21.05[1][a]. In this connection, see Ltr. Rul. 9527025, which involved a former citizen who had allowed more than 10

years to expire before repatriating. The Service ruled that IRC § 2501(a)(3), concerning transfers made within 10 years of losing U.S.

citizenship, was inapplicable. It also found that the formation of a foreign trust and transfer of foreign company stock, where the

beneficiaries were the grantor's family, and the grantor retained the voting rights on the transferred stock, was not subject to IRC §

2036(b).403

  See supra ¶¶ 21.04[2] (U.S. residents), 21.05[3][b], and 21.05[3][c]. 404

  Illegal Immigration Reform and Responsibility Act of 1996, Pub. L. No. 104-208 (Sept. 30, 1996) (effective in the case of expatriations

occurring after September 29, 1996). This provision is criticized at Tilevitz & Czapiewska, “Getting the Tax-Free Boot: Tax Motivated

Expatriation May Preclude U.S. Visa,” 70 Tax Notes 1715 (Mar. 31, 1997). See also Martin, “U.S. Law Targeting Tax-Dodging

Expatriates May Have Loophole,” 14 Tax Notes Int'l 833 (Mar. 10, 1997). A private letter ruling has been issued under Section 877(c).

Priv. Ltr. Rul. 9724021 (Mar. 18, 1997) (initial dual citizen who married a foreign spouse). 405

  See supra ¶ 21.05[1][e].

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