NEW EXPATRIATION RULES Code Section 877A

1. NEW EXPATRIATION RULES Code Section 877A Phillip L. Jelsma Luce, Forward, Hamilton & Scripps LLP

2. Heroes’ Earnings Assistance and Relief Tax Act of 2008, also known as the Heroes Act • Change the rules for persons relinquishing their U.S. citizenship to a market-to-market deemed sale of assets.

3. Prior Law • For the ten-year taxable period after an individual relinquished U.S. citizenship or terminated long-tem residency, the individual was subject to income tax for a 10-year period of time at rates applicable to U.S. citizens on U.S. source income. A long term resident was a non-citizen who was a permanent resident at least eight (8) of the last fifteen (15) tax years. Former citizens were subject this 10-year tax unless: • They could establish that their average annual net income tax liability for the 5 preceding years did not exceed $124,000 and their net worth was less than $2,000,000, and • They certified under penalties of perjury they had complied with all U.S. tax obligations for the preceding five (5) years.

4. Estate Tax Rules • Special estate tax rules applied to individuals that were subject to the alternative tax regime. Certain closely held foreign stock was included in their gross estate if: • They owned directly or indirectly 10% or more of the total voting power; and • They were considered to own directly or indirectly more than 50% of the combined voting power of all classes of stock entitled to the vote or total value of the foreign corporation.

5. Gift Tax Rules • If the individual made gifts during the 10-year period of time, they were subject to gift tax on U.S. situated intangibles.

6. Sanctions for Returning to the U.S. • If the individual returned to the United States for more than 30 days during the calendar year, they were then subject to tax on worldwide income and subject to full U.S. estate tax.

7. New Code Section 877A • Generally these individuals are now subject to a tax on the net unrealized gain or loss on their property if it had been sold at fair market value on the day before expatriation. Any net gain on the deemed sale is recognized to the extent it exceeds $600,000.

8. Who Does It Apply To? • Any person who relinquishes citizenship or a long-term resident who terminates tax residency if: • He or she has an average annual net tax liability for the five (5) preceding years in excess of $139,000 in 2008; • Has net worth in excess of $2,000,000 or more on that date; or • Fails to certify under penalties of perjury that he or she has complied with all U.S. Federal tax obligations for the five (5) preceding years.

9. Who Does It Apply To? – Cont’d • It generally doesn’t apply if the individual has duel citizenship and the individual has been a resident of the U.S. for not more than 10 years during the 15 year taxable period ending on the date of expatriation. The provision also doesn’t apply to anyone who relinquishes their U.S. citizenship before reaching the age of 18-1/2 provided they were not a resident for more than 10 taxable years before relinquishment.

10. Treaty Provisions • A long term resident can terminate their U.S. residency if they commence to be treated as a resident of a foreign country under a tax treaty between the U.S. and the foreign country and they do not waive the benefits of the treaty applicable to residence of the foreign country and notify the Secretary of the commencement of such treatment.

11. Deferral of Market-to-Market Tax • An individual may elect to defer the payment of the market-to-market tax by paying interest at the underpayment rate. The election is irrevocable and is made on a property-by-property basis. The deferred tax is due when the property is disposed of. To elect, the individual must furnish a bond and potentially other security mechanisms such as a letter of credit.

12. Deferred Compensation Items • Deferred compensation plans including normal retirement plans and simplified retirement accounts, must deduct and withhold 30% of the taxable payment to the expatriate. If the withholding tax does not apply, the present value of accrued benefit is treated as being received on the date of expatriation and subject to tax.

13. Interest and Trusts Grantor Trusts • If the expatriate is treated as the owner of the trust, because it is a grantor trust, the assets held in the trust are subject to the market-to-market tax. If the trust becomes a non-grantor trust immediately before expatriation, the trust remains a grantor trust for purposes of these provisions.

14. Interest and Trusts Non-Grantor Trusts • The market-to-market tax does not apply to any portion of the trust not treated as owned by the covered expatriate. Upon any direct or indirect distribution from such portion of the trust to the expatriate, the Trustee must deduct and withhold 30% of the distribution that would otherwise be includable in the gross income of the covered expatriate. Exchanges • If the expatriate is involved with a tax deferred exchange on a voluntary conversion, the 45-day, 180-day, 2 year or 3 year periods are deemed to terminate on the date before expatriation.

15. Gifts And Bequests Received From A Former Citizen • Gifts and bequests received from a former citizen are subject to a tax on the recipient. The tax is at the highest estate or gift tax rate. The tax applies if the recipient is a domestic trust.

16. EXAMPLE • Imagine a British subject and green card holder who accepted an opportunity by his employer, a U.K. investment bank, to relocate to the United States oin 1998 to take a position in the investment bank’s New York City office. Not being certain of the duration of the U.S. assignment, he did not sell his flat in London, but rented it to a friend. After getting an important promotion and offer to stay in NewYork in 2000, he bought a condominium

17. Con’t. • in a restored building in the meat packing district for $200,000. He also continued putting money into stocks in the United States, the United Kingdon, and several emerging markets. In 2003, his grandfather died, leaving the banker a small condominium on the Croissette in Cannes overlooking the Meditereranean that he bought in 1985, which was used for the grandparents’ frequent vacations in the south of France.

18. Cont’d. • On June 10, 2008, the banker’s boss calls him into her office and offers him an irresistible opportunity to run a division of the bank back in London. At the time he leaves the U.S., his NY condo is worth $1 Million, the flat in London is worth $2 million and the condo in Cannes is worth $2 Million. He has $500,000 in his 401(k) plan. 701024500