[gsc] Led Zeppelin

[rc]

Ramble On
The leaves are falling all around, time I was on my way
Thanks to you I'm much obliged, such a pleasant stay
But now its time for me to go, the autumn moon lights my way
But now I smell the rage, and with it hate, and it's headed my way.
Ah, sometimes I grow so tired, but I know there's one thing I have to
do.
Ramble on. And now's the time, the time is now.
Led Zeppelin

http://www.withersworldwide.com/news-publications/324/exit-tax-u-s-expatriate
s-to-become-law.aspx

Exit Tax for U.S. Expatriates to Become Law

28 May 2008

New rules will impose tax on expatriates and withholding requirements on
trustees

Giving up a U.S. passport will soon carry a steep price tag.  A new law
passed by the U.S. Congress and sent to the President will subject
certain individuals who expatriate or give up their green cards to
immediate tax on the inherent gain on all of their worldwide assets and
a tax on future gifts or bequests made to a U.S. citizen or resident.

Tax practitioners had been made to feel like the boy who cried wolf in
recent months as the U.S. Congress repeatedly threatened to enact
legislation aimed at U.S. citizens who expatriate.  Congress finally
made good on those threats by unanimously passing the Heroes Earning
Assistance and Relief Tax (HEART) Act (the Act'), which provides tax
relief for active duty military personnel and reservists.

The new tax regime applies to certain individuals who relinquish their
US citizenship[1] and certain long-term U.S. residents (i.e., green card
holders) who terminate their U.S. residence (hereafter referred to as
expatriates').[2]  The so-called mark-to-market' tax will apply to the
net unrealized gain on the expatriate's worldwide assets as if such
property were sold (the deemed sale') for its fair market value on the
day before the expatriation date.  Any net gain on this deemed sale in
excess of US$600,000 will be taxable.

In addition, trustees of non-grantor trusts[3] must withhold and pay
over to the IRS 30 percent of the portion of any distribution (whether
direct or indirect) that would have been taxable to the expatriate had
he not expatriated.  Failure to withhold the tax could subject the
trustee to direct liability for the unpaid U.S. tax.

The Act will become law when the President signs it, which is expected
imminently.
Individuals Covered

The Act applies to any expatriate if that individual (i) has a net worth
of US$2 million or more; (ii) has an average net U.S. income tax
liability of greater than US$139,000 for the five year period prior to
expatriation; or (iii) fails to certify that he has complied with all
U.S. federal tax obligations for the preceding five years (the covered
expatriate').

The Act contains two exceptions, which are broader than those contained
in current law.  An individual is not a covered expatriate' if he
certifies compliance with US federal tax obligations as specified in
item (iii) above, and: (i) he was at birth a citizen of the U.S. and
another country, provided that (a) as of the expatriation he continues
to be a citizen of, and a tax resident of, such other country, and (b)
he has been a resident of the U.S. for no more than 10 of the 15 taxable
years ending with the taxable year of expatriation; or (ii) he
relinquished U.S. citizenship before reaching the age of 18 =, provided
that he was a resident of the U.S. for not more than 10 taxable years
before relinquishment.
In General

The Act consists of three key elements:

1. The mark-to-market tax on the covered expatriate's worldwide assets;

2. A tax on certain gifts and bequests made by the covered expatriate to
any US person; and

3. A repeal of the current so-called 10-year shadow period for covered
expatriates.
The Mark-to-Market Tax

As noted above, the mark-to-market tax will apply to the net unrealized
gain on the covered expatriate's worldwide assets as if such property
were sold for its fair market value on the day before the expatriation
date to the extent that the net gain exceeds US$600,000.[4]

However, the mark-to-market tax will not apply to (i) certain deferred
compensation items; (ii) certain specified tax deferred accounts; or
(iii) any interest in a nongrantor trust.

A.      Deferred Compensation Items

Under the Act, certain deferred compensation items will be subject to
the mark-to-market tax.  For purposes of this calculation, the covered
expatriate is deemed to receive the present value of his accrued benefit
on the day before the expatriation date.  No early distribution excise
tax applies by virtue of this treatment, and appropriate adjustments
must be made to subsequent distributions from the plan to reflect such
treatment.

Other qualifying deferred compensation items will not be subject to the
mark-to-market tax; however, the payor must deduct and withhold a tax of
30 percent from any taxable payment to a covered expatriate.  A taxable
payment is subject to withholding to the extent it would be included in
the gross income of the covered expatriate if such person were a U.S.
citizen or resident.

B.      Specified Tax Deferred Accounts

Under the Act, the mark-to-market tax will apply to certain specified
tax deferred accounts.  In the case of any interest in a specified
account held by a covered expatriate on the day before the expatriation
date, the expatriate is deemed to receive a distribution of his entire
interest in the account on that date.  Appropriate adjustments are made
for subsequent distributions to take into account this treatment.  Such
deemed distributions are not subject to additional tax.

C.       Interests in Non-Grantor Trusts

The Act makes a distinction between grantor trusts and non-grantor
trusts.  A grantor trust is ignored as a taxable entity for U.S. federal
income tax purposes.  The owner' of a grantor trust must include in
computing his personal tax liability the items of income, deduction and
credit that are attributable to the trust.  Therefore, in the case of
the portion of any trust for which the covered expatriate is treated as
the owner under the grantor trust provisions, the assets held by that
portion of the trust are subject to the mark-to-market tax.

The mark-to-market tax does not generally apply to non-grantor
trusts.[5]  Rather, in the case of any direct or indirect distribution
from the trust to a covered expatriate, the trustee must deduct and
withhold an amount equal to 30 percent of the distribution portion that
would be includable in the gross income of the covered expatriate if he
were subject to U.S. income tax.  The covered expatriate waives any
right to claim a reduction in withholding under any treaty with the U.S.
The Act does not explain how the withholding will be enforced against a
non-U.S. trustee of a trust.

In addition, if the non-grantor trust distributes appreciated property
to a covered expatriate, the trust recognizes gain as if the property
were sold to the expatriate at its fair market value.

If a non-grantor trust becomes a grantor trust of which the covered
expatriate is treated as the owner, such conversion is treated as a
distribution to the covered expatriate and will trigger the 30 percent
withholding tax.

Conversely, if a grantor trust becomes a non-grantor trust after the
individual expatriates, it appears that the mark-to-market tax will
apply to assets in the grantor trust, and the 30 percent withholding
requirement will not apply to the trust once it becomes a non-grantor
trust.  This is an important point because the grantor's expatriation
commonly converts grantor trusts into non-grantor trusts.
Tax on Gifts and Bequests to U.S. Citizens or Residents

The Act taxes certain covered gifts or bequests'[6] received by a U.S.
citizen or resident.  The tax, which is assessed at the highest marginal
estate or gift tax rate at the time of the gift or bequest, applies only
to the extent that the covered gift or bequest exceeds $12,000 during
any calendar year.  The tax is reduced by the amount of any gift or
estate tax paid to a foreign country with respect to such covered gift
or bequest.  No allowance appears to exist for the $1 million exemption
from U.S. gift tax or the $2 million exemption from U.S. estate tax
normally granted to U.S. persons.  Gifts or bequests made to a U.S.
spouse or a qualified charity are not subject to the tax.

In the case of a covered gift or bequest made to a U.S. trust, the tax
applies as if the trust were a U.S. citizen, and the trust is required
to pay the tax.  In the case of a covered gift or bequest made to a
foreign trust, the tax applies to any distribution, whether from income
or corpus, made from such trust to a recipient that is a U.S. citizen or
resident in the same manner as if such distribution were a covered gift
or bequest.
Repeal of 10-Year Shadow Period

Current law subjects expatriates to a so-called 10-year shadow period,
which results in a covered expatriate being taxed as a U.S. citizen in
any of the 10 years following expatriation in which the expatriate
spends 30 days in more in the U.S. In addition, current law taxes
expatriates on all U.S. source income and gain during the shadow period.

Under the Act, individuals who expatriate on or after the date of
enactment will not be subject to the shadow period but will instead be
subject to the mark-to-market tax and the tax on gifts and bequests to
U.S. citizens and residents.
Effective date

The Act will be effective as of the date of enactment and will therefore
not apply to those individuals who expatriate prior to its enactment.
Enactment occurs upon the signature of the President or 10 days after
the Act is presented to the President if he does not veto it.

The White House has not issued an official position on the Act, but
given the veto-proof margin by which the Act passed in both houses of
Congress and the Act's emphasis on active duty members of the military,
most commentators believe that enactment is imminent.
Conclusion

In light of the Act, individuals who are considering expatriation should
consider the substantial new tax burdens that this action will generate.
Those persons who expatriate after the enactment date and who are
considering making gifts or bequests to U.S. persons in the future
should also review their planning.  In addition, trustees should very
carefully consider whether trust beneficiaries are covered expatriates
before making any distribution without withholding U.S. tax.  Trustees
who fail to become familiar with the new rules do so at their peril.

[1] For purposes of the Act, an individual is treated as having
relinquished his citizenship on the earliest of four possible dates:
(i) the date on which he renounces his U.S. nationality before a
diplomatic or consular officer of the U.S.; (ii) the date on which he
furnishes to the U.S. Department of State a signed statement of
voluntary relinquishment of U.S. nationality confirming the performance
of an expatriating act; (iii) the date on which the U.S. Department of
State issues a certificate of loss of nationality; or (iv) the date on
which a U.S. court cancels a naturalized citizen's certificate of
naturalization.

[2] The term long-term resident' means any individual (other than a
U.S. citizen) who is a lawful permanent resident of the U.S. in at least
eight taxable years during the period of 15 taxable years ending with
the taxable years during which he ceases to be a lawful permanent
resident or commences to be treated as a resident of a foreign country.

[3] The definition of non-grantor trust' includes both U.S. and
non-U.S. non-grantor trusts.

[4] An individual may elect to defer payment of the tax imposed on the
deemed sale of property until the return is due for the taxable year in
which he disposes of such property, but interest will apply for the
period during which the tax is deferred.  This irrevocable election is
made on a property-by-property basis and requires the individual to
provide adequate security with respect to such property and a waiver of
treaty rights that would preclude the assessment or collection of the
tax.

[5] Under certain circumstances, the mark-to-market tax may arguably
apply to non-grantor trusts (i.e., where the non-grantor trust holds
shares in a passive foreign investment company).

[6] Defined as any property acquired (i) by gift directly or indirectly
from an individual who was a covered expatriate at the time of such
acquisition; or (ii) directly or indirectly by reason of the death of an
individual who was a covered expatriate.  The definition excludes (i)
any property shown as a taxable gift on a timely filed gift tax return
by the covered expatriate, and (ii) any property included in the gross
estate of the covered expatriate for U.S. estate tax purposes and shown
on a timely filed estate tax return of the estate of the covered
expatriate.