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Facebook Co-Founder Eduardo Saverin Renounces U.S. Citizenship Ahead Of Facebook IPO

Facebook co-founder Eduardo Saverin, best known for his bitter legal battle with Facebook founder and CEO Mark Zuckerberg which was highlighted in the popular 2010 film The Social Network, has renounced his American citizenship ahead of Facebook’s impending initial public offering (IPO), which is currently scheduled for Friday, May 18.  Born and raised in Brazil before moving to the U.S. in 1992, the 30-year old Mr. Saverin now lives in Singapore.  Saverin renounced his citizenship on September 30, 2011 but the information did not become public until the IRS released his name on April 30.

This maneuver was obviously done to save Mr. Saverin U.S. income taxes, and it will probably succeed over the long term.  Once an American citizen has successfully renounced their citizenship, they are no longer subject to U.S. taxes.  In fact, tax motivation is not even considered to be relevant to the tax treatment of citizens or permanent residents who permanently depart the U.S.  However, Mr. Saverin will likely be facing a substantially larger tax bill in the short term.  This is because Americans who give up their citizenship owe what is effectively an “exit tax” on the capital gains from their stock holdings, even if they do not sell the actual shares.

In 2008, federal lawmakers attached the aforementioned exit tax to the HEART act as a revenue enhancer to offset increased military benefits.  According to the legislation, a person owes this exit tax if they qualify under one of the following three tests:

  1. The expatriate’s average annual U.S. income tax liability over the 5 years prior to expatriation was over $145,000 (adjusted annually for inflation);
  2. The expatriate’s net worth is at least $2 million; or
  3. The expatriate does not certify that he met all U.S. tax obligations for the five years before expatriation.

If a person is subject to the exit tax, then there are three tax issues they should be aware of:

  1. The mark-to-market tax: an exit tax on the “deemed sale” of all of the taxpayer’s assets;
  2. The tax on deferred compensation and non-grantor trusts; and
  3. The tax on gifts to U.S. Citizens (including bequests after death).

In Mr. Saverin’s case, his primary concern is issue number 1.  For the mark-to-market tax, he must calculate the amount owed as if he had sold all of his assets, including the Facebook stock, on the day before his expatriation.  He would then have to pay tax on the theoretical profit which that sale would have gained him, at the capital gains tax rate of 15%.

As a result of renouncing his U.S. citizenship, Mr. Saverin will owe millions of dollars in taxes based on the billions of dollars in Facebook stock that he owns.  However, this likely seems preferable because Mr. Saverin’s value in the Facebook stock would have been calculated based on the private, secondary market price for Facebook stock that was in effect in 2011.  Now that it is 2012, and Facebook has planned an IPO which is projected to raise approximately $100 billion, Mr. Saverin is no doubt appreciating the fact that his future tax bills will be substantially lower than if he had remained a U.S. citizen.