Previously, we reported on Facebook co-founder Eduardo Saverin, who renounced his American citizenship months ahead of Facebook’s initial public offering, which occurred on Friday, May 18. Many have opined that Mr. Saverin stands to save millions in future taxes as a result of his actions and that this outcome played a significant role in his decision to abandon his citizenship.
Now, Democratic Senators Chuck Schumer and Bob Casey have announced a new bill called the Ex-PATRIOT Act which would re-impose taxes on expatriates like Saverin even after they leave the United States and take up residence in a foreign country. The new bill would presume that any person who renounced their citizenship and had either a net worth greater than $2 million or an average income tax liability of at least $148,000 over the last five years had done so for tax avoidance purposes. The individual would then have to prove to the IRS that their expatriation was not designed to avoid taxes or they would risk additional tax on future income. In addition, the Senators want to take steps to make it official that anyone who renounced their citizenship to avoid paying taxes would be permanently denied reentry into the U.S. The bill has received bipartisan support, earning a surprising endorsement from House Speaker John Boehner.
In response to the uproar his actions have created, Mr. Saverin stated, “my decision to expatriate was based solely on my interest in working and living in Singapore, where I have been since 2009.” “I am obligated to and will pay hundreds of millions of dollars in taxes to the United States government. I have paid and will continue to pay any taxes due on everything I earned while a U.S. citizen.”
It would be interesting to see how an individual would prove to the IRS that their decision to renounce their U.S. citizenship was not motivated by an interest in tax avoidance. What exactly would be the standard? Would the individual have to show that tax avoidance was not the sole motivation? The most important motivation? Any motivation at all? The last of these would likely be impossible considering that it would seem that the only way to appropriately determine whether to undertake such a severe action as renouncing one’s U.S. citizenship would require analyzing all of the angles, including the tax consequences.
The issue reminds me of the old IRS rule for § 2035 that when a person gave away assets within three years of their death, the presumption would arise that the transfer was done “in contemplation” of death and the gifts would be drawn back into the estate for estate tax purposes. This law led to ridiculous cases where the relatives of extremely elderly individuals were trotted before an IRS investigator to testify that the decedent was full of vigor and planned to live forever (or at least another three years) in an effort to rebut this presumption and avoid the imposition of estate tax. In the end, everyone decided that it was better to have a bright line rule that, in nearly all circumstances, gifts made within three years of death were always drawn back into the estate. This rule may not be perfect, but at least everyone understands it and can work within the confines it presents.
I would argue that a bright line approach might be better in this case as well. Whatever the final rule turns out to be, taxpayers should be able to fully understand the consequences of their expatriation before they take such action and should not have the ultimate outcome hinge on the uncertain possibility of rebutting a legal presumption.