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Florida Tax Review

Abstract

The thesis of this article is that the revised U.S. tax expatriation provisions fail to correct the most important defects of the prior U.S. tax expatriation regimes. Under the new rules, expatriating U.S. citizens and resident aliens subject to the U.S. tax expatriation rules can still avoid U.S. tax on items properly taxable by the U.S. On the other hand, they remain subject to U.S. tax on income that should fall outside of U.S. tax jurisdiction.

In this Article, I argue that the revised rules do not fully eradicate the potential for tax avoidance through tax-motivated expatriation. Instead, the amended rules create new problems. The abandonment of the tax avoidance motive, the elimination of the ruling request procedure, the addition of a bright-line test, and the use of tax rules for determining whether one has expatriated maybe viewed as positive developments. These changes reduce the potential for subjective judgment calls, lessen the administrative burden on the Internal Revenue Service (“IRS”), and broaden the taxpayer base subject to the alternative method. However, the revised provisions still subject expatriates to U.S. tax on certain gains that should be free of U.S. tax. In addition, expatriates can still avoid U.S. tax on accrued gain by holding on to property with accrued gain for the ten-year period during which the alternative method applies. This also creates unequal tax treatment among similarly situated expatriates. Moreover, the revised rules treat U.S. citizens and resident aliens unequally, allowing some exceptions to U.S. citizens that technically cannot be extended to U.S. resident aliens. Last but not least, the expatriation provisions are out of step with international norms, in particular by taxing former U.S. citizens and resident aliens subject to the alternative regime as U.S. persons in any one year during the ten-year period in which they return to the U.S. for as little as thirty-one days a year.

Part II of this article provides a brief overview of the U.S. taxation of U.S. persons and nonresident aliens and highlights the areas relevant in triggering tax-motivated expatriation. Part III examines the alternative method of taxation developed in response to tax-motivated expatriation and compares the FITA and HIPAA expatriation provisions. Part III also examines the problems that plagued the FITA and HIPAA expatriation provisions and ultimately triggered reform. Part IV analyzes the expatriation provisions of the Jobs Act by detailing the U.S. tax effects on expatriating individuals and by highlighting areas in need of reform. Part V argues that Congress should consider adopting a mark-to-market approach for taxing expatriates because such an approach would eliminate the potential for tax avoidance, prevent the U.S. taxation of income accrued after expatriation, eliminate economic inefficiencies caused by the dissimilar tax treatment of U.S.-source and foreign-source income, and would conform to international tax norms. Part VI provides a summary of the key characteristics of the current expatriation regime and briefly outlines the most compelling reasons for the adoption of a mark-to-market regime.

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