26 U.S.C. § 877 : US Code - Section 877: Expatriation to avoid tax

Search 26 U.S.C. § 877 : US Code - Section 877: Expatriation to avoid tax

(a) Treatment of expatriates
(1) In general
Every nonresident alien individual to whom this section applies
and who, within the 10-year period immediately preceding the
close of the taxable year, lost United States citizenship shall
be taxable for such taxable year in the manner provided in
subsection (b) if the tax imposed pursuant to such subsection
(after any reduction in such tax under the last sentence of such
subsection) exceeds the tax which, without regard to this
section, is imposed pursuant to section 871.
(2) Individuals subject to this section
This section shall apply to any individual if -
(A) the average annual net income tax (as defined in section
38(c)(1)) of such individual for the period of 5 taxable years
ending before the date of the loss of United States citizenship
is greater than $124,000,
(B) the net worth of the individual as of such date is
$2,000,000 or more, or
(C) such individual fails to certify under penalty of perjury
that he has met the requirements of this title for the 5
preceding taxable years or fails to submit such evidence of
such compliance as the Secretary may require.
In the case of the loss of United States citizenship in any
calendar year after 2004, such $124,000 amount shall be increased
by an amount equal to such dollar amount multiplied by the cost-
of-living adjustment determined under section 1(f)(3) for such
calendar year by substituting "2003" for "1992" in subparagraph
(B) thereof. Any increase under the preceding sentence shall be
rounded to the nearest multiple of $1,000.
(b) Alternative tax
A nonresident alien individual described in subsection (a) shall
be taxable for the taxable year as provided in section 1 or 55,
except that -
(1) the gross income shall include only the gross income
described in section 872(a) (as modified by subsection (d) of
this section), and
(2) the deductions shall be allowed if and to the extent that
they are connected with the gross income included under this
section, except that the capital loss carryover provided by
section 1212(b) shall not be allowed; and the proper allocation
and apportionment of the deductions for this purpose shall be
determined as provided under regulations prescribed by the
Secretary.
For purposes of paragraph (2), the deductions allowed by section
873(b) shall be allowed; and the deduction (for losses not
connected with the trade or business if incurred in transactions
entered into for profit) allowed by section 165(c)(2) shall be
allowed, but only if the profit, if such transaction had resulted
in a profit, would be included in gross income under this section.
The tax imposed solely by reason of this section shall be reduced
(but not below zero) by the amount of any income, war profits, and
excess profits taxes (within the meaning of section 903) paid to
any foreign country or possession of the United States on any
income of the taxpayer on which tax is imposed solely by reason of
this section.
(c) Exceptions
(1) In general
Subparagraphs (A) and (B) of subsection (a)(2) shall not apply
to an individual described in paragraph (2) or (3).
(2) Dual citizens
(A) In general
An individual is described in this paragraph if -
(i) the individual became at birth a citizen of the United
States and a citizen of another country and continues to be a
citizen of such other country, and
(ii) the individual has had no substantial contacts with
the United States.
(B) Substantial contacts
An individual shall be treated as having no substantial
contacts with the United States only if the individual -
(i) was never a resident of the United States (as defined
in section 7701(b)),
(ii) has never held a United States passport, and
(iii) was not present in the United States for more than 30
days during any calendar year which is 1 of the 10 calendar
years preceding the individual's loss of United States
citizenship.
(3) Certain minors
An individual is described in this paragraph if -
(A) the individual became at birth a citizen of the United
States,
(B) neither parent of such individual was a citizen of the
United States at the time of such birth,
(C) the individual's loss of United States citizenship occurs
before such individual attains age 18 1/2 , and
(D) the individual was not present in the United States for
more than 30 days during any calendar year which is 1 of the 10
calendar years preceding the individual's loss of United States
citizenship.
(d) Special rules for source, etc.
For purposes of subsection (b) -
(1) Source rules
The following items of gross income shall be treated as income
from sources within the United States:
(A) Sale of property
Gains on the sale or exchange of property (other than stock
or debt obligations) located in the United States.
(B) Stock or debt obligations
Gains on the sale or exchange of stock issued by a domestic
corporation or debt obligations of United States persons or of
the United States, a State or political subdivision thereof, or
the District of Columbia.
(C) Income or gain derived from controlled foreign corporation
Any income or gain derived from stock in a foreign
corporation but only -
(i) if the individual losing United States citizenship
owned (within the meaning of section 958(a)), or is
considered as owning (by applying the ownership rules of
section 958(b)), at any time during the 2-year period ending
on the date of the loss of United States citizenship, more
than 50 percent of -
(I) the total combined voting power of all classes of
stock entitled to vote of such corporation, or
(II) the total value of the stock of such corporation,
and
(ii) to the extent such income or gain does not exceed the
earnings and profits attributable to such stock which were
earned or accumulated before the loss of citizenship and
during periods that the ownership requirements of clause (i)
are met.
(2) Gain recognition on certain exchanges
(A) In general
In the case of any exchange of property to which this
paragraph applies, notwithstanding any other provision of this
title, such property shall be treated as sold for its fair
market value on the date of such exchange, and any gain shall
be recognized for the taxable year which includes such date.
(B) Exchanges to which paragraph applies
This paragraph shall apply to any exchange during the 10-year
period beginning on the date the individual loses United States
citizenship if -
(i) gain would not (but for this paragraph) be recognized
on such exchange in whole or in part for purposes of this
subtitle,
(ii) income derived from such property was from sources
within the United States (or, if no income was so derived,
would have been from such sources), and
(iii) income derived from the property acquired in the
exchange would be from sources outside the United States.
(C) Exception
Subparagraph (A) shall not apply if the individual enters
into an agreement with the Secretary which specifies that any
income or gain derived from the property acquired in the
exchange (or any other property which has a basis determined in
whole or part by reference to such property) during such 10-
year period shall be treated as from sources within the United
States. If the property transferred in the exchange is disposed
of by the person acquiring such property, such agreement shall
terminate and any gain which was not recognized by reason of
such agreement shall be recognized as of the date of such
disposition.
(D) Secretary may extend period
To the extent provided in regulations prescribed by the
Secretary, subparagraph (B) shall be applied by substituting
the 15-year period beginning 5 years before the loss of United
States citizenship for the 10-year period referred to therein.
In the case of any exchange occurring during such 5 years, any
gain recognized under this subparagraph shall be recognized
immediately after such loss of citizenship.
(E) Secretary may require recognition of gain in certain cases
To the extent provided in regulations prescribed by the
Secretary -
(i) the removal of appreciated tangible personal property
from the United States, and
(ii) any other occurrence which (without recognition of
gain) results in a change in the source of the income or gain
from property from sources within the United States to
sources outside the United States,
shall be treated as an exchange to which this paragraph
applies.
(3) Substantial diminishing of risks of ownership
For purposes of determining whether this section applies to any
gain on the sale or exchange of any property, the running of the
10-year period described in subsection (a) and the period
applicable under paragraph (2) shall be suspended for any period
during which the individual's risk of loss with respect to the
property is substantially diminished by -
(A) the holding of a put with respect to such property (or
similar property),
(B) the holding by another person of a right to acquire the
property, or
(C) a short sale or any other transaction.
(4) Treatment of property contributed to controlled foreign
corporations
(A) In general
If -
(i) an individual losing United States citizenship
contributes property during the 10-year period beginning on
the date the individual loses United States citizenship to
any corporation which, at the time of the contribution, is
described in subparagraph (B), and
(ii) income derived from such property immediately before
such contribution was from sources within the United States
(or, if no income was so derived, would have been from such
sources),
any income or gain on such property (or any other property
which has a basis determined in whole or part by reference to
such property) received or accrued by the corporation shall be
treated as received or accrued directly by such individual and
not by such corporation. The preceding sentence shall not apply
to the extent the property has been treated under subparagraph
(C) as having been sold by such corporation.
(B) Corporation described
A corporation is described in this subparagraph with respect
to an individual if, were such individual a United States
citizen -
(i) such corporation would be a controlled foreign
corporation (as defined in (!1) 957), and
(ii) such individual would be a United States shareholder
(as defined in section 951(b)) with respect to such
corporation.
(C) Disposition of stock in corporation
If stock in the corporation referred to in subparagraph (A)
(or any other stock which has a basis determined in whole or
part by reference to such stock) is disposed of during the 10-
year period referred to in subsection (a) and while the
property referred to in subparagraph (A) is held by such
corporation, a pro rata share of such property (determined on
the basis of the value of such stock) shall be treated as sold
by the corporation immediately before such disposition.
(D) Anti-abuse rules
The Secretary shall prescribe such regulations as may be
necessary to prevent the avoidance of the purposes of this
paragraph, including where -
(i) the property is sold to the corporation, and
(ii) the property taken into account under subparagraph (A)
is sold by the corporation.
(E) Information reporting
The Secretary shall require such information reporting as is
necessary to carry out the purposes of this paragraph.
(e) Comparable treatment of lawful permanent residents who cease to
be taxed as residents
(1) In general
Any long-term resident of the United States who -
(A) ceases to be a lawful permanent resident of the United
States (within the meaning of section 7701(b)(6)), or
(B) commences to be treated as a resident of a foreign
country under the provisions of a tax treaty between the United
States and the foreign country and who does not waive the
benefits of such treaty applicable to residents of the foreign
country,
shall be treated for purposes of this section and sections 2107,
2501, and 6039G in the same manner as if such resident were a
citizen of the United States who lost United States citizenship
on the date of such cessation or commencement.
(2) Long-term resident
For purposes of this subsection, the term "long-term resident"
means any individual (other than a citizen of the United States)
who is a lawful permanent resident of the United States in at
least 8 taxable years during the period of 15 taxable years
ending with the taxable year during which the event described in
subparagraph (A) or (B) of paragraph (1) occurs. For purposes of
the preceding sentence, an individual shall not be treated as a
lawful permanent resident for any taxable year if such individual
is treated as a resident of a foreign country for the taxable
year under the provisions of a tax treaty between the United
States and the foreign country and does not waive the benefits of
such treaty applicable to residents of the foreign country.
(3) Special rules
(A) Exceptions not to apply
Subsection (c) shall not apply to an individual who is
treated as provided in paragraph (1).
(B) Step-up in basis
Solely for purposes of determining any tax imposed by reason
of this subsection, property which was held by the long-term
resident on the date the individual first became a resident of
the United States shall be treated as having a basis on such
date of not less than the fair market value of such property on
such date. The preceding sentence shall not apply if the
individual elects not to have such sentence apply. Such an
election, once made, shall be irrevocable.
(4) Authority to exempt individuals
This subsection shall not apply to an individual who is
described in a category of individuals prescribed by regulation
by the Secretary.
(5) Regulations
The Secretary shall prescribe such regulations as may be
appropriate to carry out this subsection, including regulations
providing for the application of this subsection in cases where
an alien individual becomes a resident of the United States
during the 10-year period after being treated as provided in
paragraph (1).
(f) Burden of proof
If the Secretary establishes that it is reasonable to believe
that an individual's loss of United States citizenship would, but
for this section, result in a substantial reduction for the taxable
year in the taxes on his probable income for such year, the burden
of proving for such taxable year that such loss of citizenship did
not have for one of its principal purposes the avoidance of taxes
under this subtitle or subtitle B shall be on such individual.
(g) Physical presence
(1) In general
This section shall not apply to any individual to whom this
section would otherwise apply for any taxable year during the 10-
year period referred to in subsection (a) in which such
individual is physically present in the United States at any time
on more than 30 days in the calendar year ending in such taxable
year, and such individual shall be treated for purposes of this
title as a citizen or resident of the United States, as the case
may be, for such taxable year.
(2) Exception
(A) In general
In the case of an individual described in any of the
following subparagraphs of this paragraph, a day of physical
presence in the United States shall be disregarded if the
individual is performing services in the United States on such
day for an employer. The preceding sentence shall not apply if -

(i) such employer is related (within the meaning of section
267 and 707) to such individual, or
(ii) such employer fails to meet such requirements as the
Secretary may prescribe by regulations to prevent the
avoidance of the purposes of this paragraph.
Not more than 30 days during any calendar year may be
disregarded under this subparagraph.
(B) Individuals with ties to other countries
An individual is described in this subparagraph if -
(i) the individual becomes (not later than the close of a
reasonable period after loss of United States citizenship or
termination of residency) a citizen or resident of the
country in which -
(I) such individual was born,
(II) if such individual is married, such individual's
spouse was born, or
(III) either of such individual's parents were born, and
(ii) the individual becomes fully liable for income tax in
such country.
(C) Minimal prior physical presence in the United States
An individual is described in this subparagraph if, for each
year in the 10-year period ending on the date of loss of United
States citizenship or termination of residency, the individual
was physically present in the United States for 30 days or
less. The rule of section 7701(b)(3)(D) shall apply for
purposes of this subparagraph.