US Tax Laws Pushing Americans to Expatriate; OVDI “Arbitrary and Capricious” – An Interview With Bill Yates – Former Attorney, Office of Associate Chief Counsel (International), IRS, continued…

TaxConnections Picture - Tax BriefcaseThis is a continuation from yesterday’s post of the interview with Bill Yates:

Yates: Everyone in the room who knew me turned and looked at me. I’ve been involved in horses since I was five. Believe me, no one makes $50 million raising bucking horses. That is patently ridiculous. What it shows is that LGT would accept any explanation regarding the source of a prospective client’s funds or assets. Then, the UBS scandal broke. That’s when things really got ridiculous.

La Torre Jeker: How?

Yates: Well, we started seeing how European governments were shocked, I mean shocked, really, to find out that any of their banks could be involved in promoting and facilitating tax evasion. Give me a break. How could you live in the EU and not know about what was going on in Switzerland, Lichtenstein and the Caribbean tax havens, many of which by the way are British protectorates?

La Torre Jeker: So, are you saying that foreign banks had it coming to them? I mean FATCA.

Yates: In a way, I guess I am. It’s not like they didn’t know that we knew and didn’t like what was going on. Congress passed the Bank Secrecy Act in 1970. Eleven years later, the Gordon Report was submitted to the Commissioner of Internal Revenue, the Assistant Attorney General (Tax Division) and the Assistant Secretary of the Treasury (Tax Policy). The report provides a detailed analysis of tax evasion through the use of tax havens.

I was also very much involved in developing learning programs for the IRS regarding the use of asset protection trusts (APT). During the course of my involvement, we learned that a U.S. firm had helped an otherwise obscure island jurisdiction design its very own asset protection statute. It was a work of art, or a poke in the eey, depending on your point of view. In order to upset a transfer to an APT set up in this jurisdiction as fraudulent, it would have to be proved “beyond a reasonable doubt” that the transfer was intended to defraud the victim. Enough is enough.

La Torre Jeker: Let’s talk about some of the specifics of the RBT Proposal.

Yates: Sure. I’ll focus on some points in the RBT Proposal that got my attention.

Under RBT, Americans living abroad would not be subject to tax on foreign source income. They would be subject to U.S. tax through withholding on U.S. source income. This is fine, it’s clean and, therefore acceptable, assuming ACA’s revenue estimates for RBT are accurate.

In order to be subject to RBT, an American establishing residence abroad must file an application for the Departure Certificate with the IRS that provides proof of both foreign residence and residence in a foreign “tax home’ and pay any U.S. income taxes due up to the date of establishment of overseas residence, and pay a Departure Tax, if applicable.  I assume that an American applying for a Departure Certificate would be subject to the same standards as are applicable for the section 911 exclusion. This sounds acceptable.  The RBT Proposal provides that, “No renewal or further notification would be required, as long as the non-resident American remains in the same country; if the individual moves to another country, he or she would be required to inform the IRS of the new address overseas. From a compliance stand point, I am not comfortable with this. How would IRS find out if an American moves to a tax haven?

La Torre Jeker: Well, the RBT Proposal provides that the taxpayer would have to notify IRS about any change in tax home.

Yates: Uh, huh. Right.

La Torre Jeker: You sound like you’re still working at IRS.

Yates: No, I’m working for the American taxpayer. That was true when I was at IRS; I was working for the American taxpayer. Anyway, the whole Departure Certificate procedure is problematic. The RBT Proposal provides that filing a U.S. resident tax return when a U.S. citizen moves back to the U.S. automatically makes the Departure Certificate expire. What if the taxpayer does not file a U.S. tax return?

In general, the RBT Proposal provides, among other things, that “. . . Americans abroad who return to the United States to reside would again be automatically subject to the ordinary tax rules for U.S. residents; their Departure Certificate would automatically expire. However, the market value of all assets, except U.S. real estate, U.S. based pension funds and possibly U.S. based family company shares, held on the date of taking up U.S. residence would become the cost basis for future capital gains determination.”

How is IRS going to know that an American has returned to reside in the United States? This is going to require coordination between IRS and USCIS, which maybe easier said than done. IRS can’t send USCIS a list of taxpayers who have been issued Departure Certificates for purposes of some kind of USCIS “watch list.” This would not be legally possible. Is USCIS going to send IRS a list of names of all Americans who are coming back to the States? For what purpose; vacation, medical reasons, Christmas? This would also be administratively impossible.

La Torre Jeker: What about the Departure Tax part of the RBT Proposal? It is similar to US current tax law expatriation provisions found in Section 877A.

Yates: The RBT Proposal Departure Tax changes the current thresholds for application of the mark-to-market regime as follows:

The Departure Tax would apply if –

• total assets exceed $5 million, excluding U.S. real estate, foreign residence and U.S-based and foreign-based pension funds and retirement savings accounts, or average income tax over the last five years exceeds $190,000, indexed to inflation, and
• unrealized capital gains on foreign assets exceed $650,000, indexed to inflation.

I have two comments. First, I agree with raising the asset and income tax thresholds. We always thought they were too low. Second, regarding the unrealized capital gains test on foreign assets raises compliance concerns. How can IRS verify the basis and current market values of foreign assets? However, having said that, IRS faces the same problem regarding a taxpayer’s valuation of foreign assets for purposes of determining the application of section 877A expatriation provisions. Third, the RBT Proposal provides that the Departure Tax “. . . should be viewed as an anti-abuse measure aimed at wealthy individuals who might consider leaving the U.S. for tax reasons.” This would take IRS back to the private letter ruling (PLR) days under a previous version of section 877. The National Office was put in the position of being a fact-finding body regarding the intent of an individual contemplating expatriation. The PLR process was a disaster. The National Office is not a fact-finding body; fact-finding is for the Field. How is an attorney sitting in the National Office expected to be able to determine if one of the principal purposes of expatriation is the avoidance of U.S. taxes? So, in my opinion, that part of the RBT Proposal is a non-starter.

La Torre Jeker: Implementing the RBT begins on page 14 of the RBT Proposal. Do you have any comments on the implementation of the RBT Proposal?

To be continued…

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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