Breaking Up With Uncle Sam Can Be Expensive

You are leaving him. But he is an adult, so of course he won’t take it personally. He respects your decision, and he promises to be supportive. This is a free country, after all, and you should be with whomever you want. Painless breakup, right?  Wrong. Uncle Sam is jealous, maybe even vindictive, when it comes to your US citizenship or long-term resident status. One need look no further than the expatriation provisions of the Internal Revenue Code (“IRC”).

If you relinquish citizenship after June 18, 2008, you may be subject to the tax under IRC 877A if you are considered a “covered expatriate.”

IRC 877A imposes a mark-to-market regime, which generally means a covered expatriate is deemed to have sold all of his or her property, at fair market value on the day before the expatriation date.[1] A covered expatriate is considered to own any interest in property that would be taxable as part of his or her gross estate for federal estate tax purposes[2]. However, assets described in IRC 877A(c) are not deemed sold under the constructive sale, which includes interests in nongrantor trusts, certain deferred compensation, and specified tax-deferred accounts. [3]

Fortunately your soon-to-be ex is not entirely unreasonable. The amount otherwise includible in gross income by reason of the deemed sale rule is reduced up to the “exclusion amount,” which was $680,000 for calendar year 2014.[4]

Gain resulting from the hypothetical liquidation in excess of the exclusion amount is included in gross income for the tax year in which expatriation occurs.[5]  If the covered expatriate does not want to cut it off entirely with Uncle Sam, the taxpayer can drag it out by deferring any tax due by posting adequate security with the IRS.[6]

The above provisions only touch upon the complexity of IRC 877A, and the related regulations and notices. Like every aspect of the tax code, IRC 877A is fraught with sub-rules, special rules, and exceptions.

Breaking up can be expensive, especially if you have assets. Get the right advice before you pull the trigger.


— By Michael S. Cooper, Esq., Barnes Law

Michael S. Cooper is associated with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See IRC 877A(a)(1)

[2] See IRS Notice 2009-85

[3] See IRC 877A(c)-(e)

[4] See IRC 877A(a)(3)

[5] See IRC 877A(a)(2)(A)

[6] See IRC 877A(b)(4)