Introduction – The S. 877A(g)(b)(B) “born a dual citizen” defense to being a “covered expatriate”
2023 Update: Introduction and summary
Boris Johnson among record number to renounce American citizenship in 2016 – But, he likely benefited from the @dualcitizenship from birth exemption to the 877A Exit Tax – making his renunciation the best investment money can buy! https://t.co/1WDhqdpPo2
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 6, 2023
“Covered expatriates” are (1) subject to the 877A Exit tax and (2) subject to the 2501 “Covered Gift” problem. U.S. citizenship taxation makes the 877A Exit tax particularly brutal for Americans abroad – possibly resulting in the confiscation of their non-US pensions. But, “citizenship” is also used to create an exemption to “covered expatriate” status for those who meet the dual citizenship requirements found in Internal Revenue Code 877A.
Former U.K. Prime Minister Boris Johnson was a dual American/British citizen from birth. His renunciation of U.S. citizenship is a public record. I suspect that he was able to avoid “covered expatriate” status by using the dual citizenship from birth exemption.
Let’s start with the text of Internal Revenue Code 877A
(g) Definitions and special rules relating to expatriation For purposes of this section—
(1) Covered expatriate
(A) In generalThe term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs,
Think about it:
U.S. citizenship taxation means that the circumstances of one’s birth determine the outcome of one’s life (as long as one remains a U.S. citizen).
Citizenship-based non-taxation and the new “caste” system of American citizenship
The dual citizen exemption to the Exit Tax is a form of citizenship-based “non-taxation”. The dual citizenship exemption to the Exit Tax has created a “preferred class” of U.S. citizens which is in effect a modern day “caste” system of citizenship.
The “Gift” of dual citizenship from birth
Multiple citizenships are generally a benefit. Because of U.S. citizenship taxation, those U.S. citizens who are “dual citizens” from birth have a “preferred” kind of U.S. citizenship. They are always able to avoid “covered expatriate status” and the associated difficulties.
Four possible ways of acquiring “dual citizenship” at birth (and there may be more):
1. Citizenship of parent: A child may be born a dual citizen by being born in the United States to a parent who is a citizen of another country. For example, a child born in the US to a Canadian citizen parent would be a dual citizen from birth.
2. Ancestry: This is based on the family lineage. Commonly associated with Ireland and Italy. The issue here is whether the citizenship is automatic at birth or is dependent on a later registration. There is a difference between automatic citizenship at birth and the right to a citizenship.
3. Child born abroad to U.S. parent(s): For example, some U.S. citizens see the value of having their children born in Mexico (a country that confers citizenship at birth).
4. Surrogacy: This is a new and interesting topic.
Note that these four ways can overlap.
2016 Original Post:
The “dual citizen” exemption to the S. 877A “Exit Tax” rules is not well understood. It is also not as simple (who could have known) as it initially appears. The focus of this discussion will be on being born both a Canadian citizen and a U.S. citizen. Although the post is “Canada centric” (hey, I am a lawyer in Canada), it will help anybody hoping to benefit from this wonderful “defense”. For the benefit of those born before February 15, 1977 (the date of the second Canada Citizenship Act), I am required to explore some of the history and difficulties of the the 1947 Canada Citizenship Act. This will lead me into a discussion of the “Lost Canadians” citizenship issue – pioneered by Don Chapman.
This is the 1st of seven posts analyzing the “dual citizen exemption” to the S. 877A Exit Tax which is found in S. 877A(g)(1)(B) of the Internal Revenue Code. Please remember that the “dual citizen exemption” is available ONLY to those who meet the “five year tax compliance test”.
2. The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?
3. The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?
4. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)
5. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian”
7. The S. 877A “Dual Citizen” exemption: “MUST certify tax compliance for the five years prior to relinquishment”
Here, we go, Post number 1 …
If @SenTedCruz had NOT renounced CDN citizenship he could have escaped US S. 877A Exit Tax https://t.co/vHaMojxgzM pic.twitter.com/QuAVA8qfx1
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 16, 2016
U.S. Senator Ted Cruz and London Mayor Boris Johnson are “high profile” examples of people who have the “unwanted citizenship” of the countries of their birth. Each of them has found the citizenship of the country of his birth to be inconvenient.
Ted Cruz was born in 1971 in Canada. He was therefore born a Canadian citizen. He claims to have been born to a U.S. citizen mother and was therefore a U.S. citizen by birth. (Whether he qualifies as a “natural born citizen” is a different question.) As a Canadian citizen he had the right (prior to renouncing Canadian citizenship) to live in Canada. Had Mr. Cruz, moved back to Canada, he could have avoided the U.S. S. 877A Exit Tax. Incredible but true. It will be interesting to see whether Mr. Cruz regrets renouncing his Canadian citizenship. As you will see, by renouncing Canadian citizenship, Mr. Cruz surrendered his right to avoid the United States S. 877A Exit Tax.
Here is why …
The S. 877A Exit Tax rules in the Internal Revenue Code, are the most punitive in relation to U.S. citizens living outside the United States (AKA Americans abroad). To put it simply, with respect to Americans abroad, the S. 877A Exit Tax rules:
– operate to confiscate assets that are located in other nations; and
– operate to confiscate assets that were acquired by U.S. citizens after they moved from the United States.
There is not and has never been an “Exit Tax” anywhere else that operates in this way. The application of the S. 877A Exit Tax to assets located in other nations, is both an example of “American Exceptionalism” at its finest and a strong deterrent to exercising the right of expatriation granted in the “Expatriation Act of 1868“.
But, the “Exit Tax” applies ONLY to “Covered Expatriates” and “dual citizens from birth” can avoid being “Covered Expatriates” …
As has been previously discussed, the Exit Tax applies ONLY to “covered expatriates“. There are two statutory defenses to becoming a “covered expatriate”. This post is to discuss the “dual citizen from birth” defense to being treated as a “covered expatriate”. I have discovered that this defense is NOT as well known or understood as it should be.
The statute granting the “dual citizen from birth” defense to “Covered Expatriate” status reads as follows:
(g) Definitions and special rules relating to expatriation
For purposes of this section—
(1) Covered expatriate(A) In general
The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2). (JOHN RICHARDSON NOTE: THIS MEANS THAT THE PERSON HAS MET ANY OF THE INCOME TEST, ASSET TEST OR COMPLIANCE TEST.)
(B) Exceptions
An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) (JOHN RICHARDSON NOTE: ONE MUST STILL MEET THE 5 YEAR TAX COMPLIANCE TEST TO AVOID BEING A COVERED EXPATRIATE) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or
Okay, it’s not quite as simple as it looks. Here are the requirements:
(1) Became “at birth” a citizen of the United States AND a citizen of another country
This means that one was born in the United States and acquired dual citizenship from your parents or you were born outside the United States to American(s) abroad.
(2) As of the expatriation date (the date you relinquished U.S. citizenship you continued to be a citizen of THAT specific country that you acquired dual citizenship from birth.
(3) You are taxed “as a resident” of the country referred to in paragraph (2) above.
Note that this says “taxed as a resident”. Does that you mean that you must reside in that country? What if the country does NOT impose taxes on its residents?
(4) Has not been a U.S. resident (as defined in the Internal Revenue Code) for not more than 10 of the last 15 years.
This means that the person has NOT met the requirements of the “substantial presence test” which is described as follows:
This is a punishment for NOT having been born a “dual citizen”
Here is why.
In the current environment of FATCA, FBAR, CBT, PFIC, OVDP, Streamlined, Foreign Trusts, etc., the vast majority of Americans abroad:
A. Are finding it very difficult to exist as a U.S. tax compliant U.S. citizen abroad.
Those Americans abroad who are compliant with U.S. tax laws have agreed to live life under extreme disability. See: “How To Live Outside The United States In An FBAR and FATCA World“. Remember that “When an American is in Rome, that American must live as a Homelander”.
B. Are feeling that they are forced to renounce their U.S. citizenship.
(See the series of posts by Rachel Heller where she discusses her “renunciation” experience. Of particular interest is her post 5 – “The Irony Of Renouncing Under Duress” – where she addresses the issue of whether her renunciation really was voluntary.)
Those Americans abroad who were NOT born “dual citizens” will be subject to the Exit Tax if they become “covered expatriates”. Therefore, they are under pressure to BOTH renounce U.S. citizenship and to renounce before they become “covered expatriates”. In other words, they must “get out now!”
Those Americans abroad who WERE born dual citizens, do have to deal with the compliance problems but do NOT have to fear becoming a covered expatriate (assuming that they meet the “U.S. tax compliance test).
Therefore, it is easier for those who are “dual citizens from birth” to remain U.S. citizens (for at least a longer period of time). This post has been partly motivated by the interesting discussion by a young woman in the UK who was born a dual U.S./U.K. citizen who is dealing with her discovery that she must file U.S. taxes.
Think of it:
S. 877A of the Internal Revenue Code is most punitive with respect to American citizens who where NOT also born citizens of another nation. As I have repeatedly said, when it comes to this kind of injustice:
#youcantmakethisup
By the way, if you would like to see the brutality of the Exit Tax in action and how it discriminates against those who were NOT born dual citizens, read these examples of “The S. 877A Exit Tax In Action – 5 Examples (including the effect on those who were NOT born as dual citizens”).
Conclusion …
Those who were born dual citizens may have “won the birth lottery”! But, Ted Cruz doesn’t seem to have realized this.
John Richardson – Follow me on Twitter @Expatriationlaw
You can also avoid the exit tax generally, if you are deported. We need more tax-free deportations.