August 2012 Bar Bulletin
International Taxation: It's Not Just for Global Corporations Anymore
By Jennifer Coates
People tend to think of international tax as a world inhabited by global corporations such as Microsoft, Google and Toyota, or by billionaires trying to shelter large amounts of cash in off-shore bank accounts. However, the reality is that these rules can have implications for even ordinary individuals who might have business or personal ties across the U.S. border, perhaps in Canada (a not uncommon situation here in Washington).
This article highlights very generally some potential tax results that can catch people off guard when relocating out of the United States and/or transferring assets across the U.S. border.1 For the sake of simplicity, the potential impact of these rules is illustrated in a hypothetical.
Resident alien ("RA") is a Canadian citizen with a green card who has been living in the United States since 2006. RA owns between 60 and 100 percent of various start-up companies, as well as some commercial and residential real estate held through Washington limited liability companies.
RA wishes to relinquish his green card and retire in Canada near family. For estate tax planning, RA has been advised to undertake a two-step restructuring of his assets in conjunction with his emigration from the United States, first incorporating his LLC holdings in one or more U.S. holding corporations ("USCO")2 and then transferring the USCO shares to one or more Canadian holding corporations ("CANCO") to be owned by him.3
RA seeks advice on the U.S. federal income tax consequences of these two steps.4 The proposal, in fact, raises some very complex U.S. federal income tax issues.5
Potentially Applicable Rules and Suggested Mitigation
Section 877A of the Internal Revenue Code imposes a broad market-to-market "exit tax" on covered expatriates, treating them as though all of their assets were sold for fair market value on the day before they expatriated. The tax applies to expatriating U.S. citizens and "long term residents"6 who: (a) have a net worth of $2 million or more; (b) had an average annual net income tax of $151,000 or more for the five years preceding expatriation;7 or (c) fail to certify that they have satisfied their U.S. tax obligations for the five preceding years.
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