Marlon Brando did it. Yul Brynner did it. John Huston did it. And Elizabeth Taylor tried to do it—but it didn’t work. Four blockbuster actors with more in common than just being Oscar winners. In fact, what links them together beyond their Academy Awards is the fact that they all gave up—or at least tried to give up—their U.S. citizenship.
Last year, 1,781 U.S. individuals followed in those Hollywood legends’ footsteps and renounced their U.S. citizenships or U.S residencies. The numbers are staggering. In 2008, just 231 individuals formally renounced their U.S. residencies or citizenships. That’s a sixfold increase from 2008 to 2011. And although the Internal Revenue Service hasn’t published its list of U.S. citizens and long-term residents who turned in their passports in 2012, the numbers for this year are expected to top last year’s. Over the past 12 months, we’ve already seen Facebook co-founder Eduardo Saverin and Grammy nominated songwriter Denise Rich trade in their U.S. citizenship for Singapore and Austria, respectively.
Clearly, something’s going on. Some say that high-net-worth individuals are taking this drastic step because of the likelihood of higher tax rates in 2013. Not only are the top federal income tax rates and capital gains tax rates set to increase, but also, even if Congress extends this year’s income and capital gains tax rates temporarily through next year, the new 3.8 percent Medicare contribution tax on net investment income for individuals with adjusted gross income above $200,000 (above $250,000 for couples) will take effect in 2012.
U.S. Tax Laws
The elephant in the room is most likely the way the United States currently taxes its citizens. Unlike most countries, the United States taxes its citizens on their “worldwide” income. No matter where you’re living or where your money is coming from, the IRS is pretty clear:
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.1
So if you, or the money you earned stays in another country, you still have to pay U.S. taxes. That’s a huge financial sticking point for many high-net-worth individuals with ties to other jurisdictions.
But making the decision to give up U.S. citizenship is costly, too. For those individuals who relinquished U.S. citizenship on or after June 16, 2008, Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 kicks in. That act added new Internal Revenue Code Sections 877A and 2801, which apply to any individual who expatriated and 1) had an average annual net income tax liability for the five years ending before the date of expatriation of more than a specified amount (that is, more than $145,000 for 2009 and 2010, $147,000 for 2011, and $151,000 for this year); 2) had a net worth of $2 million or more on the date of expatriation; or 3) failed to certify on Form 8854 that he complied with all U.S. federal tax obligations for the five years preceding the date of expatriation. Section 877A imposes a mark-to-market regime, which means generally that all of an expat’s property is deemed sold for its fair market value on the day before the expatriation date. So, anyone who gives up his U.S. citizenship is treated as if he sold all of his property the day before he renounced being an American—even if he continues to own the property. While there’s an exclusion amount (for those renouncing citizenship this year, the exclusion amount is $651,000), the federal income tax on the net unrealized gain on worldwide property can amount to a pretty hefty exit tax.
Who Recently Jumped Ship?
Less than three months ago, on April 30, the name “Denise Eisenberg” appeared in the Federal Registrar's Quarterly Publication of Individuals Who Have Chosen To Expatriate. Turns out that “Denise Eisenberg” is the maiden name of “Denise Rich,” the Grammy-nominated songwriter and ex-wife of billionaire commodities trader Marc Rich. Apparently, Rich had turned in her passport back in November 2011. When the news broke in the press, Rich quickly issued a statement that she wants to live in London to be closer to her friends, family and longtime life partner, Peter Cervinka, who’s an Austrian citizen. Although Rich was born in Massachusetts, she already held dual citizenship with Austria through her Austrian-born father, Emil Eisenberg.
While Rich’s exact net worth at the time of her renunciation is unknown, she did own a 157-foot yacht, “Lady Joy,” as well as a mansion in Aspen, Colo. And just last week, David Geffen, the co-founder of Dreamworks, bought Richards’ 12,000 square foot Fifth Avenue duplex for $54 million. In January of this year, Rich had listed the seven bedroom, nine bathroom, three kitchen apartment with a 3,000-plus square foot terrace and gym, for $65 million. Although the apartment sold for $11 million less than her asking price, Rich still received quite a chunk of change.
But perhaps the most notable defector over the past year is 30-year-old Eduardo Saverin, the co-founder of Facebook, who renounced his citizenship before Facebook’s initial public offering two months ago. His name appeared on the Federal Register’s list on April 30, but Saverin turned in his passport in September 2011. Born in Brazil, Saverin became a U.S. citizen in 1998 and moved to Singapore about three years ago. Singapore, unlike the United States, has no capital gains tax (which, in the United States, is currently 15 percent and likely to increase to 20 percent in 2013) and its highest income tax bracket is 20 percent (compared with the top bracket in the United States of 35 percent this year, set to increase to 39.6 percent in 2013). In a Securities and Exchange Commission filing about two months ago, Saverin listed his shares of Facebook as a little under 2 percent, which translates to about $2 billion. His total net worth is estimated to be about $2.8 billion.2 And one Bloomberg analysis says that because Saverin gave up his U.S. citizenship back in September, he stands to save at least $67 million in federal income taxes on his Facebook shares alone.3
Congressmen Take Offense
The news of Saverin renouncing his citizenship caught the ire of a few senators, including Charles E. Schumer (D-N.Y.) and Robert P. Casey, (D-Pa.). Two months ago, Sen. Schumer issued a press release announcing his plans to “Stop Facebook Co-Founder From Dodging Taxes by Dropping U.S. Citizenship.”4 Sen. Schumer didn’t mince any words:
We aren’t going to let him get away with it so easily. It’s infuriating to see someone sell out the country that welcomed him and kept him safe, educated him and helped him become a billionaire. This is a great American success story gone horribly wrong. We plan to put a stop to this tax avoidance scheme. There should be no financial gain from renouncing your country.5
Nor did Sen. Casey:
Mr. Saverin has benefited greatly from being a citizen of the United States but he has chosen to cast it aside and leave U.S. taxpayers with the bill. Renouncing citizenship to simply avoid paying your fair share is an insult to middle class Americans and we will not accept it.6
On May 17, Sen. Schumer and Sen. Casey, along with Sen. Richard Blumenthal (D-Conn.) and Sen. Thomas Harkin (D-Iowa) introduced S. 3205, the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act). Sen. Benjamin Cardin (D-Md.) joined as a co-sponsor on May 23. The proposed act presumes that an individual with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years has renounced his citizenship for tax avoidance purposes. The proposal allows an individual to demonstrate to the IRS that he had a legitimate reason to give up citizenship (that is, an individual has the opportunity to demonstrate that his renouncing citizenship didn’t result in a substantial reduction in taxes). If the IRS is convinced, no penalties will apply. However, if the IRS finds that an individual renounced citizenship for substantial tax purposes, the IRS will prospectively impose a 30 percent capital gains tax on that individual’s future investment gains, no matter what country he resides in. And here’s the clincher: So long as that individual avoids paying those taxes, he’s barred from reentering the United States—forever.
Sen. Schumer and Casey justify the immigration bar because of their frustration with current law that allows an individual to return to the United States for 60 days per year, without any tax obligation. Their proposal would “close the doors of the U.S. forever”7 to individuals who continue to avoid paying their taxes.
The proposal is currently under consideration by the Senate Committee on Finance.
Who’s Next…and Why?
Not all ex-U.S. citizens are shy about their tax reasons for leaving the United States. And in fact, some ex-pats are quite comfortable discussing the impact of taxes on their decision to renounce citizenship. Minneapolis-born Monty Python comic Terry Gilliam obtained dual citizenship with Great Britain in 1968 and then gave up his U.S. citizenship in 2006. When questioned about his motive for turning in his U.S. passport, Gilliam, the only member of the Monty Python troupe not born in Great Britain, responded:
The reality is, when I kick the bucket, American tax authorities assess everything I own in the world—everything I own is outside of America—and then tax me on it, and that would mean my wife would probably have to sell our house to pay the taxes.8
With the proposed Ex-PATRIOT Act looming in the horizon, will other high-net-worth individuals be more likely to follow in the footsteps of Rich and Saverin and cite nontax reasons for their departure? Or, will ultra-affluent individuals be more like Gilliam, making no bones about the motive to pack up and leave before the 2013 tax hikes? Either way, it remains to be seen who else will bail out of the United States in the next five months.
2. Brian Solomon, “Eduardo Saverin’s Net Worth Publicly Revealed: More Than $2 Billion in Facebook Alone” (May 18, 2012), http://www.forbes.com/sites/briansolomon/2012/05/18/eduardo-saverins-net-worth-publicly-revealed-more-than-2-billion-in-facebook-alone/.
3. Jesse Drucker, “Facebook Saverin May Save $67 Million on U.S. Tax Bill” (May 16, 2012), http://www.bloomberg.com/news/2012-05-16/facebook-s-saverin-may-save-67-million-on-u-s-tax-bill.html.
4. “Schumer, Casey Announce Plan to Stop Facebook Co-Founder From Dodging Taxes by Dropping U.S. Citizenship,” May 17, 2012, http://www.schumer.senate.gov/record.cfm?id=336808.
6. “Casey, Schumer Announce Plan to Stop Facebook Co-Founder From Dodging Taxes by Dropping U.S. Citizenship” (May 17, 2012), http://www.casey.senate.gov/newsroom/press/.
7. See supra note 4.
8. Tasha Robinson, “Interview With Terry Gilliam” (Oct. 11, 2006), http://www.avclub.com/articles/terry-gilliam,14021/.