MARCH 2010

• On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the "HIRE" Act) intending to boost private sector hiring in 2010, principally through payroll forgiveness for Social Security taxes paid on certain new hires and a tax credit for retaining such new hires for at least one year thereafter. While providing incentives for new hiring, the estimated $18 billion cost of the HIRE Act is by no means insubstantial. Congress and the President believe that these costs will be offset, at least in part, through increased taxation, information reporting and enforcement in the area of offshore accounts and foreign trusts under the ‘offset provisions’ of HIRE known as the Foreign Account Tax Compliance Act (FATCA or informally FATCAt). This legislation already has impacted many taxpayers, worldwide.
  
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OCTOBER 2009

• In Notice 2009-85 (issued 15th October) the IRS gave us long-awaited guidance concerning the “exit tax” regime in new section 877A of the Internal Revenue Code. That section applies to a “covered expatriate,” which is an individual that renounces either their U.S. citizenship or their long-term permanent resident (a.k.a. “green card”) status and has a net worth or level of income that exceeds statutory thresholds. The imposition is a “deemed sale” of assets, regardless of where any such assets are located, requiring the expatriating taxpayer to recognize gain or loss vis-à-vis the assets…if there is a deemed gain, then a tax will be owed.
  
  The Notice explains the operation of the section (there are complex aspects regarding a taxpayer’s beneficial interests in trusts, retirement plans, etc.), the filing requirements and IRS forms and so forth. It can be criticized on some points but most poignantly in that the Notice requires us to wait for future instruction concerning the novel inheritance tax imposed under new section 2801 (which interfaces with section 877A and imposes a unique tax on any U.S. individuals receiving gifts and bequests emanating from a “covered expatriate”).
  
  As penalizing as the expatriation tax regimes are in theory, now may be the time to expatriate in light of market conditions (and especially if you are a long-term green card holder wishing to leave the U.S.). That is, if you are currently “down,” “breaking even” or not far “up” in the market, it may be possible to avoid all or much of the exit tax. With the foregoing Notice in hand the planning opportunities and limitations are clearer so careful analyses of the statutes and this Notice (and soon, Treasury regulations) are required if you are a U.S. citizen (including a dual citizen) or long-term green card holder considering renouncing such status.
  
  
• The market being in the condition it is, now may be the time for estate planning with hedge fund interests with e.g. grantor retained annuity trusts (GRATs). See “Hedge Fund Discounts” by Formento, Jacobson and Robak, Trusts & Estates vol. 148 no. 10 (October 2009).
  

 

SEPTEMBER 2009

• In Charania Estate v. Commissioner of Revenue (14th September) the Tax Court, in a case of first impression, has upheld a deficiency determination against an estate finding that the decedent and his wife did not avail themselves of the Belgian community property regime after being exiled from Uganda and, therefore, that the entire amount of U.S. company stock held only in his name is includable in his gross estate.
  
  The decedent owned 250,000 shares of Citigroup Inc. stock at the time of his death. The estate claimed that only half the stock was includable in the gross estate because it was community property under Belgian law. The Tax Court ruled against the estate’s claim, opining that the case hinged on whether the couple’s exile from Uganda created a new location of the matrimonial domicile for purposes of the applicable marital property regime. Applying Belgian conflict-of-laws rules, the court found that English law applied to determine the matrimonial domicile. The court examined the two possible principles that might apply under English law to determine domicile. The principle of immutability would require that the law of place of marriage continued to apply after they moved, while the mutability principle requires that the shares be governed by Belgian law. The Tax Court was not persuaded by the estate's argument that the mutability principle applied.
  
  The court found that since the couple never changed their marital property regime as provided for under Belgian law and there was no evidence that they had the intention to change the character of their property, all the stock was includable in Charania’s gross U.S. estate, for the shares were issued by a U.S. chartered company.
  
  Note well, that if the Charania’s had taken a simple planning step of buying/holding the shares through a non-U.S. corporation, under section 2104(a) and there would not have been a U.S. gross estate to tax in the first-place; and thus the community property issue would have been irrelevant as well.
  
  
• Though Delaware has reinstated its estate tax by deciding not to decouple it from the federal state death tax credit, this in no way diminishes Delaware’s status as a hospitable jurisdiction for trusts (e.g. asset protection trusts) created by non-DE residents (at least in the vast majority of cases). See “The Reinstated Delaware Estate Tax: The Truth, the Whole Truth, and Nothing but the Truth,” Nenno and Wolken, T.M. Estates, Gifts and Trusts Journal vol. 34 no. 5 (10th September).