IRC 877 Dual-Citizen Exception & Substantial Contacts

IRC 877 Dual-Citizen Exception & Substantial Contacts

IRC 877 Dual-Citizen Exception & Substantial Contacts  

IRC 877 Dual-Citizen Exception & Substantial Contacts: When it comes time to expatriate from the United States, one of the main concerns for US Citizens and long-term residents is whether or not they will be considered a covered expatriate and subject to IRS rules involving exit tax. Being a covered expatriate means the individual may be subject to potential exit tax consequences — along with potential future gift tax consequences and an increased withholding tax rate for 401K distributions.

Under the Internal Revenue Code section 877 — which is used to define who is in expatriate — there are some exceptions. One exception is for certain dual-citizens.

Let’s review the IRC 877 Dual-Citizen Exception & Substantial Contacts analysis.

877(c)(2)(A) Dual Citizens

As provided by IRC 877:

(2) Dual citizens 

In general

An individual is described in this paragraph if—

  1. the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and
  2. the individual has had no substantial contacts with the United States.”

Which Dual-Citizens are Covered by the IRC 877 Dual Citizen Exception

The IRC 877 dual-citizen exception is very limited, and does not apply to all dual citizens. First, the individual must have been a US citizen at birth and citizen of two countries (aka dual citizen). In addition, the individual must continue to be a citizen of both countries as well.

Therefore, if for any reason the individual gave up their first citizenship, the rule may not apply. For example, if a person became a dual-citizen of the United States and country A at birth, but gave up their citizenship in country A, and instead is now a dual-citizen of the United States and country B (with country B citizenship not being by birth) — the IRS would argue the dual-citizenship rule exception would not apply.

This person could still argue that “became at birth a citizen of United States” is limited to the United States (and not in refrence to “the other country”) — but the IRS will fight it.

Assuming that the taxpayer can make it past the first part of the exception, they must continue onto the next section which indicates that the individual must have had no substantial contacts with United States.

(B) Substantial Contacts

“An individual shall be treated as having no substantial contacts with the United States only if the individual—

(i) was never a resident of the United States (as defined in section 7701(b)),

(ii) has never held a United States passport, and

(iii ) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual’s loss of United States citizenship.”

What are Substantial Contacts under the IRC 877 Dual-Citizen Exception

This is where the IRC 877 Dual-Citizen exception can get complicated. Sure, it can be easy to show that the person never held a US passport, and was not present in the United States for more than 30 days for the time period in question — but the issues involving 7701(b) can be more complicated.

What is IRC 7701(b) for the IRC 877 Dual-Citizen Exception

IRC 7701 contains various definitions about residence and impacts the IRC 877 dual-citizen exception.

There are a slew of IRS definitions involving the idea of residence in the United States. If a dual-citizen is able to make their way all the way through the expatriation labyrinth, and “substantial contacts” is the final factor to determine whether or not they qualify for the dual-citizen exception, it is important for that individual to diligently evaluate their history United States in accordance with residence under 7701(b).

Golding & Golding: International Tax & Compliance

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and the IRC 877 dual-citizen exception.

Contact our firm today for assistance.

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