Brazilian-born Facebook co-founder Eduardo Saverin relinquished his U.S. citizenship late last year. As an expatriate, Saverin must pay an "exit tax" on the value of any unrealized gains in his worldwide estate, less a $636,000 exclusion for 2011. I'm not privy to billionaire Saverin's financial affairs, but I have no reason to doubt his statement that he will pay "hundreds of millions" of dollars in exit tax to the U.S. government. Some of this tax is on the pre-initial public offering (pre-IPO) value of his Facebook shares.
Is that fair? Not according to Senators Charles Schumer (D-N.Y.) and Bob Casey (D-Pa.). They have now introduced legislation that would retroactively punish wealthy expatriates like Saverin.
You see, Saverin still has an approximate 4% ownership stake in Facebook. While he's already subject to an exit tax on the pre-IPO value of his Facebook stock, he won't need to pay any tax on the difference between that value and the IPO value (approximately $38/share). Various media sources claim he will save at least $67 million in tax, but since he's already subject to tax on the pre-IPO value, his actual savings will be substantially less.
You might think Schumer, Casey, and their peers would instead of vilifying Saverin, thank him—and Facebook—for spawning an entire industry and creating tens of thousands of U.S. jobs. Not to mention paying hundreds of millions of dollars in taxes, and making it much simpler for the NSA and CIA to assemble dossiers on anyone they decide to watch who's on Facebook.
I've read the proposed "Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy" (or Ex-PATRIOT) Act, and it's a real nightmare.
Under the bill, expatriates with a net worth exceeding $2 million, or with average income tax liability exceeding $148,000 over the past five years, would be presumed to given up U.S. citizenship for tax avoidance purposes. If they couldn't prove otherwise to the IRS, they would face a 30% percent tax on future gains from U.S. investments, no matter where they live. They would also be permanently barred from any type of re-entry into the United States.
Both the tax and re-entry provisions are retroactive and will encompass individuals who gave up U.S. citizenship for the 10-year period prior to enactment of the statute.
The real questions are:
• Will this proposal become law?
• If it becomes law, will the courts uphold it?
I think there's a very good chance that in the current political atmosphere, the Ex-PATRIOT Act could pass. Think of it this way: if you were a politician in Washington, D.C., and wanted to get re-elected, would you dare to vote against it?
If the bill becomes law, I also think the courts will uphold its tax aspects, including retroactive application to individuals who expatriated prior to its coming into effect. From a tax standpoint, the only real difference between the Ex-PATRIOT Act and the current exit tax law is that expatriates would face a 30% percent tax on future gains from U.S. investments. Under current law, non-resident aliens investing in the United States need not pay tax on gains from sales of securities and certain other investments.
However, prior to 2008, wealthy expatriates faced a discriminatory tax regime with respect to some U.S. investments. I'm not aware of any court challenges to this former regime. Should the Ex-PATRIOT Act be enacted, I see no reason why the courts wouldn't respect congressional legislative authority.
As for retroactive application of tax rules, the Supreme Court has repeatedly held this is perfectly sound policy, despite the U.S. Constitution’s prohibition of laws with retroactive effect (ex post facto laws). Such laws are unconstitutional only when criminal activities are involved, the Supreme Court says. The prohibition doesn’t apply if "only" money or property is at risk. To pass constitutional muster the retroactive aspects of the statute need only be "rationally related to a legitimate legislative purpose" (United States v. Carlton).
Permanent exclusion from the United States is another matter. Back in 1996, Congress enacted a similar law, the Reed Amendment to the Immigration and Nationality Act. The amendment gives the U.S. Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounced U.S. citizenship in order to avoid U.S. taxation. Other categories of "excluded persons" are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.
Yet, 16 years after its original enactment, regulations under the Reed Amendment have never been issued, nor has its power ever officially been invoked. However, some U.S. consular officials have denied visa applications from former U.S. citizens, apparently using the Reed amendment as legal authority for doing so. Again, I'm not aware of any court cases testing this law. Indeed, it would probably be impossible to challenge exclusion based on the Reed Amendment since it's never officially been used.
However, if the Reed Amendment—or the Ex-PATRIOT Act were ever officially enforced, it would be open to court challenge on numerous grounds, including conflict with bilateral U.S. treaties of "Friendship, Commerce, and Navigation" and similarly titled treaties, and the non-discrimination provisions of U.S. tax treaties.
It would also be subject to constitutional challenges. While the United States has the right to exclude certain classes of individuals from entering the United States, that's not why Senators Schumer and Casey have introduced the Ex-PATRIOT Act. The sole purpose for the proposal is to deter a wealthy person from giving up citizenship in the first place. That is, faced with the certainty that he or she will never be able to re-enter the United States, the individual will make the decision not to expatriate.
This must be the purpose, because there's no other rational reason why such a statute could be proposed. Wealthy visitors to the United States spend money and pay state sales taxes on almost anything they buy. If they invest in the United States, they may also pay local, state, and/or federal taxes.
When a law infringes a fundamental right, such as the right to expatriation, U.S. courts have ruled it must be reviewed under a standard of "strict scrutiny." Such laws may be upheld only if they meet a "compelling interest."
Does excluding wealthy, free-spending, tax-paying visitors out of the United States serve a compelling national interest? Senators Schumer and Casey think it does. I'm not sure the courts will agree.
Copyright © 2012 by Mark Nestmann
