May 22, 2012
Immigration is a hot topic this year, with laws on the treatment of non-citizens in Alabama and Arizona coming under heavy (and High Court) scrutiny. Given the amount of attention paid to people attempting to enter the United States illegally, it’s not surprising that when someone seeks to voluntarily relinquish his membership in the club that is U.S. Citizenship, it can be pretty big news.
Of course, it helps if the person was the co-founder of a wildly popular social media platform and the renunciation is announced the week before that plucky startup goes public. As eveyone by now knows, Facebook.com had its Initial Public Offering last week, and Eduardo Saverin, one of the site’s founders, expatriated the same week.
Because of the timing of this move there was a perception that Mr. Saverin’s move was made to escape American Capital Gains tax. This has brought increased scrutiny to 26 U.S.C. 877 and 877A, the ‘exit tax’ on U.S. citizens who voluntarily renounce their citizenship. The tax covers assets held on the last date of citizenship. In Mr. Saverin’s case, it’s estimated to be in the hundreds of millions of dollars.
Some in Congress believe this is too easy a tax dodge, and are introducing legislation to maintain capital gains taxation on former citizens. Penatlies for non-payment would include a bar on re-entry. If Facebook’s share price grows, this would severely reduce the tax benefits of relinquishing citizenship. Of course, if the share price doesn’t grow, or actually falls from its I.P.O. price, then Mr. Saverin’s will turn out to have been an overpayment of tax. Given share performance on Friday, he may have paid a premium for his decision to leave the U.S. when he did.
The exit tax is exactly the sort of odd quirk of the Internal Revenue Code that scholars love to write about. To see some of the current scholarship, try the following search in JLR: renounc! /s u.s. “united states” american /s citizenship /p tax! /s consequen!. I found 18 hits.
News reports have all referred to Mr. Saverin as either a founder or co-Founder of Facebook, but this has, infamously, not always been a settled issue. The complaint he filed to be restored to founder status (as well as for monetary relief) can be found at 2006 WL 6627814. A search for his name in Dock-All reveals 13 dockets, all related to the ownership of Facebook.