Feds Put Billionaire Expat on No-Fly List

Each year, a few hundred Americans give up their U.S. nationality and passport.  It's a radical step, not to be taken lightly.  Most of those that do so have foreign-sounding names, as indicated by the list of expatriates published quarterly in the Federal Register.  Many in this group are presumably "accidental Americans;" i.e., individuals who by circumstances of birth or parentage unintentionally became U.S. citizens.

It's not surprising that an accidental U.S. citizen—someone with no significant ties to the United States— might wish to give up their U.S. nationality.  Among other responsibilities, U.S. citizenship brings about a legal obligation to comply with U.S. tax laws, filing an annual U.S. tax return, and paying U.S. tax on all income, anywhere in the world.

But not all expatriating Americans are accidental U.S. citizens.  Indeed, some very prominent Americans have given up their citizenship, including Sir John Templeton, chairman of The Templeton Group; Michael Dingman, chairman of Abex and a Ford Motor Co. director; Campbell Soup heir John Dorrance III; former Star-Kist Foods Chairman Joseph Bogdanovich; and Kenneth Dart, an heir to Dart Container and the US$1 billion Dart family fortune.

Why would a wealthy American give up U.S. citizenship?  For such Americans, the price of citizenship may require not only millions of dollars annually in tax payments, but also lost business and investment opportunities from the increasing number of individuals and institutions globally who refuse to do business with U.S. citizens or residents.  Laws like the USA PATRIOT Act, the Treasury Department's "qualified intermediary" rules" and the long arm of the Securities and Exchange Commission all contribute to this result.

However, expatriation is politically unpopular.  The image of former U.S. citizens living tax-free in some tropical paradise is an irresistible populist target.  As a result, anti-expatriation rules penalizing U.S. citizens and long-term residents who give up their citizenship or residence for tax avoidance reasons have been in effect for decades.  First imposed in the 1960s, the rules were tightened in 1996 and again in 2004.

These rules impose an alternative tax regime on expatriates' income and estate for 10 years after they give up U.S. citizenship if their income and/or past income tax liability at the time of expatriation meet certain thresholds.  Currently, the rules come into effect for expatriates with an estate larger than US$2 million or who paid more than an average of US$136,000 in income tax for the five-year period preceding expatriation.  They apply to the net combined amount of U.S. source income and income "effectively connected" with a U.S. trade or business, along with several other sources of income. Various proposals before Congress would tighten these rules, most notably by imposing an "exit tax" on the unrealized gains of an expatriate's worldwide estate, including assets in retirement and pension plans.

Without careful planning, however, the results can be a catastrophe.  Such was the case of a gentleman I know, a successful entrepreneur with a billion-dollar business, who has lived outside the United States for over a decade.  He recently gave up his U.S. citizenship, and not only wound up paying millions of dollars in unnecessary taxes, but also found himself on the Transportation Safety Authority's (TSA) "no-fly list."

This individual—a long-time and vocal critic of U.S. economic, political, and military policy—has been a thorn in the side of the US government for decades.  And many such critics have found themselves mysteriously on the no-fly list.  I have no way of proving it, but I suspect that the circumstances surrounding my billionaire acquaintance's expatriation may have upset enough high-level government officials to result in his current classification as a suspected terrorist.

It's a sad commentary on the United States when it stoops to such petty means to punish someone whose only "crime" was to take perfectly legal steps to end his permanent obligation to pay U.S. tax.  And it will be sadder still when the exit tax, which enjoys overwhelming support in both the House and Senate, effectively slams the door shut for those considering following his example.

(Click here for more information on expatriation, and how you might be able to benefit from it.)


Copyright © 2008 by Mark Nestmann

Update: My billionaire friend eventually got off the no-fly list and can now freely travel to and from the United States. In June 2008, Congress enacted a new anti-expatriation law, complete with an exit tax. For details, click here.

(An earlier version of this post was published by The Sovereign Society.)

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