February, 2007

PROPOSED Small Business and Work Opportunity Act May Affect Expatriates

As part of the wrangling over an increase in the minimum wage, the possibility of attaching a tax bill to the minimum wage bill is closer to reality. On January 16, 2007, the Senate Finance Committee reported out the Small Business and Work Opportunity Act. Buried in the provisions of the bill is are provisions changing the tax rules relating to expatriation to avoid tax, some of which will be of interest to estate planners.


The main body of the existing rules related to expatriation are in Section 877 of the Internal Revenue Code. Section 205(a) of the proposed legislation seeks to add a new Section 877A titled “Tax Responsibilities of Expatriation” which attempts to define who is considered an expatriate, when expatriation occurs, and the effects. Of particular note to estate planners are subsection (d)(2), which has special rules for certain retirement plans, and subsection (f), which provides special rules applicable to beneficiaries’ interests in trust. On the former, the assets are treated as distributed, which would trigger immediate recognition of ordinary income. In the case of the latter, the beneficiary’s interest in the trust is treated as a separate share which is liquidated and distributed. In both cases, additional rules are provided for when distributions actually occur.


Also of interest is section (b) of Section 205 which amends Section 102 of the Internal Revenue Code , which otherwise makes receipts of gifts and inheritances not subject to income tax. If the new statute is passed, transfers from a covered expatriate will be subject to income tax. The carry-over basis rules will not apply, giving the donee a basis equal to the asset’s fair market value.


While these provisions are not yet law, they bear watching.


Jim Roberts


2200 One Galleria Tower

13355 Noel Road, LB 48

Dallas , Texas 75240

The text of the act is available at


At the foregoing link, the new proposed Section 877A starts at page 50.

At the foregoing link, the proposed amendment to Section 102 starts at page 73.