Notice 2009-85

Part III. Administrative, Procedural, and Miscellaneous
Guidance for Expatriates
Under Section 877A
Notice 2009–85
PURPOSE
Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the
“Act”) added new sections 877A and 2801
to the Internal Revenue Code (“Code”),
amended sections 6039G and 7701(a),
made conforming amendments to sections
877(e) and 7701(b), and repealed section
7701(n) with respect to individuals who
on or after June 17, 2008, relinquish U.S.
citizenship or cease to be lawful permanent residents of the United States. This
notice provides guidance for individuals
who are subject to section 877A. This
notice does not provide new guidance
regarding section 877, which continues
to apply to individuals who relinquished
U.S. citizenship or ceased to be lawful permanent residents prior to June 17, 2008.
Additionally, this notice does not address
new section 2801, which imposes transfer
tax on U.S. persons who receive gifts or
bequests on or after June 17, 2008, from
individuals who are subject to section
877A (but see section 9 of this notice).
SECTION 1. OVERVIEW
Section 877A(a) generally imposes a
mark-to-market regime on expatriates who
are covered by section 877A, providing
that all property of a covered expatriate is
treated as sold on the day before the expatriation date for its fair market value. Section 877A further provides that any gain
arising from the deemed sale is taken into
account for the taxable year of the deemed
sale notwithstanding any other provisions
of the Code. Any loss from the deemed
sale is taken into account for the taxable
year of the deemed sale to the extent otherwise provided in the Code, except that
the wash sale rules of section 1091 do
not apply. Under section 877A(a)(3), the
amount that would otherwise be includible
in gross income by reason of the deemed
sale rule is reduced (but not to below zero)
by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For

November 9, 2009

calendar year 2009, the exclusion amount
as adjusted for inflation is $626,000. The
amount of any gain or loss subsequently
realized will be adjusted for gain and loss
taken into account under the mark-to-market regime without regard to the amount
excluded. Pursuant to section 877A(b), a
taxpayer may elect to defer payment of tax
attributable to property deemed sold.
Section 877A(c) provides that the
mark-to-market regime does not apply to
deferred compensation items, specified
tax deferred accounts, and interests in
a nongrantor trust of which the covered
expatriate was a beneficiary on the day
before the expatriation date. If the covered expatriate is treated as the owner of
any portion of a trust under the grantor
trust rules (sections 671 through 679) on
the day before the expatriation date, the
assets held by that portion of the trust are
subject to the mark-to-market regime (but
see section 4 of this notice concerning
coordination with section 684).
Section 877A(d) provides alternative
tax regimes that apply to “eligible deferred
compensation items” and to other deferred
compensation items (“ineligible deferred
compensation items”). In the case of
“eligible deferred compensation items,”
section 877A(d)(1)(A) provides generally
that the payor must deduct and withhold
from any taxable payments to a covered
expatriate with respect to such items a tax
equal to 30 percent of the amount of those
taxable payments. In the case of “ineligible deferred compensation items,” section
877A(d)(2)(A) provides that a covered
expatriate generally is treated as having
received an amount equal to the present
value of the covered expatriate’s accrued
benefit on the day before the expatriation
date.
Section 877A(e)(1)(A) provides that if
a covered expatriate holds any interest in a
specified tax deferred account on the day
before the expatriation date, such covered
expatriate is treated as having received a
distribution of the covered expatriate’s entire interest in such account on the day before the expatriation date.
Section 877A(f) provides that in the
case of any direct or indirect distribution
of property to a covered expatriate from a
nongrantor trust of which the covered ex-

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patriate was a beneficiary on the day before the expatriation date, the trustee must
deduct and withhold from the distribution
an amount equal to 30 percent of the taxable portion of the distribution. If the fair
market value of the property distributed
exceeds its adjusted basis in the hands of
the trust, gain shall be recognized to the
trust as if the property had been sold by
the trust and the proceeds distributed to the
covered expatriate.
Section 877A(i) provides that the Secretary shall prescribe such regulations
as may be necessary or appropriate to
carry out the purposes of section 877A.
The Treasury Department and the Internal
Revenue Service (IRS) expect to issue
regulations to incorporate the guidance set
forth in this notice. Until such regulations
are issued, taxpayers may rely on the guidance set forth in this notice.
This notice has nine sections. Section
1 provides background regarding the general application of section 877A. Section 2
provides rules for determining whether an
individual is subject to section 877A. Section 3 explains the operation of the markto-market regime. Section 4 addresses
the interaction of section 877A and certain other Code provisions, including section 877. Section 5 explains the application of section 877A to deferred compensation items. Section 6 explains the
application of section 877A to specified
tax deferred accounts. Section 7 explains
the application of section 877A to interests in nongrantor trusts. Section 8 describes the filing and reporting requirements of expatriates who are covered by
section 877A and provides an overview of
changes to Form 8854 (Expatriation Information Statement) as well as an introduction to new Form W–8CE (Notice of
Expatriation and Waiver of Treaty Benefits). Section 9 states that future guidance
will address gifts and bequests subject to a
transfer tax under new section 2801.
SECTION 2. INDIVIDUALS
COVERED
A. Definitions
Expatriate. Section 877A(g)(2) provides that the term “expatriate” means
(1) any U.S. citizen who relinquishes his

2009–45 I.R.B.

or her citizenship and (2) any long-term
resident of the United States who ceases
to be a lawful permanent resident of the
United States (within the meaning of section 7701(b)(6), as amended). Pursuant to
section 877A(g)(5), a long-term resident
is an individual who is a lawful permanent
resident of the United States in at least
8 taxable years during the period of 15
taxable years ending with the taxable year
that includes the expatriation date.
Covered expatriate.
Section
877A(g)(1)(A) defines the term “covered
expatriate” to mean an expatriate who:
(1) has an average annual net income
tax liability for the five preceding taxable
years ending before the expatriation date
that exceeds a specified amount that is adjusted for inflation ($145,000 in 2009) (the
“tax liability test”);
(2) has a net worth of $2 million or more
as of the expatriation date (the “net worth
test”); or
(3) fails to certify, under penalties of
perjury, compliance with all U.S. Federal
tax obligations for the five taxable years
preceding the taxable year that includes
the expatriation date, including, but not
limited to, obligations to file income tax,
employment tax, gift tax, and information
returns, if applicable, and obligations to
pay all relevant tax liabilities, interest, and
penalties (the “certification test”). This
certification must be made on Form 8854
and must be filed by the due date of the
taxpayer’s Federal income tax return for
the taxable year that includes the day before the expatriation date. See section 8
of this notice for information concerning
Form 8854.
However, section 877A(g)(1)(B) provides that an expatriate will not be treated
as meeting the tax liability test or the net
worth test of section 877(a)(2)(A) or (B)
if—
(1) the expatriate became at birth a U.S.
citizen and a citizen of another country
and, as of the expatriation date, continues
to be a citizen of, and is taxed as a resident
of, such other country, and has been a U.S.
resident for not more than 10 taxable years
during the 15 taxable year period ending
with the taxable year during which the expatriation date occurs; or
(2) the expatriate relinquishes U.S. citizenship before the age of 181/2 and has
been a U.S. resident for not more than 10

2009–45 I.R.B.

taxable years before the date of relinquishment.
The determination as to whether an individual is a covered expatriate is made as
of the expatriation date.
Expatriation date. Section 877A(g)(3)
defines the term “expatriation date” as the
date an individual relinquishes U.S. citizenship or, in the case of a long-term resident of the United States, the date on which
the individual ceases to be a lawful permanent resident of the United States within
the meaning of section 7701(b)(6).
Relinquishment of citizenship. Section
877A(g)(4) provides that a citizen will be
treated as relinquishing his or her U.S. citizenship on the earliest of four possible
dates:
(1) the date the individual renounces
his or her U.S. nationality before a diplomatic or consular officer of the United
States pursuant to paragraph (5) of section
349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), provided
the renunciation is subsequently approved
by the issuance to the individual of a
certificate of loss of nationality by the
United States Department of State,
(2) the date the individual furnishes to
the United States Department of State a
signed statement of voluntary relinquishment of U.S. nationality confirming the
performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the
individual of a certificate of loss of nationality by the United States Department of
State,
(3) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(4) the date a court of the United States
cancels a naturalized citizen’s certificate of
naturalization.
Cessation of lawful permanent residency. Under section 7701(b)(6), as
amended by the Act, a long-term resident
ceases to be a lawful permanent resident if
(A) the individual’s status of having been
lawfully accorded the privilege of residing
permanently in the United States as an immigrant in accordance with immigration
laws has been revoked or has been administratively or judicially determined to have
been abandoned, or if (B) the individual

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(1) commences to be treated as a resident
of a foreign country under the provisions
of a tax treaty between the United States
and the foreign country, (2) does not waive
the benefits of the treaty applicable to
residents of the foreign country, and (3)
notifies the Secretary of such treatment on
Forms 8833 and 8854.
B. Tax Liability and Net Worth Tests
For guidance on determining whether
an individual is a covered expatriate by
reason of the tax liability test or the net
worth test, see Section III of Notice 97–19,
1997–1 C.B. 394.
SECTION 3. MARK-TO-MARKET
REGIME
A. Identification of a covered
expatriate’s property and
determination of fair market value
For purposes of the mark-to-market
regime, the covered expatriate is deemed
to have sold any interest in property that
he or she is considered to own under the
rules of this paragraph other than property
described in section 877A(c). For purposes of computing the tax liability under
the mark-to-market regime, a covered expatriate is considered to own any interest
in property that would be taxable as part
of his or her gross estate for Federal estate
tax purposes under Chapter 11 of Subtitle
B of the Code as if he or she had died on
the day before the expatriation date as a
citizen or resident of the United States.
Whether property would constitute part of
the gross estate will be determined without regard to sections 2010 through 2016.
In addition, for this purpose, a covered
expatriate also is deemed to own his or her
beneficial interest(s) in each trust (or portion of a trust), that would not constitute
part of his or her gross estate as described
in the preceding sentences. The covered
expatriate’s beneficial interest(s) in such
a trust shall be determined under the special rules set forth in section III of Notice
97–19, 1997–1 C.B. 394.
In computing the tax liability under the
mark-to-market regime, a covered expatriate must use the fair market value of
each interest in property as of the day before the expatriation date in accordance
with the valuation principles applicable for
purposes of the Federal estate tax, except

November 9, 2009

as otherwise provided in this paragraph.
Specifically, fair market value will be determined under section 2031 and the regulations thereunder, but without regard to
sections 2032 and 2032A, as if the covered expatriate had died as a citizen or resident of the United States on the day before
the expatriation date. For these purposes:
(a) the provisions of sections 2701 through
2704 will be applied as if the covered expatriate’s interests subject to those provisions
were being transferred to family members;
(b) the covered expatriate’s tax liability as
a result of section 877A, or otherwise, will
not be taken into account; and (c) sections
2055, 2056, 2056A, and 2057 will not be
taken into account. A covered expatriate
must determine the fair market value of his
or her beneficial interest in each trust, other
than a nongrantor trust subject to section
877A(f), to the extent the trust would not
constitute part of his or her gross estate, in
accordance with the Federal gift tax valuation principles of section 2512 and the regulations thereunder without regard to any
prohibitions or restrictions on such interest. An interest in a life insurance policy
will be valued in accordance with Treas.
Reg. § 25.2512–6 as if the covered expatriate had made a gift of the policy on the
day before the expatriation date.

Asset X
Asset Y
Asset Z

The exclusion amount, as described
in section 877A(a)(3), must be allocated
among all built-in gain property that is
subject to the mark-to-market regime and
is owned by the covered expatriate on the
day before the expatriation date, regardless
of whether the covered expatriate makes
an election to defer tax with respect to any
such property pursuant to section 877A(b).
Specifically, the exclusion amount must
first be allocated pro-rata to each item of
built-in gain property (“gain asset”) by
multiplying the exclusion amount by the
ratio of the built-in gain with respect to
each gain asset over the total built-in gain
of all gain assets. The exclusion amount
allocated to each gain asset may not exceed the amount of that asset’s built-in
gain. If the total section 877A(a) gain of
all the gain assets is less than the exclusion
amount, then the exclusion amount that
can be allocated to the gain assets will be
limited to the total section 877A(a) gain.
Each individual is eligible for only one
lifetime exclusion amount. Thus, if a covered expatriate becomes a U.S. citizen or
long-term resident, and then loses such citizenship or ceases to be a lawful permanent
resident and thereby becomes a covered
expatriate subject again to section 877A,
the exclusion amount with respect to the

Adjusted
Basis

FMV

$200,000
$800,000
$800,000

$2,000,000
$1,000,000
$500,000

Step 2. Determine the portion of the exclusion
amount allocable to each gain asset by multiplying

Asset X

$1,800,000 X $626,000 = $563,400
$2,000,000

Asset Y

$200,000 X $626,000 = $62,600
$2,000,000

Step 3. Determine the amount includible in gross
income with respect to each gain asset as a result of

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B. Allocation of the exclusion amount

individual on a second expatriation is limited to the unused portion of his or her exclusion amount remaining (if any) after the
first expatriation, as adjusted for inflation.
For example, if a covered expatriate used
one third of the exclusion amount for the
first expatriation, he or she will have two
thirds of the exclusion amount available,
as adjusted for inflation, in the event of a
second expatriation.
After allocating the appropriate amount
of the exclusion amount among the gain
assets, the covered expatriate must report
gains and losses on the appropriate Schedules and Forms depending upon the character of each asset. Losses may be taken
into account only to the extent permitted
by the Code, except that the wash sale rules
of section 1091 do not apply. Thus, for example, losses are subject to the limitations
of section 1211(b).
Example 1. A, a covered expatriate, relinquished
his citizenship on November 1, 2009. On October 31,
2009, A owned three assets. As of October 31, 2009,
Asset X had a fair market value of $2,000,000 and
an adjusted basis of $200,000, Asset Y had a fair
market value of $1,000,000 and an adjusted basis of
$800,000, and Asset Z had a fair market value of
$500,000 and an adjusted basis of $800,000. A must
allocate the exclusion amount to each gain asset as
follows:
Step 1. Determine the built-in gain or loss of each
asset by subtracting the asset’s adjusted basis from the
fair market value of the asset on October 31, 2009.

Built-in Gain/(Loss)
$1,800,000
$200,000
($300,000)

the exclusion amount ($626,000 for 2009) by the ratio of the built-in gain on each gain asset over the to-

tal built-in gain on all gain assets subject to section
877A(a).

section 877A(a) by subtracting the exclusion amount

allocated to each asset from the amount of built-in
gain deemed realized with respect to that asset.

600

2009–45 I.R.B.

Asset X:

$1,800,000
($563,400)
$1,236,600

Asset Y:

$200,000
($62,600)
$137,400

A must report the amount includible in gross income as a result of the application of section 877A(a)
with respect to Assets X and Y (as determined in Step
3), and A’s loss with respect to Asset Z on A’s Form
1040 (or other schedule, as provided in Treas. Reg.
§ 1.6012–1(b)(2)(ii)(b)) for the portion of A’s taxable year that includes the day before the expatriation
date. This Form 1040 (or other schedule) should be
attached as a schedule to A’s Form 1040NR for the

Asset X
Asset Y
Asset Z

Adjusted
Basis

FMV

$1,700,000
$800,000
$800,000

$2,000,000
$1,000,000
$500,000

The total gain of all the gain assets for 877A(a)
purposes is $500,000. Because the total gain is less
than the exclusion amount ($626,000 for 2009), A can

Asset X

$300,000 X $500,000 = $300,000
$500,000

Asset Y

$200,000 X $500,000 = $200,000
$500,000

Step 3. Determine the amount includible in gross
income with respect to each gain asset as a result of

Asset X:

$300,000
($300,000)
$0

Asset Y:

$200,000
($200,000)
$0

Because all of the gain was excluded under
the exclusion amount, A does not recognize any
gain as a result of section 877A(a). A must report the loss with respect to Asset Z on A’s Form
1040 (or other schedule, as provided in Treas. Reg.
§ 1.6012–1(b)(2)(ii)(b)) for the portion of A’s taxable
year that includes the day before the expatriation
date. This Form 1040 (or other schedule) should be
attached as a schedule to A’s Form 1040NR for the
remainder of that taxable year. In the absence of
other gains for the portion of A’s taxable year that
includes the day before the expatriation date, A’s
use of the loss would be limited by the loss-limiting
provisions in the Code, including section 1211(b).
However, A’s use of the loss will not be limited by
section 1091.

2009–45 I.R.B.

remainder of that taxable year. Assuming that Assets
X and Y are business assets and that Asset Z is a capital asset, in the absence of other capital gains in the
year of expatriation, A’s use of the capital loss from
Asset Z would be limited by section 1211(b), as well
as other loss-limiting provisions in the Code. However, A’s use of the loss will not be limited by section
1091.

Example 2. The facts are the same as in Example
1, but assume that as of October 31, 2009, Asset X
had a fair market value of $2,000,000 and an adjusted
basis of $1,700,000. A must allocate the exclusion
amount to each gain asset as follows:
Step 1. Determine the built-in gain or loss of each
asset by subtracting the asset’s adjusted basis from the
fair market value of the asset on October 31, 2009.

Built-in Gain/(Loss)
$300,000
$200,000
($300,000)

only allocate $500,000 of the exclusion amount to the
gain assets.
Step 2. Determine the portion of the exclusion
amount allocable to each gain asset by multiplying

the allowable exclusion amount ($500,000) by the ratio of the built-in gain on each gain asset over the total built-in gain on all gain assets subject to section
877A(a).

section 877A(a) by subtracting the exclusion amount

allocated to each asset from the amount of built-in
gain deemed realized with respect to that asset.

C. Adjustment to basis of property
subject to the mark-to-market regime

Example 3. The facts are the same as in Example 1. Assume that Assets X and Z are United States
real property interests within the meaning of section
897(c) (“USRPIs”). On October 15, 2013, A, now a
resident of country B, sells Asset X for $3,000,000
and Asset Z for $700,000. A’s taxable gain is determined as follows:
Asset X: A’s basis of $200,000 in Asset X is adjusted by $1,800,000 (the amount of gain taken into
account under section 877A(a)(2) by reason of the
deemed sale under section 877A(a) without regard
to the amount excluded under section 877A(a)(3)),
resulting in a basis of $2,000,000. The $1,800,000
adjustment to basis is determined without regard to
the $563,400 exclusion amount allocated to asset
X. A recognizes $1,000,000 of gain ($3,000,000
amount realized - $2,000,000 basis) on this subse-

Section 877A(a) requires proper adjustments to be made in the amount of any
gain or loss subsequently realized with respect to an asset for the amount of gain
or loss taken into account under section
877A(a)(2) with respect to that asset. In
making such adjustment, the basis of the
asset will be adjusted by the amount of
gain or loss taken into account under section 877A(a)(2)(A) and (B), without regard to the exclusion amount provided in
section 877A(a)(3).

601

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quent actual disposition of Asset X. Because A is
now a nonresident alien individual as defined under
section 7701(b), and because Asset X is a USRPI,
that gain is subject to section 897.
Asset Z: A’s basis of $800,000 in Asset Z is adjusted downward by $300,000 (the amount of loss
taken into account under section 877A(a)(2) by reason of the deemed sale under section 877A(a)), resulting in a basis of $500,000. A recognizes $200,000 of
gain ($700,000 amount realized - $500,000 basis) on
this subsequent actual disposition. Because A is now
a nonresident alien individual as defined under section 7701(b), and because Asset Z is a USRPI, that
gain is subject to section 897.

D. In-bound step-up in basis for
nonresident aliens becoming resident
aliens
Section 877A(h)(2) provides that,
solely for purposes of determining the tax
imposed by reason of section 877A(a),
property that was held by a nonresident
alien on the day that individual first became a resident of the United States
(within the meaning of section 7701(b))
will be treated as having a basis on such
date of not less than the fair market value
of such property on such date. A covered
expatriate to whom this basis adjustment
rule applies may make an irrevocable election, on a property-by-property basis, not
to have such rule apply. The election must
be made on Form 8854, which must be
filed with the covered expatriate’s Federal
income tax return for the taxable year that
includes the day before the expatriation
date. See section 8 of this notice for information concerning Form 8854.
The IRS and Treasury Department intend to exercise their regulatory authority
to exclude from this step-up-in-basis rule
United States real property interests within
the meaning of section 897(c) (“USRPIs”)
and property used or held for use in connection with the conduct of a trade or business within the United States. Thus, if on
the date the nonresident alien first became
a resident of the United States, the nonresident alien held property that was a USRPI
or was property used or held for use in
connection with the conduct of a trade or
business within the United States, then the
basis of such property may not be stepped
up to fair market value under 877A(h)(2).
If, however, prior to becoming a resident
of the United States, the nonresident alien
was a resident of a country with which
the United States had an income tax treaty,
and the nonresident alien held property

November 9, 2009

used or held for use in connection with the
conduct of a U.S. trade or business that
was not carried on through a permanent
establishment in the United States under
the income tax treaty of such country and
the United States, then that property is
eligible for a step up in basis to fair market
value under 877A(h)(2).
Example 4. A first became a resident of the
United States when A became a lawful permanent
resident (green card holder) on April 1, 1995. On
April 1, 1995, A owned Asset S with a basis of
$400X and a fair market value of $700X and Asset
T with a basis of $500X and a fair market value
of $300X. Neither Asset S nor Asset T is a USRPI
or property used or held for use in connection with
the conduct of a trade or business within the United
States. On June 30, 2010, the fair market value of
Asset S is $1,300X and the fair market value of Asset
T is $800X. On July 1, 2010, A ceases to be a lawful
permanent resident and becomes a covered expatriate within the meaning of section 877A(g)(1)(A). A
does not make the irrevocable election not to have
the rule of section 877A(h)(2) apply. Therefore,
Assets S and T will each be treated for purposes
of the mark-to-market regime as having a basis of
not less than the fair market value on April 1, 1995,
so that Assets S and T will be treated as having a
basis of $700X and $500X, respectively, on June
30, 2010, for purposes of determining the tax under
section 877A(a). A will be deemed to realize $600X
($1,300X -$700X) of gain with respect to Asset S
and $300X ($800X -$500X) of gain with respect to
Asset T, for a total of $900X.
Example 5. The facts are the same as in Example 4. If A makes an irrevocable election on Form
8854 not to have the rule of section 877A(h)(2) apply with respect to Asset S because A does not want
to incur the expense of having an appraisal conducted
with respect to Asset S’s fair market value on April 1,
1995, A will be deemed to realize $900X ($1,300X $400X) of gain with respect to Asset S.

E. Deferral of payment of tax under the
mark-to-market regime
Deferral election. Section 877A(b)
provides that a covered expatriate may
make an irrevocable election (“deferral
election”) with respect to any property
deemed sold by reason of section 877A(a)
to defer the payment of the additional tax
attributable to any such property (“deferral
assets”). The deferral election is made on
an asset-by-asset basis. In order to make
the election with respect to any asset, the
covered expatriate must provide adequate
security (defined below) and must irrevocably waive any right under any U.S.
treaty that would preclude assessment or
collection of any tax imposed by reason
of section 877A. If the IRS subsequently
determines that the security provided for
the deferred tax no longer qualifies as ade-

602

quate security, the deferred tax and interest
will become due immediately, unless the
covered expatriate corrects such failure
within 30 days after the IRS mails notification of such failure to the last known
addresses of the covered expatriate and
the covered expatriate’s U.S. agent.
Subject to the preceding sentence, the
time for payment of the tax attributable to
a particular deferral asset under the markto-market regime is extended until the earlier of the due date (without extensions) of
the covered expatriate’s income tax return
for (a) the taxable year in which the asset is
disposed of by sale, non-recognition transaction, gift, or other means, or (b) the taxable year that includes the date of death of
the covered expatriate. However, a covered expatriate may pay any tax deferred
under section 877A(b), together with accrued interest, at any time.
Interest accrual. Section 877A(b)(7)
provides that for purposes of section 6601,
the last date for the payment of tax will be
determined without regard to the deferral
election. Interest will be computed at the
underpayment rate established under section 6621 from the due date of the return
(without extensions) for the taxable year
that includes the day before the expatriation date and will compound daily under
section 6622 until the date the tax is paid.
Waiver of treaty benefits.
Section
877A(b)(5) provides that a covered expatriate may not make a deferral election
with respect to a particular asset unless the
covered expatriate makes an irrevocable
waiver of any right under any U.S. treaty
that would preclude the assessment or
collection of any tax imposed by reason
of section 877A. The covered expatriate
must make the waiver on Form 8854,
which must be filed with the covered expatriate’s Federal income tax return for the
taxable year that includes the day before
the expatriation date. See section 8.C of
this notice. Additionally, acknowledgment of such waiver must be noted in the
agreement to defer tax with respect to a
particular property (“tax deferral agreement”) as described below.
Adequate security/Tax deferral agreement. Section 877A(b)(4)(A) provides
that, in order to make a deferral election
with respect to any asset, the covered
expatriate must provide adequate security with respect to such asset. Section
877A(b)(4)(B) defines the term “adequate

2009–45 I.R.B.

security” as (1) a bond that is furnished
to, and accepted by, the Secretary, that
is conditioned on the payment of the tax
(and interest thereon), and that meets the
requirements of section 6325, or (2) another form of security for such payment
(including letters of credit) that meets
such requirements as the Secretary may
prescribe.
Each covered expatriate who makes a
deferral election must enter into a tax deferral agreement with the IRS. Execution
of the agreement by the IRS will constitute
acceptance by the Secretary of the security
as adequate security. A template of a tax
deferral agreement is provided in Appendix A of this notice. Any covered expatriate who wishes to enter into a tax deferral
agreement under this notice must submit
to the following address a request to enter
into a tax deferral agreement (“deferral request”) by the due date of his or her return
for the taxable year that includes the day
before the expatriation date:
Internal Revenue Service
PO Box 331
Drop Point S607-F8854
Bensalem, PA 19020
The deferral request must include (1)
two signed copies of the template agreement provided in Appendix A of this notice, (2) a description of the asset(s) with
respect to which the covered expatriate is
electing to defer tax, (3) an attachment
showing the calculation of the tax attributable to such asset(s) under the method set
forth below, (4) documentation of the proposed security offered to secure the deferral of tax, (5) a copy of an agreement with
a U.S. agent, as described below, and (6)
a copy of the covered expatriate’s return
for the taxable year that includes the day
before the expatriation date. Provided that
the security offered by the covered expatriate is determined to be adequate to secure
the tax being deferred, the IRS will sign
the tax deferral agreement and provide one
copy to the covered expatriate.
Additionally, the covered expatriate
must attach a copy of the deferral request
to his or her return for the taxable year that
includes the day before the expatriation
date. The covered expatriate may file the
deferral request simultaneously with his
or her tax return.

2009–45 I.R.B.

The tax deferral agreement must be periodically renewed according to the terms
provided in the agreement. If the agreement is not renewed within the time frame
specified in the agreement, the collateral
will be applied to the tax liability and interest.
Appointment of U.S. agent. In order to
make a deferral election, a covered expatriate must appoint a U.S. person to act as
the covered expatriate’s limited agent for
purposes of accepting communication related to the tax deferral agreement from
the IRS on behalf of the covered expatriate, the timely enforcement of the terms
of the tax deferral agreement between the
covered expatriate and the IRS, and applying section 7602 and all related procedural
provisions of the Code with respect to a request by the IRS to examine records, for
the production of testimony, or for a summons by the IRS for such records or testimony related to the enforcement of the tax
deferral agreement.
In order to authorize a U.S. person to act
as an agent, the covered expatriate and the
agent must enter into a binding agreement
that is substantially similar in form to the
agreement provided in Appendix B of this
notice. The agreement must be executed
by the covered expatriate and the agent and
must be submitted as part of the deferral
request. The authorization must remain in
effect for as long as the tax deferral agreement remains in effect.
If the U.S. agent resigns, liquidates, or
terminates its responsibility as an agent of
the covered expatriate, the covered expatriate must, within 90 days, notify IRS-Advisory (Telephone: 954–423–7344, Fax:
954–423–7809) in writing at the following
address:
Advisory
7850 SW 6th Court
Mail Stop 5780
Plantation, FL 33324–3202
This notification must contain the
name, address, and TIN of the new U.S.
agent (if any). If no new agent is appointed, then the tax deferral agreement
will be in default and the collateral will
be applied to the deferred tax and interest
attributable to all of the deferral assets.
Determination of tax attributable to
particular assets. Deferral of tax is made
on an asset-by-asset basis, and a cov-

603

ered expatriate who elects to defer the tax
attributable to one or more assets must
determine the amount of tax imposed by
reason of section 877A(a) attributable to
each asset deemed sold pursuant to section
877A(a). The tax imposed by reason of
section 877A(a) is the difference between
(a) the covered expatriate’s tax liability
for the portion of the taxable year that includes the day before the expatriation date
as reflected on a Form 1040 with respect to
that portion of the taxable year and that includes the net taxable gain resulting from
all deemed sales under section 877A(a)
and (b) the covered expatriate’s tax liability for the portion of the taxable year that
includes the day before the expatriation
date as reflected on a Form 1040 with
respect to that portion of the taxable year
but that does not include the net taxable
gain resulting from all deemed sales under
section 877A(a).
The amount of tax imposed by reason
of section 877A(a) that is attributable to
each asset is determined by multiplying the
amount of tax imposed by reason of section 877A(a) by the ratio of (a) the gain, if
any, includible in gross income under section 877A(a) with respect to that particular asset to (b) the gain includible in gross
income by reason of section 877A(a) with
respect to all gain assets deemed sold pursuant to section 877A(a). The tax attributable to that particular asset, computed as
described in the preceding sentence, is the
amount of tax that that a covered expatriate
may elect to defer under section 877A(b)
with respect to that asset. The effect of
such election is to reduce the amount of tax
currently due and payable by the amount of
the tax attributable to the asset with respect
to which the election is made.
Example 6. The facts are the same as Example
1, except that A elects to defer the tax attributable to
Assets X and Y. Assume that A’s taxable income for
the portion of the taxable year that includes the day
before the expatriation date without regard to section
877A is $1,300,000, and that the tax liability on that
taxable income is $300,000. Also assume that A’s
taxable income for that same period, including the
$1,100,000 net gain resulting from all deemed sales
under section 877A(a) (and taking into account the
amount excluded pursuant to section 877A(a)(3)), is
$2,400,000, and that A’s total tax liability with respect
to that taxable income as reflected on a Form 1040 is
$500,000.
Step 1. Determine the amount of tax imposed by
reason of section 877A(a) by subtracting A’s tax liability for the portion of the taxable year that includes
the day before the expatriation date computed without taking into account section 877A(a) ($300,000)

November 9, 2009

from A’s tax liability for that period including the taxable gain resulting from all deemed sales under section 877A(a) ($500,000). The amount of tax that must
be allocated among the assets deemed sold pursuant
to section 877A(a) is $200,000.

Asset X

$1,236,600 X $200,000 = $180,000
$1,374,000

Asset Y

$137,400 X $200,000 = $20,000
$1,374,000

Asset Z

$0 X $200,000 = $0
$1,374,000

For the portion of the taxable year that includes
the day before the expatriation date, A has a total tax
liability of $500,000, but, due to A’s deferral elections
with respect to Assets X and Y, A will report and pay
only $300,000 with A’s return for that portion of the
year. Of the $200,000 deferred tax, $180,000 is attributable to Asset X and $20,000 is attributable to
Asset Y. If instead of electing to defer the tax attributable to Asset X and to Asset Y, A had elected to
defer only the tax attributable to Asset X ($180,000),
A would have been required to pay $320,000 of tax
with A’s return for that portion of the year (the total
tax otherwise due of $500,000 less the $180,000 of
tax attributable to Asset X which tax A has elected to
defer).

SECTION 4. COORDINATION WITH
CERTAIN CODE PROVISIONS
Termination of deferrals.
Section
877A(h)(1)(A) provides that, notwithstanding any other provision of the Code,
any time period for acquiring property that
would result in the reduction of gain recognized with respect to property disposed
of by a covered expatriate terminates on
the day before the expatriation date. This
rule applies to certain incomplete transactions such as deferred like-kind exchanges
and involuntary conversions. In addition, section 877A(h)(1)(B) provides that,
notwithstanding any other provision of the
Code, any extension of time for payment
of tax ceases to apply on the day before the
expatriation date, and the unpaid portion
of such tax becomes due and payable at the
time and in the manner prescribed by the
Secretary. Accordingly, the tax shall be
due and payable on the earlier of the date
the tax would become due and payable
without regard to section 877A and the
due date of the covered expatriate’s return
for the taxable year that includes the day
before the expatriation date.
Section 367(a).
Regulations under
section 367(a) regarding gain recognition
agreements (GRAs) provide that if an

November 9, 2009

Step 2. Determine the portion of tax attributable
to each asset deemed sold by multiplying the amount
of tax determined under Step 1 by the ratio of the
amount includible in gross income with respect to
each gain asset (as determined in Step 3 of Example 1,

with the amount with respect to assets with a built-in
loss being zero) to the total amount includible in gross
income with respect to all gain assets.

individual U.S. transferor loses U.S. citizenship or ceases to be a lawful permanent
resident of the United States, the individual shall be treated as disposing of all the
stock of the transferee foreign corporation
received in the initial transfer as of the day
before the loss of such status. This disposition shall constitute a triggering event
with respect to the GRA and require the
recognition of gain under the GRA (and
the payment of applicable interest with
respect to any additional tax due); this disposition shall not terminate or reduce the
amount of gain subject to the GRA. Gain
recognized under the GRA as a result of
this disposition, and any basis adjustments
resulting from such gain recognition, shall
be taken into account prior to any gain or
loss that is required to be taken into account under section 877A on the deemed
sale of the stock of the transferee foreign
corporation under section 877A(a).
Section 684. Section 877A(h)(3) provides that if the expatriation of any individual would result in recognition of gain
under section 684, the provisions of section 684 apply before the provisions of section 877A. Section 684(a) and the regulations thereunder generally require immediate recognition of gain when a U.S. person directly, indirectly, or constructively
transfers appreciated property to a foreign
trust of which the U.S. person is not treated
as the owner under the grantor trust rules
(sections 671 through 679). Section 672(f)
limits the circumstances in which a foreign person may be treated as the owner
of a trust under the grantor trust rules.
A covered expatriate’s expatriation may
cause a domestic trust of which the covered expatriate was treated as the owner
on the day before the expatriation date to
become a foreign trust under the rules of
section 7701(a)(31)(B) and § 301.7701–7.

If a covered expatriate’s expatriation also
causes the covered expatriate to cease to
be treated as the owner of the trust, appreciated property held by the trust will generally be subject to the gain recognition rules
of section 684. Gain that is subject to tax
under the rules of section 684 will not also
be subject to tax under the mark-to-market
regime.
Section 897. If a covered expatriate
holds a USRPI on the day before the expatriation date, the USRPI is generally
subject to tax under the mark-to-market regime in the same manner as other
property of the covered expatriate. As
provided in section 3.C of this notice, the
covered expatriate’s basis in the USRPI
will be adjusted to reflect the gain or loss
taken into account under the mark-to-market regime. Section 897 will not apply
to the gain or loss recognized as a result
of the mark-to-market regime, because
the covered expatriate will not be a nonresident alien within the meaning section
7701(b) on the day before the expatriation
date. However, as illustrated in Example
3, above, section 897 will apply when the
covered expatriate subsequently disposes
of the USRPI.
Expatriations subject to section 877.
An individual whose expatriation date occurred before June 17, 2008, continues to
be covered by the rules of sections 877 and
6039G as in effect on the individual’s expatriation date. An individual whose expatriation date occurred after June 3, 2004,
but before June 17, 2008, continues to be
subject to the provisions of section 7701(n)
(as in effect prior to June 17, 2008). In
such case, the 10-year period described in
section 877(a) commences on the date the
U.S. citizen or long-term resident complies
with the provision of section 7701(n) (as in
effect prior to June 17, 2008).

604

2009–45 I.R.B.

Example 7. A, a U.S. citizen, relinquishes U.S.
citizenship on June 10, 2008, but does not file Form
8854 until December 12, 2009. A is subject to the
rules of section 877 and the reporting and notification
provisions of sections 6039G and 7701(n), as in effect
prior to June 17, 2008. The ten-year period described
in section 877(a) commences on December 12, 2009.
Example 8. A is a long-term resident who commences to be treated as a resident of a foreign country
pursuant to an income tax treaty between the United
States and the foreign country. A qualifies under the
treaty to be treated as a resident of the foreign country
as of January 1, 2008. A is subject to the rules of section 877 and the reporting and notification provisions
of sections 6039G and 7701(n), as in effect prior to
June 17, 2008.

SECTION 5. DEFERRED
COMPENSATION ITEMS
A. In general
Section 877A(c)(1) provides that the
tax under the mark-to-market regime provided in section 877A(a) does not apply
to any deferred compensation item, as
defined below. Instead, alternative tax
regimes apply to “eligible deferred compensation items” and “ineligible deferred
compensation items.” In the case of an
“eligible deferred compensation item,”
section 877A(d)(1)(A) provides generally
that the payor must deduct and withhold a
tax equal to 30 percent of any taxable payment to a covered expatriate with respect
to such an item. In the case of “ineligible deferred compensation items,” section
877A(d)(2)(A) provides that a covered expatriate generally is subject to taxation on
the ineligible deferred compensation item
as if received by the covered expatriate on
the day before the expatriation date.
Sections 5.B(2) and 5.B(3) of this notice provide definitions for “eligible deferred compensation items” and “ineligible deferred compensation items,” respectively. Sections 5.C and 5.D of this notice
provide guidance on the taxation of “eligible deferred compensation items” and “ineligible deferred compensation items,” respectively.
B. Definitions
The following definitions apply for purposes of section 877A and this notice.
(1) Deferred compensation item means:
a. Any interest in a plan or arrangement described in section 219(g)(5), which
means:

2009–45 I.R.B.

i. a plan described in section 401(a)
that includes a trust exempt from tax under
section 501(a),
ii. an annuity plan described in section
403(a),
iii. a plan established for its employees
by the United States, by a State or political subdivision thereof, or by an agency
or instrumentality of any of the foregoing,
but excluding an eligible deferred compensation plan (within the meaning of section
457(b)),
iv. an annuity contract described in section 403(b),
v.
a simplified employee pension
(within the meaning of section 408(k)),
vi. a simplified retirement account
(within the meaning of section 408(p)), or
vii.
a trust described in section
501(c)(18);
b. Any interest in a foreign pension
plan or similar retirement arrangement or
program;
c. Any item of deferred compensation,
as defined in section 5.B(4) of this notice;
or
d. Any property, or right to property,
that the individual is entitled to receive
in connection with the performance of
services to the extent not previously taken
into account under section 83 or in accordance with section 83. Until further
guidance is issued, a deferred compensation item described in this section 5.B(1)d
means property that has been transferred
(as defined in § 1.83–3(a)) to the covered
expatriate, or a right to property that the
covered expatriate, as of the expatriation
date, has a legally binding right to receive, in connection with the performance
of services (whether or not such property or right to property is substantially
vested), but only to the extent the covered
expatriate has not taken such item into
account under, or in accordance with, section 83. For this purpose, the following
generally constitute property or a right to
property: statutory and nonstatutory stock
options (see sections 421 through 424
and § 1.83–7); stock and other property;
stock-settled stock appreciation rights;
and stock-settled restricted stock units. A
covered expatriate will be considered to
have taken property or a right to property into account under section 83 or in
accordance with section 83 to the extent
that: (A) on or before the expatriation
date, there has been a transfer of property

605

to or on behalf of the covered expatriate
in connection with the performance of
services with respect to such property or
right to property within the meaning of
section 83(a) and the regulations thereunder; (B) on or before the expatriation
date, either (i) such transferred property
has become substantially vested or (ii)
the covered expatriate has made a valid
election under section 83(b) with respect
to such transferred property; and (C) the
covered expatriate has filed a Federal income tax return for the appropriate taxable
year or years accurately reporting the full
amount (if any) includible in such covered
expatriate’s income with respect to such
transferred property for such year or years
and has paid all taxes due with respect to
such return or returns, or, if such tax return is due after the expatriation date, the
income with respect to such transferred
property has been subject to appropriate
tax withholding.
(2) Eligible deferred compensation
item means any deferred compensation
item with respect to which: (i) the payor is
either a U.S. person or a non-U.S. person
who elects to be treated as a U.S. person for purposes of section 877A(d)(1)
and (ii) the covered expatriate notifies the
payor of his or her status as a covered
expatriate and irrevocably waives any
right to claim any withholding reduction
under any treaty with the United States.
See section 8 of this notice for the applicable filing and reporting requirements.
Separate guidance will be issued under
section 877A(d)(3)(A) providing rules for
a non-U.S. person to elect to be treated
as a U.S. person for purposes of section
877A(d)(1).
(3) Ineligible deferred compensation
item means any deferred compensation
item that is not an eligible deferred compensation item. See section 8 of this notice
for the applicable filing and reporting requirements.
(4) Item of deferred compensation
means any amount of compensation if, under the terms of the plan, contract, or other
arrangement providing for such compensation (compensation arrangement), the
covered expatriate has a legally binding
right as of the expatriation date to such
compensation, the compensation has not
been actually or constructively received
on or before the expatriation date, and
pursuant to the compensation arrange-

November 9, 2009

ment the compensation is payable to (or
on behalf of) the covered expatriate on or
after the expatriation date, but such term
does not include any deferred compensation item that is described in section
5.B(1)a, 5.B(1)b, or 5.B(1)d of this notice. An item of deferred compensation
generally includes an amount (other than
a deferred compensation item described
in sections 5.B(1)a, 5.B(1)b, or 5.B(1)d
of this notice), whether or not substantially vested, that constitutes nonqualified
deferred compensation for purposes of
section 404(a)(5) (determined without regard to § 1.404(b)–1T, Q&A 2), including
a cash-settled stock appreciation right, a
phantom stock arrangement, a cash-settled restricted stock unit, an unfunded and
unsecured promise to pay money or other
compensation in the future (other than
such a promise to transfer property in the
future), and an interest in a trust described
in section 402(b)(1) or (4) (commonly
referred to as a secular trust).
(5) Property has the meaning set out in
§ 1.83–3(e).
(6) Stock appreciation right means a
right to compensation based on the appreciation in value of a specified number of
shares of stock or other property during a
specified period (such as a period beginning on the date of grant or some other
specified date and the date of exercise of
such right). A stock appreciation right is
a stock-settled stock appreciation right to
the extent that the compensation payable
under such right is in the form of a transfer of shares of stock or other property or
a right to receive property in the future.
A stock appreciation right is a cash-settled
stock appreciation right to the extent that
it is not a stock-settled stock appreciation
right.
(7) Restricted stock unit means a right
to receive compensation in cash, shares of
stock, or other property, as defined in section 5.B(5) of this notice, following the
satisfaction of a specified vesting condition. A restricted stock unit is a stock-settled restricted stock unit to the extent that
the compensation payable under such restricted stock unit is in the form of a transfer following the satisfaction of such vesting condition of shares of stock or other
property or a right to receive property in
the future. A restricted stock unit is a
cash-settled restricted stock unit to the ex-

November 9, 2009

tent that it is not a stock-settled restricted
stock unit.
(8) Substantially vested has the meaning set out in § 1.83–3(b).
C. Taxation of eligible deferred
compensation items
If a deferred compensation item qualifies as an eligible deferred compensation
item, the payor must deduct and withhold a
tax equal to 30 percent of any taxable payment to a covered expatriate with respect
to such an item. Section 877A(d)(1)(B)
provides that a taxable payment is any payment to the extent it would be includible in
gross income of the covered expatriate if
such person continued to be subject to tax
as a citizen or resident of the United States.
Because the covered expatriate must waive
his or her right to claim treaty benefits with
respect to an eligible deferred compensation item, the 30 percent withholding tax
cannot be reduced or eliminated by treaty.
See section 5.E of this notice for rules with
respect to an amount of deferred compensation attributable to services performed
outside the United States while the covered
expatriate was not a citizen or resident of
the United States. See section 5.F of this
notice for information concerning the application of the withholding rules.
D. Taxation of ineligible deferred
compensation items
With respect to any ineligible deferred
compensation item described in section
5.B(1)a, 5.B(1)b, and 5.B(1)c of this notice, an amount equal to the present value
of the covered expatriate’s accrued benefit is treated as having been received
by the covered expatriate on the day before the expatriation date as a distribution
under the plan and must be included on
the covered expatriate’s Form 1040 (or
other schedule, as provided in Treas. Reg.
§ 1.6012–1(b)(2)(ii)(b)) for the portion
of the taxable year that includes the day
before the expatriation date.
Within 60 days of the receipt of a properly completed Form W–8CE, the payor of
the ineligible deferred compensation item
must advise the covered expatriate of the
present value of the covered expatriate’s
accrued benefit in the deferred compensation item on the day before the expatriation
date. See section 8 of this notice for more
information concerning Form W–8CE.

606

In the case of a defined contribution
plan described in section 5.B(1)a, until further guidance is issued, the present value
of the covered expatriate’s accrued benefit is the account balance. In the case of
a defined benefit plan described in section
5.B(1)a, until further guidance is issued,
the present value of the covered expatriate’s accrued benefit is determined using
the method set forth in section 4.02 of Rev.
Proc. 2004–37, 2004–1 C.B. 1099, determined as of the day before the expatriation
date. See section 5.E of this notice with respect to an amount of deferred compensation attributable to services performed outside the United States while the covered
expatriate was not a citizen or resident of
the United States.
With respect to any ineligible deferred
compensation item not described in section 5.B(1)a or 5.B(1)d of this notice, until further guidance is issued, the present
value of the covered expatriate’s accrued
benefit is determined by applying principles in Prop. Treas. Reg. § 1.409A–4,
except as provided herein. Where such
proposed regulations provide for a determination to be made as of the end of the
taxable year, such determination shall be
made as of the day before the expatriation
date. For the purposes of this section 5.D,
the present value of the covered expatriate’s accrued benefit is determined without regard to any substantial risk of forfeiture. See section 5.E of this notice with respect to an amount of deferred compensation attributable to services performed outside the United States while the covered
expatriate was not a citizen or resident of
the United States.
With respect to any ineligible deferred
compensation item described in section
5.B(1)d of this notice, the rights of the
covered expatriate to such item will be
treated as becoming transferable (within
the meaning of Treas. Reg. § 1.83–3(d))
and not subject to a substantial risk of forfeiture (within the meaning of Treas. Reg.
§ 1.83–3(c)) on the day before the expatriation date. Thus, for example, in the case
of property transferred to or on behalf of
the covered expatriate in connection with
the performance of services that has not
become substantially vested as of the expatriation date, such as restricted stock, to
the extent that the covered expatriate has
not previously taken into account under
section 83 or in accordance with section

2009–45 I.R.B.

83 with respect to such transfer, generally
such property will be treated as having
become substantially vested for purposes
of section 83 on the day before the expatriation date. Consequently, the fair
market value of such property (determined
without regard to any lapse restriction as
defined in Treas. Reg. § 1.83–3(i)), reduced by the amount (if any) the covered
expatriate paid for the property, generally
will be includible in the covered expatriate’s income for Federal income tax
purposes as of such date.
With respect to a right to a transfer of property in the future (such as a
stock-settled stock appreciation right or a
stock-settled restricted stock unit), such
right will be treated as substantially vested
as of the day before the expatriation date
and, under the cash-equivalency doctrine
(see Cowden v. Commissioner, 289 F.2d
20 (5th Cir. 1961)), the value of such
right generally will be includible in the
income of the covered expatriate as of
such date. Until further guidance is issued,
the value of such right is determined by
applying principles similar to Prop. Treas.
Reg. § 1.409A–4, except that where
such proposed regulations provide for a
determination to be made as of the end
of the taxable year, such determination
shall be made as of the day before the
expatriation date.
Under section 877A(d)(2)(B), no early
distribution tax will be imposed by reason of the treatment resulting from section 877A(d)(2)(A). For purposes of this
notice, an early distribution tax is any
additional tax that would be imposed under sections 72(t), 220(e)(4), 223(f)(4),
409A(a)(1)(B), 529(c)(6), or 530(d)(4) if
the amounts required to be included in the
income of the covered expatriate under
section 877A(d)(2) had actually been paid
or transferred to the covered expatriate on
the day before the expatriation date.
Section 877A(d)(2)(C) provides that
appropriate adjustments shall be made
to subsequent distributions from the plan
to reflect the tax imposed by section
877A(d)(2). Thus, when the covered expatriate receives distributions, the amount
that was includible in his or her gross
income under section 877A(d)(2) will be
treated as investment in the contract for
purposes of section 72 in cases where such
section would apply to such amounts.

2009–45 I.R.B.

In other cases, the covered expatriate
may make an appropriate adjustment to the
amount that would otherwise be includible
in the covered expatriate’s income to prevent amounts previously taxed under section 877A(d)(2) from being includible in
income and subject to Federal income tax
a second time. With respect to ineligible deferred compensation items to which
Prop. Treas. Reg. § 1.409A–4 would apply, such adjustment will be made pursuant
to principles similar to Prop. Treas. Reg.
§ 1.409A–4. With respect to any ineligible deferred compensation items to which
section 72 does not apply and Prop. Treas.
Reg. § 1.409A–4 would not apply, until
further guidance is issued, taxpayers may
use any reasonable method to determine
the amount of such adjustment, so long
as such method: is consistently applied to
all such ineligible deferred compensation
items with respect to the covered expatriate; does not reduce the amount includible
in the covered expatriate’s income with respect to any ineligible deferred compensation item below zero; and does not result in
an aggregate amount of such adjustments
that, when combined with amounts treated
as investment in the contract for purposes
of section 72 and pursuant to principles
similar to Prop. Treas. Reg. § 1.409A–4,
exceeds the amount included in the covered expatriate’s income pursuant to section 877A(d)(2)(A).
E. Services performed outside the
United States
Section 877A(d)(5) provides that the
rules of sections 877A(d)(1) and (2) shall
not apply to any deferred compensation
item to the extent attributable to services
performed outside the United States while
the covered expatriate was not a citizen or
resident of the United States. Thus, in the
case of an eligible deferred compensation
item, the amount of a taxable payment under section 877A(d)(1)(A) with respect to
such item will not include the portion of
such item that is attributable to services
performed outside the United States before
or after the expatriation date while the covered expatriate was not a citizen or resident
of the United States.
To the extent that a portion of an ineligible deferred compensation item is attributable to services performed outside
the United States before or after the expa-

607

triation date while the covered expatriate
was not a citizen or resident of the United
States, the amount includible in income
under section 877A(d)(2)(A) with respect
to such item will not include such portion.
Until further guidance is issued, taxpayers may use any reasonable method that is
consistent with existing guidance (including Treas. Reg. § 1.861–4(b)(2), Revenue Ruling 79–388, and Revenue Procedure 2004–37) and is based upon a reasonable, good faith interpretation of section
877A(d)(5) to determine the portion of a
deferred compensation item that is attributable to services performed outside the
United States while the covered expatriate
was not a citizen or resident of the United
States.
F. Application of withholding rules
Section 877A(d)(6) provides that the
tax that is imposed on taxable payments
from eligible deferred compensation items
by section 877A(d)(1) is imposed under
section 871, but that the payment is subject
to withholding under section 877A(d)(1)
and not under section 1441 or Chapter 24.
Any amount due under section 871 that is
not paid by means of withholding must be
reported on the income tax return filed by
the covered expatriate for the relevant taxable year. Section 877A(d)(6)(A) provides
that rules similar to the rules of sections
1461 through 1464 apply for purposes of
section 877A(d). Thus, a payor is liable for
the tax as stated under section 1461. The
covered expatriate must notify the payor of
his or her covered expatriate status by submitting Form W–8CE to the trustee on the
earlier of (1) the day prior to the first distribution on or after the expatriation date or
(2) 30 days after the expatriation date.
Section 877A(g)(1)(C) provides that in
the case of any covered expatriate who is
subject to tax as a citizen or resident of the
United States for any period beginning after the expatriation date, such individual
will not be treated as a covered expatriate
during such period for purposes of the 30
percent withholding tax on a taxable payment from an eligible deferred compensation item. Thus, the taxable payment
would not be subject to tax under section
871, but would be subject to the tax imposed on payments to a citizen or resident
of the United States.

November 9, 2009

This notice does not address certain
withholding issues with respect to deferred
compensation items.
Pending further
guidance, employers and plans need not
withhold income taxes with respect to
amounts deemed received under section
877A(d)(2)(A). Instead, the covered expatriate should report ineligible deferred
compensation items on his or her Form
1040 (or other schedule, as provided in
Treas. Reg. § 1.6012–1(b)(2)(ii)(b)) for
the portion of the taxable year that includes
the day before the expatriation date. Also
pending further guidance, the FICA and
FUTA taxation of deferred compensation
items should be determined without regard
to section 877A. The IRS and Treasury
Department invite public comments on
these issues and expect to provide future
guidance on such withholding requirements.
G. Examples
Example 9. On January 3, 2006, Corporation
Y, a U.S. corporation, granted B, an employee of
Corporation Y, 10 stock-settled stock appreciation
rights and 10 cash-settled stock appreciation rights
in connection with B’s performance of services. B
can exercise the stock appreciation rights at any
time from January 3, 2006, through January 2,
2016. Each stock-settled stock appreciation right
entitles B to receive upon exercise a number of
shares of the common stock of Corporation Y equal
to the difference between the value of a share of
Corporation Y common stock on the date B exercises
the right over the value of a share of such stock
on the date of grant, divided by the value of a
share of such stock on the date of exercise. Each
cash-settled stock appreciation right entitles B to a
cash payment upon exercise equal to the excess of
the value of a share of Corporation Y stock on the
date of exercise over the value of a share of such
stock on the date of grant. The stock appreciation
rights do not provide for a deferral of compensation
under section 409A, in accordance with Treas. Reg.
§ 1.409A–1(b)(5). On January 3, 2006, the per share
price of the Corporation Y stock was $10. As of
November 18, 2009, B had not exercised any of the
stock appreciation rights and the value of a share of
the Corporation Y stock was $20. On November 19,
2009, B ceases to be a lawful permanent resident of
the United States and becomes a covered expatriate.
During B’s employment with Corporation Y, B
performed all services for Corporation Y in the
United States.
The stock-settled stock appreciation rights are
deferred compensation items within the meaning of section 877A(d)(4)(D). Pursuant to section
877A(d)(2)(A)(ii), the stock-settled stock appreciation rights are treated as substantially vested on
November 18, 2009, and their value is includible in
B’s income on that date. Pursuant to Prop. Treas.
Reg. § 1.409A–4(b)(6), B is required to include $100
in income on that date with respect to such rights.

November 9, 2009

The cash-settled stock appreciation rights are deferred compensation items within the meaning of section 877A(d)(4)(C). Under section 877A(d)(2)(A)(i),
B is treated as having received on November 18,
2009, an amount equal to the present value of the
cash-settled stock appreciation rights. Pursuant to
Prop. Treas. Reg. § 1.409A–4(b)(6), B is required to
include $100 in income with respect to such rights.
Example 10. Assume the same facts as in Example 9, except that, with respect to all of B’s stock
appreciation rights, B timely notifies Corporation
Y of her status as a covered expatriate and irrevocably waives any right to claim any withholding
reduction under any treaty with the United States.
On January 15, 2010, when the value of a share of
Corporation Y stock is $25, B exercises all of her
stock appreciation rights.
The stock appreciation rights are eligible deferred
compensation items within the meaning of section
877A(d)(3). B has no income inclusion on November 18, 2009, with respect to the stock appreciation
rights.
With respect to the stock-settled stock appreciation rights, on January 15, 2010, B is required to include $150 in income. Corporation Y is required to
deduct and withhold a tax equal to $45 from the $150
of income recognized by B on January 15, 2010 (30%
of the amount included in B’s gross income). With
respect to the cash-settled stock appreciation rights,
Corporation Y is required to deduct and withhold a
tax equal to $45 from the $150 that is includible in
B’s income on January 15, 2010.
Example 11. C relinquishes his citizenship on December 17, 2009 and becomes a covered expatriate.
On December 16, 2009, C was an employee of Corporation Z, a U.S. corporation. During C’s employment
with Corporation Z, C performed all services for Corporation Z in the United States.
On December 16, 2009, C had stock-settled restricted stock units that entitle C to 100 shares of
Corporation Z’s common stock if C continues to provide substantial services to Corporation Z until December 16, 2013. Corporation Z granted C the restricted stock units on December 16, 2008, in connection with C’s performance of services. Under Treas.
Reg. § 1.409A–1(b)(4), the restricted stock units do
not provide for a deferral of compensation for purposes of section 409A. On December 16, 2009, the
fair market value of a share of Corporation Z stock
was $30.
The stock-settled restricted stock units are
deferred compensation items within the meaning of section 877A(d)(4)(D). Pursuant to section 877A(d)(2)(A)(ii), the stock-settled restricted
stock units are treated as substantially vested on
December 16, 2009, and the value of such units is
includible in C’s income on December 16, 2009.
Pursuant to Prop. Treas. Reg. § 1.409A–4(b)(6),
C is required to include $3,000 in income on
December 16, 2009, the amount of the fair market
value of Corporation Z’s stock on that date multiplied
by the number of shares covered by the restricted
stock units ($30 x 100).
Example 12. Assume the same facts as in Example 11, except that, on December 16, 2009, with respect to the restricted stock units, C timely notifies
Corporation Z of his status as a covered expatriate
and irrevocably waives any right to claim any withholding reduction under any treaty with the United

608

States. C continues to perform services for Corporation Z outside the United States and, on December
16, 2013, C fulfills the requirements of the vesting
schedule and receives 100 shares of Corporation Z’s
common stock when the share price of Corporation Z
stock is $50.
The restricted stock units are eligible deferred
compensation items within the meaning of section 877A(d)(3). C has no income inclusion on
December 16, 2009, with respect to the restricted
stock units.
Pursuant to section 5.E of this notice, C reasonably determines that 80% of the value of the stock
transferred to C on December 16, 2013 pursuant to the
restricted stock units is attributable to services performed outside the United States while C was not a
citizen or resident of the United States. Therefore,
$1,000 (20% of $5,000) will be includible in C’s gross
income and Corporation Z is required to deduct and
withhold a tax equal to $300.
Example 13. D has been a U.S. citizen since birth.
D relinquishes her citizenship on November 19, 2009
and becomes a covered expatriate. On November 18,
2009, the day before D’s relinquishment of citizenship, D was an employee of Corporation W, a U.S.
corporation. After November 18, 2009, D performs
services for Corporation W outside the United States.
On November 18, 2009, D had 1,000 shares of restricted common stock of Corporation W that Corporation W granted to D on November 18, 2008, in connection with D’s performance of services. Under the
terms of the award, D will forfeit all of the restricted
shares if D ceases to be employed by Corporation D
before November 18, 2013. D’s shares of restricted
stock become substantially vested on November 17,
2013. D did not make an election pursuant to section
83(b) with respect to the shares of restricted stock and
paid nothing for them. On November 18, 2009, the
fair market value of Corporation W’s stock was $100
per share.
The shares of restricted stock are deferred
compensation items within the meaning of
section 877A(d)(4)(D). Pursuant to section
877A(d)(2)(A)(ii), D’s rights to the shares of restricted stock are treated as substantially vested on
November 18, 2009. Accordingly, D is required to
include in income $100,000 ($100 x 1,000) on that
date.
Example 14. Assume the same facts as in Example 13, except that, with respect to the restricted stock,
D timely notifies Corporation W of her status as a
covered expatriate and irrevocably waives any right
to claim any withholding reduction under any treaty
with the United States. On November 18, 2013, D’s
shares of restricted stock become substantially vested
and the fair market value of Corporation W’s stock is
$200.
Corporation W is required to deduct and withhold a tax equal to 30% from any income that would
be includible in D’s gross income as a result of D
being treated as a citizen or resident of the United
States. Pursuant to section 5.E of this notice, D reasonably determines that 80% of the value of the restricted stock on November 18, 2013, is attributable
to services performed outside the United States while
D was not a citizen or resident of the United States.
Therefore, on November 18, 2013, $40,000 (20% of
$200,000) is includible in D’s gross income, and Cor-

2009–45 I.R.B.

poration W is required to deduct and withhold a tax
equal to $12,000.
Example 15. E, a covered expatriate, relinquishes his citizenship on November 19, 2009, and
becomes a resident of Country N. Country N does
not have a tax treaty with the United States. Until
November 19, 2009, while a citizen of the United
States, E performed services as an employee for
Corporation V, a U.S. corporation, in and outside the
United States. After November 18, 2009, E performs
services for Corporation V solely outside the United
States.
On November 18, 2009, E participates in an
account balance nonqualified deferred compensation
plan. E’s account balance under the plan is deemed
to be invested in a specified predetermined actual
investment. The value of the deemed investment
under E’s account balance plan is $1,000,000 on that
date. Under the plan, Corporation V is required to
pay E an amount equal to E’s account balance under
the plan on November 30, 2012. E’s account balance
plan complies with the requirements of section 409A
at all relevant times and no amounts are set aside in a
trust or otherwise to pay amounts due under the plan.
The account balance plan is an item of deferred compensation within the meaning of section
877A(d)(4)(C). Pursuant to section 877A(d)(2)(A)(i)
and Prop. Treas. Reg. § 1.409A–4(b)(3), E is
treated as having received $1,000,000 on November
18, 2009. If, on November 30, 2012, the value of
the deemed investment in the account balance plan
is $1,500,000 and that amount is includible in E’s
gross income on that date, then, pursuant to section
877A(d)(2)(C) and Prop. Treas. Reg. § 1.409A–4,
an appropriate adjustment is made as a result of
E’s treatment as having received $1,000,000 on
November 18, 2009. Accordingly, only $500,000
is includible in E’s gross income on November 30,
2012.
Example 16. Assume the same facts as in Example 15, except that, with respect to the account balance plan, E timely notifies Corporation V of his status as a covered expatriate and irrevocably waives
any right to claim any withholding reduction under
any treaty with the United States.
The account balance plan is an eligible deferred compensation item within the meaning of
section 877A(d)(3). E has no income inclusion on
November 18, 2009, with respect to the account
balance plan. On November 30, 2012, $1,500,000 is
includible in E’s gross income as a result of E being
treated as a citizen or resident of the United States,
and Corporation V is required to deduct and withhold
a tax equal to $450,000 from the amount it pays to E
pursuant to the account balance plan.
Example 17. F relinquishes his citizenship on
November 11, 2009, and becomes a covered expatriate. On November 10, 2009, the day before F’s relinquishment of citizenship, F was a participant in a plan
described in section 401(a) that includes a trust exempt from tax under section 501(a). F complies with
the procedures prescribed in section 8 of this notice
for notifying the payor of his status as a covered expatriate and making an irrevocable waiver of any right
to claim treaty benefits with respect to withholding on
the payment. Therefore, F’s interest in the plan is an
eligible deferred compensation item and tax will not
be due under section 877A until F receives taxable
payments from the plan. When F receives taxable

2009–45 I.R.B.

payments from the plan, the payor will be required
to withhold 30 percent of the gross amount of each
taxable payment pursuant to section 877A(d)(1).
Example 18. G relinquishes her citizenship on
November 12, 2009, and becomes a covered expatriate. On November 11, 2009, the day before G’s
relinquishment of citizenship, G was a participant
in a plan described in section 401(a) that includes a
trust exempt from tax under section 501(a). G does
not comply with the prescribed procedures for notifying the payor of her status as a covered expatriate and making an irrevocable waiver of any right to
claim treaty benefits with respect to withholding on
the payment. Therefore, G’s interest in the plan is
an ineligible deferred compensation item. Under section 877A(d)(2), G is treated as having received on
November 11, 2009, an amount equal to the present
value of her accrued benefit in the plan determined
in accordance with section 5.D of this notice and is
required to report this amount on her federal income
tax return for the taxable year that includes November 11, 2009. G will not be subject to any tax on early
distributions that might otherwise be payable.
When G receives distributions from the plan, the
amount that G includes in her gross income for her
taxable period ending on November 12, 2009, will be
treated as investment in the contract for purposes of
section 72. Thus, a portion of each distribution will
constitute investment in the contract and will not be
taxed again.
Example 19. H relinquishes his citizenship on
November 13, 2009, and becomes a covered expatriate. On November 12, 2009, the day before H’s relinquishment of citizenship, H is a participant in a foreign pension plan that provides benefits pursuant to a
trust described in section 402(b)(4) and that does not
provide for a deferral of compensation under Treas.
Reg. § 1.409A–1(b)(6). The trustee of the trust under the foreign pension plan does not comply with
the procedures for electing to be treated as a U.S.
person for purposes of section 877A(d)(1). Therefore, H’s interest in the plan is an ineligible deferred
compensation item even if H complies with the prescribed procedures for notifying the payor of his status as a covered expatriate and makes an irrevocable
waiver of any right to claim treaty benefits with respect to withholding on the payment. Under section
877A(d)(2), on November 12, 2009, H is treated as
having received an amount equal to the present value
of his accrued benefit in the plan determined in accordance with section 5.D of this notice and is required
to report such amount (other than his investment in
the contract) on his federal income tax return for the
taxable year that includes November 12, 2009.

SECTION 6. SPECIFIED TAX
DEFERRED ACCOUNTS
The mark-to-market regime does not
apply to specified tax deferred accounts.
Instead, section 877A(e)(1)(A) provides
that if a covered expatriate holds any interest in a specified tax deferred account
(defined below) on the day before the expatriation date, such covered expatriate is
treated as having received a distribution of
his or her entire interest in such account

609

on the day before the expatriation date.
Within 60 days of receipt of a properly
completed Form W–8CE, the custodian of
a specified tax deferred account must advise the covered expatriate of the amount
of the covered expatriate’s entire interest
in his or her account on the day before his
or her expatriation date. See section 8 of
this notice for more information concerning Form W–8CE.
Section 877A(e)(1)(B) provides that
no early distribution tax will apply by
reason of the tax imposed by section
877A(e)(1)(A). Section 877A(g)(6) provides that the term “early distribution tax”
means any increase in tax imposed under sections 72(t), 220(e)(4), 223(f)(4),
409A(a)(1)(B), 529(c)(6), or 530(d)(4).
Section 877A(e)(1)(C) provides that
appropriate adjustments must be made to
subsequent distributions to take into account the previously taxed amount under
section 877A. Thus, in the case of distributions that are taxable under the rules of
section 72, the amount that the covered
expatriate includes in gross income pursuant to section 877A(e)(1) will be treated
as investment in the contract for purposes
of section 72.
Section 877A(e)(2) provides that the
term “specified tax deferred account”
means an individual retirement plan (as
defined in section 7701(a)(37)), a qualified tuition plan (as defined in section
529), a Coverdell education savings account (as defined in section 530), a health
savings account (as defined in section
223), and an Archer MSA (as defined in
section 220). However, simplified employee pensions (within the meaning of
section 408(k)) and simplified retirement
accounts (within the meaning of section
408(p)) of a covered expatriate are treated
as deferred compensation items and not
as specified tax deferred accounts. See
section 5 of this notice for rules pertaining
to deferred compensation items.
SECTION 7. INTERESTS IN
NONGRANTOR TRUSTS
A. In general
The mark-to-market regime does not
apply to any interest in a nongrantor trust.
For this purpose, section 877A(f)(3) provides that the term “nongrantor trust”
means the portion of any trust, whether

November 9, 2009

domestic or foreign, of which the covered
expatriate is not considered the owner
under subpart E of Part I of subchapter J,
determined as of the day before the expatriation date. Section 877A(f) provides
that in the case of any direct or indirect
distribution of property (including money)
to a covered expatriate from a nongrantor
trust of which the covered expatriate was
a beneficiary on the day before the expatriation date, the trustee must deduct and
withhold from the distribution an amount
equal to 30 percent of the taxable portion
of the distribution. Section 877A(f)(2)
provides that the term “taxable portion”
means, with respect to any distribution, the
portion of the distribution that would have
been includible in the covered expatriate’s
gross income if the covered expatriate had
continued to be subject to tax as a citizen
or resident of the United States.
For purposes of determining whether
a covered expatriate is a beneficiary of a
nongrantor trust on the day before the expatriation date, a beneficiary is a person
(a) who is entitled or permitted, under the
terms of the trust instrument or applicable local law, to receive a direct or indirect distribution of trust income or corpus
(including, for example, a distribution in
discharge of an obligation of that person),
(b) with the power to apply trust income or
corpus for his or her own benefit, or (c) to
whom the trust income or corpus could be
paid if the trust or the current interests in
the trust were then terminated.
If a trust that is a nongrantor trust immediately before the expatriation date
subsequently becomes a grantor trust of
which the covered expatriate is treated
as the owner, directly or indirectly, then
the conversion is deemed to be a taxable
distribution under section 877A(f)(1) to
the covered expatriate to the extent of the
portion of the trust of which the covered
expatriate is then treated as the owner.
Section 877A(f) does not apply to any
distribution from a trust forming part of a
plan an interest in which is treated as a deferred compensation item to which section
5 of this notice applies or part of a specified tax deferred account to which section
6 of this notice applies.
B. Recognition of gain by trust
Section 877A(f)(1)(B) provides that
if the fair market value of property dis-

November 9, 2009

tributed from a trust described in section
7.A of this notice exceeds its adjusted basis in the hands of the trust, gain must be
recognized to the trust as if such property
had been sold to the covered expatriate at
its fair market value.
Example 20. On Date 1, Trustee of a complex,
nongrantor trust, distributes a painting to A, a covered expatriate who was a beneficiary of the trust
on the day before A’s expatriation date. The painting is a capital asset and has a basis of $100,000
and a fair market value of $400,000. The trust is a
domestic trust that excludes gains from the sale or
exchange of capital assets from its distributable net
income (DNI) under section 643(a)(3). On Date 1,
the trust is deemed to have recognized capital gain
of $300,000 under section 877A(f)(1)(B). The trust
must include the $300,000 of capital gain in its gross
income and may not deduct that amount under section
661 in computing its taxable income under section
641. The trust is taxable on the $300,000 capital gain
(reduced by the applicable exemption amount under
section 642(b) and any applicable deductions) and is
not required to deduct and withhold any amount pursuant to section 877A(f)(1)(A). A is not taxable on
the $300,000 capital gain.
Example 21. The facts are the same as in Example
20 except that the trust is a foreign trust that includes
capital gain in DNI pursuant to section 643(a)(6)(C).
Although the trust must include the $300,000 of capital gain in its gross income, it may deduct that amount
under section 661 in computing its taxable income
under section 641. If A, now a nonresident alien,
had continued to be subject to tax as a citizen or resident of the United States, the capital gain of $300,000
would have been includible in A’s gross income pursuant to section 662. Accordingly, the trust is required to deduct and withhold $90,000 (30 percent
of $300,000) pursuant to section 877A(f)(1)(A).

C. Withholding
Section 877A(f)(4)(A) provides that
rules similar to the rules of section
877A(d)(6) shall apply. Thus, the tax
that is imposed by section 877A(f) is imposed under section 871, but the payment
is subject to withholding under section
877A(f)(1)(A) and not under section 1441.
Any amount due under section 871 that is
not paid by means of withholding must be
reported on the income tax return filed by
the covered expatriate for the relevant taxable year. In addition, rules similar to the
rules of section 1461 through 1464 apply.
Thus, the trustee, as the person required to
deduct and withhold the tax, is liable for
such tax as stated under section 1461. The
covered expatriate must notify the trustee
of his or her covered expatriate status by
submitting Form W–8CE to the trustee on
the earlier of (1) the day prior to the first
distribution on or after the expatriation
date or (2) 30 days after the expatriation

610

date. For more information about Form
W–8CE, see section 8 of this notice.
Section 877A(g)(1)(C) provides, in
part, that in the case of any covered expatriate who is subject to tax as a citizen or
resident of the United States for any period
beginning after the expatriation date, such
individual will not be treated as a covered
expatriate during such period for purposes
of the 30 percent withholding tax on the
taxable portion of a distribution from a
nongrantor trust. Thus, the taxable portion
of the distribution would not be subject to
tax under section 871, but would be subject to the tax imposed on distributions to
a citizen or resident of the United States.
D. Interaction with treaties
Section 877A(f)(4)(B) provides that
a covered expatriate shall be treated as
having waived any right to claim any reduction under any treaty with the United
States in withholding on any distribution
to which section 877A(f)(1)(A) applies
unless the covered expatriate agrees to
such other treatment as the Secretary determines appropriate. Until further guidance
is issued, a covered expatriate may preserve his or her right to claim a treaty
benefit with respect to a distribution to
which section 877A(f)(1)(A) applies by
electing on Form 8854 to be treated as
having received the value of his or her
interest in the trust as determined for purposes of section 877A, on the day before
the expatriation date.
In order to make the election described
in the previous paragraph, the covered expatriate must obtain a letter ruling from
the IRS as to the value, if ascertainable,
of his or her interest in the trust as of the
day before the expatriation date by following the procedures set out in Revenue
Procedure 2009–4, 2009–1 I.R.B. 118 (or
any subsequent publication that replaces
Revenue Procedure 2009–4). Until the
trustee receives a copy of the letter ruling from the covered expatriate and a certification signed under penalties of perjury
that the tax due on the value of the interest
in the trust has been paid to the IRS, the
trustee must withhold as provided in section 877A(f)(1). The amount of tax due on
the value of the interest in the nongrantor
trust as of the day before the expatriation
date will be adjusted by the amount of any
tax withheld on or after the expatriation

2009–45 I.R.B.

date and prior to receipt of the letter ruling. The covered expatriate may not make
the election if the IRS determines that his
or her interest in the trust does not have an
ascertainable value as of the day before the
expatriation date.
If the covered expatriate provides the
trustee with a copy of the letter ruling and a
certification written under penalties of perjury that the tax due on the value of the
interest in the trust has been paid to the
IRS, then the tax imposed under section
877A(f) with respect to the trust will be
deemed to have been fully satisfied. Accordingly, no subsequent distribution from
the trust to the covered expatriate will be
subject to 30 percent withholding under
section 877A(f)(1)(A), and the covered expatriate will not be precluded by section
877A(f)(4)(B) from claiming treaty benefits with respect to any distribution from
the trust under the appropriate article of an
applicable treaty.
SECTION 8. FILING AND
REPORTING REQUIREMENTS
A. In general
Background. Section 301(e) of the
Act amended section 6039G to impose a
requirement on any individual to whom
section 877A applies for any taxable year,
to provide a statement that includes certain
information as provided in section 6039G,
including details of the individual’s income, assets, and liabilities. The Treasury
Department and the IRS intend to issue
regulations under section 877A that will
require covered expatriates who are liable
for tax under section 877A to report certain information in connection with their
expatriation. Until the issuance of such
regulations, covered expatriates must report information in compliance with the
rules set forth in this notice and any other
information that the IRS may require.
B. Income tax returns
Initial filing obligations for the year of
expatriation. A covered expatriate must
file a dual-status return if he or she was
a U.S. citizen or long-term resident for
only part of the taxable year that includes
the day before the expatriation date. A
dual-status return requires the covered expatriate to file a Form 1040NR with a Form
1040 attached as a schedule. See Treas.

2009–45 I.R.B.

Reg. § 1.6012–1(b)(2)(ii)(b), Treas. Reg.
§ 1.871–13, and chapter 6 of IRS Publication 519 for the requirements for filing a
dual-status return. If the covered expatriate’s expatriation date is January 1, then he
or she will not be required to file a dual-status return.
Filing obligations for subsequent years.
A covered expatriate must file Form
1040NR in accordance with Treas. Reg.
§1.6012–1(b). If the covered expatriate is
fully withheld upon at source for a particular taxable year and has no income
effectively connected with the conduct of
a trade or business in the United States
for that year, then he or she will not be
required to file a Form 1040NR for that
year. See Treas. Reg. §1.6012–1(b)(2).
C. Form 8854
Certification of compliance with tax
obligations for preceding five years. All
U.S. citizens who relinquish their U.S. citizenship and all long-term residents who
cease to be lawful permanent residents
of the United States (within the meaning of section 7701(b)(6)) must file Form
8854 in order to certify, under penalties
of perjury, that they have been in compliance with all federal tax laws during the
five years preceding the year of expatriation. Individuals who fail to make such
certification will be treated as covered
expatriates within the meaning of section
877A(g) whether or not they also meet the
tax liability test or the net worth test. For
more information about the tax liability
test, the net worth test, and the certification test, see section 2 of this notice.
Initial waiver of treaty benefits for eligible deferred compensation items and
annual reporting requirements. A covered
expatriate who wishes to treat a deferred
compensation item as an eligible deferred
compensation item must make an irrevocable election on Form 8854 for the
taxable year that includes the day before
the expatriation date to waive any right to
claim any withholding reduction under any
treaty with the United States with respect
to the eligible deferred compensation item.
See section 5.B(2) of this notice. The
covered expatriate must make a separate
election for each deferred compensation
item that he or she wishes to treat as an
eligible deferred compensation item. The
covered expatriate must also annually file

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Form 8854 to certify that no distributions
have been received from his or her eligible
deferred compensation item(s) or to report
the distributions received.
Interest in a nongrantor trust. A covered expatriate with any interest in a
nongrantor trust on the day before his or
her expatriation date must file Form 8854
annually to certify that no distributions
have been received or to report the distributions received. However, if a covered
expatriate makes an election on Form 8854
to be treated as having received the value
of his or her entire interest in the trust as
determined for purposes of section 877A
(thereby preserving his or her right to
claim a treaty benefit with respect to a distribution to which section 877A(f)(1)(A)
applies), follows the procedure set forth
in section 7.D of this notice for obtaining
a letter ruling from the IRS, and pays the
tax due, the covered expatriate will not be
required to report subsequent distributions
with respect to his or her interest in the
trust on Form 8854. The election, once
made, cannot be revoked except with the
consent of the Commissioner.
Election not to apply in-bound step-up
in basis rule. A covered expatriate who
wishes to make an election described in
section 3.D of this notice, with respect
to assets that the covered expatriate held
when he or she first became a resident of
the United States, must make the election
on Form 8854 for the taxable year that includes the day before the expatriation date.
Time and manner of filing initial Form
8854. A covered expatriate must file Form
8854 with the covered expatriate’s Form
1040NR or Form 1040, whichever is applicable, for the covered expatriate’s taxable
year that includes the day before the expatriation date. A covered expatriate who
is required to file Form 8854 for such taxable year will be considered to have timely
filed Form 8854 if it is filed by the due
date of the original Form 1040NR or Form
1040 (including extensions) for such taxable year. Covered expatriates who are
U.S. citizens or long-term residents for
only part of the taxable year that includes
the day before the expatriation date must
file a dual-status return. See section 8.B of
this notice.
Example 22. A relinquishes his citizenship on
December 1, 2009. Under section 877A(a)(1), A is
deemed to have sold all of A’s property on November 30, 2009, the day before the expatriation date. A

November 9, 2009

must certify on a Form 8854 filed with Form 1040NR
for the 2009 taxable year that A has complied with all
of A’s federal tax obligations for 2004 through 2008.
For the portion of the taxable year that includes the
day before the expatriation date, A must attach a Form
1040 (or other schedule, as provided in Treas. Reg.
§ 1.6012–1(b)(2)(ii)(b)) to his Form 1040NR. If A
does not file Form 8854, A will be treated as a covered expatriate even if A does not meet the tax liability test or the net worth test.

Individuals electing to defer the tax imposed by section 877A. A covered expatriate who makes a deferral election under
section 877A(b) and section 3.E of this notice must list all deferral assets on Form
8854 for the taxable year that includes the
day before the expatriation date, as well as
the amount of deferred tax attributable to
each deferral asset, and make an irrevocable election on such Form 8854 to waive
any right under any treaty of the United
States that would preclude assessment or
collection of any tax imposed by reason of
section 877A. The covered expatriate also
must file Form 8854 annually for taxable
years up to and including the taxable year
in which the full amount of deferred tax
and interest is paid. These annual filings
will permit the IRS to monitor compliance
with the terms of the covered expatriate’s
tax deferral agreement. See section 3.E
of this notice for guidance on the types of
events that will trigger the payment of the
deferred tax. The Form 8854 must be attached to a timely filed Form 1040NR (or,
if applicable, Form 1040). If the covered
expatriate is not otherwise required to file
Form 1040NR (or Form 1040), Form 8854
must be submitted to the address provided
in the instructions to the form by the due
date (had the covered expatriate otherwise
been required to file) of Form 1040NR
plus extensions, and must contain such information as required by the instructions to
Form 8854.
2008 tax year. For purposes of complying with section 877A for the 2008 tax
year, Form 8854 and the request for the deferral of tax will be timely filed if these
documents are filed by the due date of the
return plus extensions (or 30 days after
publication of this notice, if later). However, interest will be imposed on tax that is
paid after the due date of the return (without regard to extensions granted).
D. Form W–8CE
A covered expatriate who has a deferred compensation item, a specified tax

November 9, 2009

deferred account, or an interest in a nongrantor trust must file Form W–8CE with
the relevant payor on the earlier of (1) the
day prior to the first distribution on or after
the expatriation date or (2) 30 days after
the covered expatriate’s expatriation date
as defined in section 877A(g)(3)). However, if the expatriation date was prior to
the publication date of Form W–8CE, the
covered expatriate must file Form W–8CE
with the relevant payor on the earlier of
(1) the date prior to the first distribution
on or after the expatriation date or (2) 30
days after the date of publication of this
notice.
Eligible deferred compensation item.
In the case of an eligible deferred compensation item described in section 5.B(2) of
this notice, Form W–8CE provides notice
to the payor that the individual is a covered
expatriate who has waived treaty benefits
with respect to the eligible deferred compensation item, with the result that taxable
payments will be subject to 30 percent
withholding under section 877A(d)(1).
See section 5.C of this notice.
Ineligible deferred compensation item.
In the case of an ineligible deferred compensation item described in section 5.B(3)
of this notice, Form W–8CE provides notice to the payor that the individual is a
covered expatriate who is treated as receiving an amount equal to the present
value of his or her accrued benefit on the
day before the expatriation date and with
respect to which appropriate adjustments
must be made to subsequent distributions
to reflect the tax imposed by reason of such
treatment. See section 5.D of this notice.
Within 60 days of receipt of Form W–8CE,
the payor must provide a written statement
to the covered expatriate setting forth the
present value of the covered expatriate’s
accrued benefit on the day before the expatriation date.
Specified tax deferred account. In the
case of a specified tax deferred account,
Form W–8CE provides notice to the payor
that the individual is a covered expatriate
who is treated as receiving a distribution
of his or her entire interest in the account
on the day before his or her expatriation
date and with respect to which appropriate
adjustments must be made to subsequent
distributions to reflect the tax imposed by
reason of such treatment. See section 6 of
this notice. Within 60 days of receipt of
Form W–8CE, the payor must provide a

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written statement to the covered expatriate
setting forth the amount of the covered expatriate’s account balance on the day before the expatriation date.
Interest in nongrantor trust. In the case
of an interest in a nongrantor trust of which
the covered expatriate was a beneficiary on
the day before the expatriation date, Form
W–8CE provides notice to the trustee that
the individual is a covered expatriate. The
covered expatriate will be deemed to have
waived treaty benefits with respect to future distributions from the trust unless the
covered expatriate checks a box on Form
W–8CE certifying that he or she will elect
on Form 8854 to pay tax currently on the
value of his or her interest in the trust as
determined for purposes of section 877A
and will request a letter ruling from the
IRS as to the value of his or her interest
in such trust, as provided in section 7.D
of this notice. If the box is checked, the
trustee must, within 60 days of receipt of
Form W–8CE, provide the covered expatriate with the information needed to calculate the value of his or her interest in the
trust as of the day before the expatriation
date. The covered expatriate will be subject to 30 percent withholding under section 877A(f)(1)(A) on the taxable portion
of each distribution from the trust on or after the expatriation date until such time as
the trustee receives a copy of the letter ruling and the covered expatriate’s certification in writing under penalties of perjury
that the tax owed on the value of the interest in the trust has been paid to the IRS. See
section 7.D of this notice.
SECTION 9. GIFTS OR BEQUESTS
Gifts or bequests from a covered expatriate on or after June 17, 2008, are subject
to a transfer tax under new section 2801.
Separate guidance will be issued for U.S.
persons who receive gifts or bequests on or
after June 17, 2008, from expatriates who
are subject to the rules of this notice. Satisfaction of the reporting and tax obligations
for covered gifts or bequests received will
be deferred, pending the issuance of guidance. That guidance will provide a reasonable period of time between the issuance of
that guidance and the date prescribed for
such reporting and tax payments.

2009–45 I.R.B.

REQUEST FOR COMMENTS
The Treasury Department and the IRS
invite public comments on the guidance
provided in this notice. All materials submitted will be available for public inspection and copying.
Comments may be submitted to Internal
Revenue Service, CC:PA:LPD:PR (Notice
2009–85), Room 5203, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may also be hand-delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to the Couriers Desk
at 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR
(Notice 2009–85), Room 5203. Submissions may also be sent electronically via
the internet to the following email address:
[email protected].
Include the notice number (Notice
2009–85) in the subject line.
EFFECTIVE DATE
Regulations to be issued incorporating
the guidance set forth in this notice will apply to individuals whose expatriation date
is on or after October 15, 2009. Until
such regulations are issued, such individuals may apply the rules described in the notice in their entirety. Individuals whose expatriation date is on or after June 17, 2008,
and before October 15, 2009, may apply
the rules described in this notice in their
entirety.
DRAFTING INFORMATION
The principal drafters of this notice are
Willard W. Yates and Lara A. Banjanin

2009–45 I.R.B.

of the Office of Associate Chief Counsel
(International). For further information
regarding this notice generally, contact
Willard W. Yates or Lara A. Banjanin at
(202) 622–3880 (not a toll-free number).
For further information regarding
deferred compensation items, contact
Ilya E. Enkishev at (202) 622–6030 (not a
toll-free number).
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–2123.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The first collection of information
requirement in this notice is in section
8 of the notice, as required by section
877A(a)(1). The collection of information
relates to the requirement that the covered
expatriate obtain the fair market value
appraisal of his or her property and report
such value to the IRS. This collection of
information is necessary for the proper
performance of the function of the IRS in
the collection of the mark-to-market tax
imposed by section 877A(a)(1).
The statement must be attached to the
final Form 1040 filed by the covered expatriate setting forth the fair market value
of all assets the covered expatriate owns
along with the basis of such assets. We

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estimate that annually approximately 100
taxpayers will expatriate who will be subject to 877A, and that it will take approximately 4 hours to prepare the documentation. The total reporting burden is estimated to be 400 hours.
The second collection requirement in
the notice is also in section 8 of the notice,
as required by section 877A(b)(4)(B). This
collection of information is necessary for
the proper performance of the function of
the IRS because it notifies the IRS that the
covered expatriate is electing to defer a tax
that is owed and allows for insuring that
the tax owed is eventually paid.
A bond, letter of credit, or adequate security statement must be furnished to the
appropriate SBSE Advisory Office by the
covered expatriate for each item the covered expatriate wishes to defer the tax. We
estimate that annually approximately 10
taxpayers will elect to defer the payment
of tax, and that it will take approximately
2 hours to prepare the documentation. The
total reporting burden is estimated to be 20
hours.
Books or records relating to collections
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by section 6103.

November 9, 2009