US citizen renunciation law in §877A and "covered expatriate" exception

Question

The legal code regarding the expatriation tax contains 2 completely different, though closely related, sections here: §877 and §877A.

Sect §877 looks to be one that has the exception for "accidental Americans". It is also the one where we see the criteria of net worth of $2M along with that average income tax over the past 5 years of $124K (yearly adjusted) The exception here requires to be born a dual citizen as well as to have had no substantial contacts with the United States. OK great.

Sect §877A though, is the one that goes over the hated term "covered expatriate", but specifies its own exception to being a covered expatriate. The exception is halfway identical to the exception from 877 but the second part is different. Here you also must have been born a dual citizen, but then instead of "no substantial contacts" we have the second requirement:

has been a resident of the United States (as defined in section §7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs

Lets break down the headings/titles of that §7701(b)(1)(A)(ii)) there:

§7701 - Definitions
§7701b - Definition of resident alien and nonresident alien
§7701b1 - In General
§7701b1A - Resident alien
§7701bAii - Substantial presence test

The presence test itself refers to even other sections, but nowhere in the code of §7701(b)(1)(A)(ii)), or where it refers, to mention resident/nonresident alien.

Since the first criteria to the exception there is to have been born a dual citizen, and since it follows then that a dual citizen cant be either a resident alien nor a nonresident alien, then is that simply a poorly written law? Or is the fact that the presence test can also be applied to anyone, even though its coded under the "resident alien" section?

So my main question here then is, can someone who was born a dual citizen, lived in the US their whole life just leave the US and use the exception to not be considered a covered expatriate if they renounce after being gone for 6 years?

Answer 1

The reference to the IRC 7701(b)(1)(A)(ii) is to the substantial presence test. I.e.: someone whose days count makes them a resident.

This rule means that the exception only applies to dual citizens at birth who are also foreign citizens and tax residents of the country of their second citizenship (subsection (1)) and they were not present in the US during the preceding 15 years to be counted as residents for 10 years or more based on IRC 7701(b)(1)(A)(ii) (subsection (2)).

See the IRS Notice 09-85:

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

The determination is not whether the person is alien or not, but whether the person is resident or not.

So my main question here then is, can someone who was born a dual citizen, lived in the US their whole life just leave the US and use the exception to not be considered a covered expatriate if they renounce after being gone for 6 years?

Yes (for the purposes of Sec. 877A), if they moved to the country of their second citizenship they had since birth, are being taxed as resident there, and did not pass the substantial presence test for more than 10 of the last 15 preceding years.