Why Sir John Templeton may have renounced US citizenship

John Marks Templeton, the pioneer global investor who founded the Templeton Mutual Funds and for the past three decades devoted his fortune to his Foundation’s work on the “Big Questions” of science, religion, and human purpose, passed away on July 8, 2008, at Doctors Hospital in Nassau, Bahamas, of pneumonia.

As a pioneer in both financial investments and philanthropy, John Templeton spent a lifetime encouraging open-mindedness. If he hadn’t sought new paths, he once said, “he would have been unable to attain so many goals.” The motto that Templeton created for his Foundation, “How little we know, how eager to learn,” exemplified his philosophy in the financial markets and his groundbreaking methods of philanthropy.

Templeton started his Wall Street career in 1937 and went on to create some of the world’s largest and most successful international investment funds. Called by Money magazine “arguably the greatest global stock picker of the century” (January 1999), he sold the Templeton Funds in 1992 to the Franklin Group for $440 million.

A naturalized British citizen who lived in Nassau, the Bahamas, Templeton was created a Knight Bachelor by Queen Elizabeth II in 1987 for his many philanthropic accomplishments, including his endowment of the former Oxford Centre for Management Studies as a full college, Templeton College, at the University of Oxford in 1983.

http://www.sirjohntempleton.org/biography.asp

I have always had an interest in Sir John Templeton as an investor and as a human being. For many years, I took the overnight flight to Toronto, to see Sir John speak at the annual meetings of the Templeton Growth Fund held in Toronto. Although I never personally owned mutual funds (management fees too high) I regarded the meetings as the best educational events of the year. Sure he talked about investing, but he talked about much more. Although Sir John was one of the wisest investors the world has ever known, he was also one of the wisest men I have had the privilege to hear. He was most interested in those things that make us human – religion, education, and most significantly – connection with the whole world. The above video describes how as a young man who travelled the world. This is certain to have shaped his “global outlook” on life and investing. This made him a very unusual American – one who recognized a world outside the U.S. borders.

Sir John’s investment philosophy was to NOT be restricted to one country but to look for opportunities the world over. He was truly a citizen of he world. Templeton Growth Fund – the world’s first truly global mutual fund – which invested in shares all over the world – was an expression of this principle! Imagine investing in companies located in all nations. By creating a global mutual fund, Sir John was exhibiting a mindset that was fundamentally at odds with U.S. cultures and values. To put it simply:

Sir John Templeton invested in “foreign” corporations!

I am sure there were those who wondered:

Why would Sir John do this? Weren’t there enough “perfectly good” stocks in America? Why, exactly why, would somebody invest outside the Homeland? (Does this remind you of the “foreign bank account reasoning?) The answer of course is that Sir John was looking for the best investment opportunities regardless of where they were to be found.  In his early years, Sir John, “never paid more than four times earnings” for shares in the Japanese market.

The bad thing about all good things is that they come to an end

In July of 1992, I was present when he spoke for the last time before selling his business to Franklin. Don Reed (manager of the Templeton International Fund) announced that  “sooner or later Sir John is going to sell his interest in the business”. Sir John Templeton delivered one final speech to the fund holders (despite suffering from bronchitis) and it was the end of an era. The next day the announcement was made that Sir John was in fact selling his interest in the Templeton Mutual Funds to Franklin for 440 million dollars. At that final meeting he gave all attendees a “Templeton Growth Fund” key chain. I used it for many years.

The legacy of Sir John Templeton

In spite of his numerous achievements and gifts to the world, Sir John Templeton was best known for two things. I suspect that the second was related to the first.

1. Sir John Templeton’s first claim to fame was his founding of the Templeton Growth Fund. It is probably among the world’s most famous mutual funds (later to become a PFIC). Templeton Grown Fund was incorporated in Toronto, Canada in 1954. It’s interesting that it was founded in Canada and not in the United States. This means that Sir John’s mutual fund was “offshore”. It would be interesting to know the reason for this decision.

Sir John’s investment philosophy included a belief in the principles of tax deferral and the importance of international (diversified aka “foreign”) investing.

2. Sir John Templeton’s second claim to fame was the fact that he joined a number of famous Americans and renounced his U.S. citizenship in 1964. I am not aware of any statement by Sir John that explains why he renounced U.S. citizenship. Nevertheless, a significant 1962 change to the U.S. code suggests why it may have become necessary for Sir John to renounce U.S. citizenship.

To put it simply:

in 1962, changes in U.S. tax law (sound familiar) meant that Sir John Templeton was deemed to be the owner of a Controlled Foreign Corporation (“Templeton Growth Fund”) and subject to the SubPart F rules. (making deferral of income impossible by attributing the company’s investment income to Sir John personally).

1962 – A bad year for “Global Investors” – Controlled Foreign Corporations and the  assault on tax deferral

The world of U.S. tax changed significantly in 1962. 1962 was the year that the U.S. enacted the “foreign corporation” and “SubPart F” income rules. The effect of these rules was to make tax deferral for U.S. persons impossible. Basically the rules would have forced Sir John to pay tax personally on certain earnings of the fund.

A reasonably accurate Wikipedia article describing the Controlled Foreign Corporation “CFC” and “SubPart F” rules appears as an appendix below. All you need understand is that the new rules made it impossible for Sir John to be a shareholder in a Controlled Foreign Corporation with deferred passive income.

Sir John probably felt like the U.S. citizens abroad of today

It is likely that Sir John found himself in the same predicament as many Americans abroad today. He was forced to choose between his business and his citizenship – making renunciation of U.S. citizenship an act of self defense.

Does the decision to renounce make Templeton a “tax cheat”?

This is the argument advanced by the Schumers of the world (and other ignorant “Homelanders”). Had Templeton been a U.S. citizen when he sold to Franklin, it is believed that he would have owed approximately one hundred million in taxes to the U.S. government. Of course, he was NOT a U.S. citizen.  Therefore, he did NOT pay taxes to the U.S. government. Some believe this makes him a “tax cheat”. I have trouble following this argument.

Another perspective is that the U.S. government shot itself in the foot (shades of FATCA)

If the U.S. government had not forced Sir John to choose between his business and his citizenship, the U.S. government might have collected a cool one hundred million on Sir John’s death. But, all of this is speculative. We just don’t know.

As the U.S. citizens abroad today know: One man’s responsible investor (“TFSAs anyone) is another man’s “tax cheat” (“Foreign trust”)

Here is some interesting commentary on the “tax cheat” angle  from the Harvard Crimson:

This “new refugee” phenomenon, though, is not just unique to the liberal Clinton administration. Back in 1962, during Kennedy’s reign, the legendary global investor Sir John Templeton renounced his U.S. citizenship, moving to Nassau.

And Templeton’s decision was not that of a miserly curmudgeon. He has generously donated most of his billion dollar fortune to charities. Of course, without U.S. citizenship, he–instead of some faceless bureaucrat–decides where his money goes.

Non-U.S. Citizens have greater freedom to live, to love and to invest

Without U.S. citizenship, Templeton was able to invest in all countries of the world. This may be the real reason why he renounced, freeing him from the “fiscal prison” of citizenship- based taxation!

Sir John may have realized that “U.S. citizenship was a problem to be solved“

Sir John was a visionary. The art of investing is the art of understanding what the future will be. Clearly Sir John saw that “U.S. citizenship” was not a “growth” citizenship. He may not have specifically foreseen: the PFIC rules, FBAR, the attack of the U.S. government on its citizens abroad and FATCA. But, he did see that “U.S. citizenship is a problem to be solved”. He saw that U.S. citizenship was NOT a good investment.

The CFC rules and SubPart F rules of 1962 likely made it impossible for Sir John to effectively run the Templeton Growth Fund. I suspect that may be why he renounced U.S. citizenship.

Who do you think did more for humanity? The U.S. government or Sir John Templeton?

President Clinton noted that when it came to the United States, that people were more impressed with the power of US example, rather than the example of US power.

Do you think Barack Obama (example of U.S. power) or Sir John Templeton (power of U.S. example) is the better global ambassador for the US?

Concluding comment

Obviously my thoughts are purely speculative. I am not aware of any statements from Sir John explaining why he renounced U.S. citizenship.  I suspect (but do not know for sure) that the timing between the introduction of the CFC rules and Sir John’s renunciation was NOT a coincidence.

Appendix – About Controlled Foreign Corporations and SubPart F – Wikipedia edition

United States Subpart F Rules
Enacted in 1962, these rules incorporate most of the features of CFC rules used in other countries. Subpart F^[1] was designed to prevent U.S. citizens and resident individuals and corporations from artificially deferring otherwise taxable income through use of foreign entities.^[2] The rules require that:

• A U.S. Shareholder
• of a Controlled Foreign Corporation (“CFC”)

must include in his/its income currently

• his/its share of Subpart F Income of the CFC and
• his/its share of earnings and profits (“E&P”) of the CFC that are invested in United States Property,

and further exclude from his/its income any dividends distributed from such previously taxed income.

Each of the capitalized terms above is defined:

• A Controlled Foreign Corporation^[3] is any corporation organized outside the U.S. (a foreign corporation) that is more than 50% owned by U.S. Shareholders.
• A U.S. Shareholder is any person (individual or entity) that owns 10% or more of the foreign corporation. Complex rules apply to attribute ownership of one person to another person.^[4]
• United States Property specifically includes obligations of or investments in related parties, tangible property with a physical situs in the U.S., and stock of a domestic corporation. It does not include bank deposits or obligations of unrelated persons.^[5]

Subpart F income includes the following:^[6]

• Foreign Personal Holding Company Income (FPHCI), including dividends, interest, rents, royalties, and gains from alienation of property that produces or could produce such income. Exceptions apply for dividends and interest from related persons organized in the same country as the CFC, active rents and royalties, rents and royalties from related persons in the same country as the CFC, and certain other items.^[7]
• Foreign Base Company Sales Income from buying goods from a related party and selling them to anyone or buying goods from anyone and selling them to a related party, where such goods are both made and for use outside the CFC’s country of incorporation. A branch rule may cause transfers between a manufacturing branch of a CFC in one country and a sales branch in another country to trigger Subpart F income. ^[8]
• Foreign Base Company Services Income form performing services for or on behalf of a related person. A substantial assistance rule can cause services performed for unrelated parties to be treated as performed for or on behalf of a related party. ^[9]
• Foreign Base Company Oil Related Income from oil activities outside the CFC’s country of incorporation. ^[10]
• Insurance Income from insurance or annuity contracts related to risks outside the CFC’s country of incorporation. ^[11]

but it does not include:

• items of income which (after considering deductions, etc., under U.S. concepts) were subject to foreign income tax in excess of 90% of the highest marginal U.S. tax rate for the type of shareholder;

• de minimis amounts of Subpart F income in absence of other Subpart F income in the period;

• such income if the CFC has a deficit in E&P, in which case it is deferred from recognition until the CFC has positive E&P.^[12]

• any dividend received which is considered paid from amounts previously taxed under Subpart F.^[13]