Promoter structures library
Puerto Rico Act 60
Sold as: "move to Puerto Rico, pay 0 percent on capital gains and 4 percent on your business", "Act 60 decree", "the last legal tax haven for Americans"
Technical name: IRC Sec. 933 exclusion of Puerto Rico source income of a bona fide resident, with bona fide residency defined by IRC Sec. 937
Moving to Puerto Rico does not retroactively make your pre-move gain Puerto Rico source income. That single misunderstanding is the number one failure the IRS is auditing.
Classification B. Real tax law with a real benefit. Promoters break it.
The pitch
Move to Puerto Rico under an Act 60 decree and pay 0 percent on capital gains and 4 percent on your business income. The last legal tax haven for Americans.
The real law
Sec. 933 excludes Puerto Rico source income of a bona fide resident. Sec. 937 defines bona fide residency via a THREE-PART test: 183-day physical presence, tax home in PR, and closest connection to PR. Act 60 grants 0 to 4 percent PR rates.
Where it breaks
- failure
Pre-move appreciation is the number one failure
- detail
Treas. Reg. 1.937-2 requires SPLIT-SOURCING under the lookback rule. Decades of crypto or securities appreciation do not become PR-source by relocating.
- failure
Residency failures
- detail
Inadequate documentation of the Sec. 937 three-part test
- failure
Services income sourcing
- detail
Compensation must follow where the work was performed. Fund managers traveling to New York and London get their fees recharacterized as U.S.-source.
- failure
Partnership structures do not cure it
- detail
AM 2024-005 and CCA 202538025 reject the idea that a pass-through converts pre-move appreciation to PR-source.
What it costs you if it is wrong
Pre-move appreciation split-sourced back to the United States under Reg. 1.937-2 is taxed as U.S. source income, which is usually the entire benefit. A residency failure under Sec. 937 unwinds the Sec. 933 exclusion for the year. The IRS identified roughly 100 high-wealth individuals for investigation with the expectation of criminal referrals, and one taxpayer has already pleaded guilty to filing false documents about backdated elections and residency timing.
Red flags specific to this structure
- The plan is to move and then sell an asset that appreciated for years
- Nobody applied the Reg. 1.937-2 lookback to pre-move appreciation
- Documentation of the Sec. 937 three-part test is thin
- Services will be performed off-island but sourced to Puerto Rico
- A pass-through is said to convert the character of pre-move gain
- A document is being dated earlier than it was signed
Questions to ask the person selling this
Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.
- 1How is my pre-move appreciation sourced under the Reg. 1.937-2 lookback?
- 2What documentation proves the Sec. 937 three-part test: day counts, tax home, closer connection?
- 3Where will I actually perform the work that generates my fees?
- 4Is Form 8898 being filed for the year of the move?
- 5Does any part of this rely on a pass-through changing the character of pre-move gain?
Which of the Seven Markers this trips
The client keeps control of what they supposedly gave away
The legitimate version
An individual who genuinely and permanently relocates.
What distinguishes it
- Meets all three Sec. 937 prongs with documentation: utility bills, driver's license, physician, schools, day counts
- Files Form 8898 in the year of the move
- Applies Reg. 1.937-2 split-sourcing to any pre-move appreciation
- Sources services income to where the work is actually done
- The client actually lives there
- Nobody backdates anything
What the courts have done
How this has actually gone for the people who bought one.
Enforcement
- campaign
Active LB&I campaign, Puerto Rico Act 22 Individual Investors Act, lead executive Judith A. McNamara
- scale
By July 2023 the IRS had identified roughly 100 high-wealth individuals for investigation, with expectation of criminal referrals. Puerto Rico's Hacienda has audited roughly 1,800 decree holders.
- criminal
Suresh Gajwani pleaded guilty June 2025 to filing false documents with the IRS: backdated corporate elections and misrepresented residency timing to shield roughly 30,000,000 dollars in capital gains accrued while a Florida resident.
- escalation
DOJ subpoenaed at least one law firm for client files on residency analysis and income-sourcing positions. Senate Finance Ranking Member called for a full IRS investigation on April 30, 2026, identifying two abuse patterns: false residency claims and recharacterization of pre-move appreciation.
Holding one of these, or being pitched one?
The diagnostic work is worth doing before the return gets filed rather than after. That is a conversation, not an engagement.
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