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Tax Law

Guidance on Taxation of Gifts or Bequests from U.S. Expatriates

The Service and Treasury have issued proposed regulations affecting taxpayers who receive gifts or bequests from U.S. expatriates. [80 FR 54447]. The regulations are issued under IRC Section 2801, which imposes a tax on covered gifts or bequests received by U.S. citizens or U.S. residents from covered U.S. expatriates. [See IRC § 2801].

The IRC Section 2801 Tax on Covered Gifts or Bequests.

The taxation of gifts or bequests to U.S. citizens or residents from U.S. expatriates is provided in IRC Section 2801. Under Section 2801, the tax is equal to the product of:

(1)   the highest rate of tax specified in IRC Section 2001(c) as in effect of the date of such receipt, and

(2)   the value of the covered gift or bequest. [IRC § 2801(a)]. The recipient of the covered gift or bequest is liable for the tax imposed by Section 2801. [IRC § 2801(b)].

A “covered gift or bequest” is defined in IRC Section 2801(e)(1) as:

(1)   “any property acquired by gift directly or indirectly from an individual who, at the time of such acquisition, is a covered expatriate,” and

(2)   “any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate.” [See IRC § 2801(e)]. 

Certain transfers, such as transfers otherwise subject to estate or gift tax or transfers to spouses or charities, are excepted from the definition of a covered gift or bequest. [IRC § 2801(e)].In addition, there is an exception from the tax for covered gifts or bequests that do not exceed the dollar amount in effect under IRC Section 2503(b) for the calendar year in which the covered gift or bequest is received. [IRC § 2801(c)]. The IRC Section 2801 tax is also reduced by the amount of any gift or estate tax paid to a foreign country with respect to the covered gift or bequest. [IRC § 2801(d)].

The definition of a covered expatriate for purposes of IRC Section 2801 is the definition given to such term in IRC Section 877A(g)(1) (Note, IRC Section 877A pertains to the tax responsibilities resulting from expatriation). [IRC § 2801(f)].

Proposed Regulations.

As discussed in the preamble to the proposed regulations, prior to their issuance, the Service and Treasury gave taxpayers notice in 2009 (Announcement 2009-57, 2009-29 IRB 158) that any covered gift or bequest received on or after June 17, 2008, would be subject to the imposition of the tax under IRC Section 2801. Also in 2009, the Service and Treasury issued Notice 2009-85, 2009-45 IRB 598, in which guidance was provided for individuals subject to the tax under IRC Section 877A. [80 FR 54447]. As noted in the preamble to the proposed regulations, Notice 2009-85 also provided that gifts or bequests on or after June 17, 2008, from a covered expatriate would be subject to a transfer tax under IRC Section 2801 and further provided that satisfaction of the reporting and tax obligations under Section 2801 for covered gifts or bequests received on or after the June date would be deferred pending the Service’s issuance of separate guidance. [80 FR 54447].

 On September 10, 2015, the Service and Treasury issued the proposed regulations that affect U.S. citizens and residents who have received gifts or bequests from certain individuals who relinquished their U.S. citizenship or who ceased to be lawful permanent U.S. residents on or after June 17, 2008.  [80 FR 54447]. The proposed regulations will apply to covered gifts or bequests received on or after the date the proposed regulations are published as final regulations. [80 FR 54447].

The proposed regulations amend Title 26 by adding part 28, “Imposition of Tax on Gifts and Bequests from Covered Expatriates”, to the Code and, accordingly, provide detailed guidance on the application of the tax under IRC Section 2801.

New Part 28 consists of several regulations, issued under IRC Sections 2801, 6001, 6011, 6060, 6071, 6081, 6091, 6101, 6107, 6109, 6151, 6694, 6695, and 6696.

Articulating the general rule of IRC Section 2801, Section 28.2801-1(a) states that Section 2801 imposes a tax on covered gifts and covered bequests, including distributions from foreign trusts that are attributable to covered gifts or covered bequests, received by a U.S. citizen or U.S. resident from a covered expatriate during a calendar year. [Prop Treas Reg § 28.2801-1(a)]. Section 28.2801-1(a) further states that domestic trusts, as well as foreign trusts that elect to be treated as domestic trusts for Section 2801 purposes, are subject to tax under Section 2801 in the same manner as if the trusts were U.S. citizens. [Prop Treas Reg § 28.2801-1(a)]. Section 28.2801-1(a) states that, accordingly, the Section 2801 tax is paid by the U.S. citizen or resident, domestic trust, or foreign trust electing to be treated as a domestic trust for Section 2801 purposes that receives the covered gift or covered bequest. [Prop Treas Reg § 28.2801-1(a)]. Section 28.2801-1(a) notes further that for purposes of part 28, references to a U.S. citizen or U.S. citizens are considered to include a domestic trust and a foreign trust that has elected to be treated as a domestic trust for Section 2801 purposes. [Prop Treas Reg § 28.2801-1(a)].

Definitions for Section 2801 are provided in Section 28.2801-2 of the regulations.

Section 28.2801-2(f) defines the term “covered bequest” as “any property acquired directly or indirectly by reason of the death of a covered expatriate, regardless of its situs and of whether such property was acquired by the covered expatriate before or after expatriation from the United States.” [Prop Treas Reg § 28.2801-2(f)]. Section 28.2801-2(f) states that a “covered bequest” also includes “. . . distributions made by reason of the death of a covered expatriate from a foreign trust that has not elected under § 28.2801-5(d) to be treated as a domestic trust for purposes of section 2801 to the extent the distributions are attributable to covered gifts or covered bequests made to the foreign trust.” [Prop Treas Reg § 28.2801-2(f)].

Section 28.2801-2(g) defines the term “covered gift” as “any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time the property is received by a U.S. citizen or resident, regardless of its situs and of whether such property was acquired by the covered expatriate before or after expatriation from the United States.” Section 28.2801-2(g) further states that term “also includes distributions made, other than by reason of the death of a covered expatriate, from a foreign trust that has not elected under § 28.2801-5(d) to be treated as a domestic trust for purposes of section 2801 to the extent the distributions are attributable to covered gifts or covered bequests made to the foreign trust.” [Prop Treas Reg § 28.2801-2(g)].

The definitions of the terms “expatriate” and “covered expatriate” are provided in Section 28.2801-2(h). [Prop Treas Reg § 28.2801-2(h)].  The term “expatriate” is defined in Section 28.2801-2(h) as having the “same meaning for purposes of section 2801 as that term has in section 877A(g)(2)” and that the term “covered expatriate” “. . . has the same meaning for purposes of section 2801 as that term has in section 877A(g)(1).” [Prop Treas Reg § 28.2801-2(h)]. Guidance as to when an individual will be considered a “covered expatriate” is also provided in Section 28.2801-2(h), which states:

The determination of whether an individual is a covered expatriate is made as of the expatriation date as defined in section 877A(g)(3), and if an expatriate meets the definition of a covered expatriate, the expatriate is considered a covered expatriate for purposes of section 2801 at all times after the expatriation date. However, an expatriate (as defined in section 877A(g)(2) is not treated as a covered expatriate for purposes of section 2801 during any period beginning after the expatriation date during which such individual is subject to United States estate or gift tax (chapter 11 or chapter 12 of subtitle B) as a U.S. citizen or resident. See section 877A(g)(1)(c). An individual's status as a covered expatriate will be determined as of the date of the most recent expatriation, if there has been more than one. [Prop Treas Reg § 28.2801-2(h)].

As noted above, new Part 28 contains several new regulations, issued under several Code sections. Rules and exceptions applicable to covered gifts and covered bequests are provided in Section 28.2801-3. Rules regarding the liability for and payment of the Section 2801 tax on covered gifts and bequests and rules on computation of the tax are provided in Section 28.2801-4. Rules pertaining to foreign trusts are provided in Section 28.2801-5. Rules for determining the U.S. recipient’s basis in property received as a covered gift or covered bequest, rules relating to the generation-skipping transfer tax, rules on information returns, and rules on the application of penalties are provided in Section 28.2801-6. Rules for determining responsibility under Section 2801 are provided in Section 28.2801-7. In addition, the proposed regulations provide several other rules, including rules on record-keeping, rules on the reporting requirements for tax return preparers, rules as to the time for filing returns and the automatic extension of time for filing returns, and rules on the place for filing returns.