Expatriation. IRS Proposes New Regulations on Gifts. Abrahm W. Smith. Tax Section of the Florida Bar Wednesday, February 10, 2016

Transcription

1 Expatriation IRS Proposes New Regulations on Gifts Tax Section of the Florida Bar Wednesday, February 10, 2016 Abrahm W. Smith Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm Baker & McKenzie LLP

2 History Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008, Public Law (the HEART Act) added sections 877A and 2801 to the Code. Prior to the HEART Act, citizens and long-term residents of the United States who expatriated to avoid U.S. taxes were subject to an alternative regime of U.S. income, estate and gift taxes for a period of 10 years following expatriation Baker & McKenzie LLP 2

3 Legislative History House Ways and Means Committee stated that citizens and long-term residents of the United States have a right to physically leave the United States and relinquish their citizenship or terminate their residency. The Committee believed that the Code should not be used to discourage individuals from relinquishing citizenship or terminating residency. At the same time, however, the Code should not reward individuals who leave the United States Baker & McKenzie LLP 3

4 Notice (October 15, 2009) Provided guidance on expatriation and covered gifts. Section 9 provides that satisfaction of the reporting and tax obligations under Section 2801 for covered gifts/bequests received on or after June 17, 2008, is deferred pending the issuance of further IRS guidance Baker & McKenzie LLP 4

5 Law Section 877 applies to individuals who expatriated (relinquished U.S. citizenship or ceased to be lawful permanent residents) prior to June 17, Section 877A imposes an "exit tax" on "covered expatriates Baker & McKenzie LLP 5

6 Exit Tax Deemed sale of all property on the day before expatriation by a covered expatriate. $600,000 income threshold Baker & McKenzie LLP 6

7 Expatriate US citizen: Relinquishes citizenship. Long term resident of the United States (i.e., green card holder): Ceases to be a lawful permanent resident of the United States. For purposes of the covered expatriate rules, a "long term resident" means any 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 year during which the expatriation occurs Baker & McKenzie LLP 7

8 Covered Expatriate (877(a)(2)) Average net income tax for a period of 5 years ending before the date of expatriation is greater than $157,000 (2014); Net worth of the individual is $2,000,000 or more; or Fail to certify tax compliance for the 5 preceding taxable years. 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 (Notice ) Baker & McKenzie LLP 8

9 Exceptions to Covered Expatriate Dual citizen at birth At the date of expatriation, individual continues to be a citizen of, and is taxed as a resident of, the other country, and has been a resident of the United States for not more than 10 years during the 15-year period ending on the date of expatriation. 18 ½ years old Expatriation occurs before individual attains age 18 1/2 and the individual has been a resident of the United States for not more than 10 taxable years before the date of relinquishment Baker & McKenzie LLP 9

10 Section 2801 Imposes a new tax "Section 2801 Tax" If a US citizen or "resident" receives any "covered gift or bequest", there is a tax equal to the gift/estate tax. Tax is paid by recipient. Value of gift must exceed the annual exclusion amount ($14,000 in 2015). Tax is reduced by the amount of any gift/estate tax paid to a foreign country with respect to the covered gift/bequest Baker & McKenzie LLP 10

11 Covered Gift or Bequest Property acquired (by gift or inheritance) from a covered expatriate Baker & McKenzie LLP 11

12 Proposed Regs (REG ) (September 28, 2015) Resident Based on domicile in the United States, notwithstanding that section 877A (covered expatriate rules) adopts the income tax definition of that term Baker & McKenzie LLP 12

13 Proposed Regs (continued) No basis increase Unlike Section 1015(d), which generally allows gift tax paid on the gift to be added to the donee's basis, section 2801 does not provide a similar basis adjustment for the payment of the section 2801 tax Baker & McKenzie LLP 13

14 Proposed Regs (continued) All property 2801 tax applies regardless of whether the property was acquired by the covered expatriate before or after expatriation Baker & McKenzie LLP 14

15 Proposed Regs (continued) Indirect transfer Transfers to corporations or other entities Property acquired through other persons Payment of debt or liability (i.e., payment made on donee's behalf) 2016 Baker & McKenzie LLP 15

16 Proposed Regs (continued) New Form Form 708, not yet released. Filed on or before the 15th day of the 18th month following the close of the calendar year in which the covered gift or bequest was received Baker & McKenzie LLP 16

17 Proposed Regs (continued) Protective Form 708. When a donee receives a gift/bequest from an expatriate and determines that the gift/bequest is not a covered gift or covered bequest, the donee may file a protective Form 708. Will start the period of assessment for any 2801 tax Baker & McKenzie LLP 17

18 Proposed Regs (continued) Effective Date. On and after date the final regs are published. We may rely on the final rules for periods beginning June 17, 2008 to the date preceding the final regs Baker & McKenzie LLP 18

19 Proposed Regs (continued) Trust A domestic trust that receives a covered gift/bequest is treated as a U.S. citizen and liable for the 2801 tax. A foreign trust may elect to be treated as a domestic trust for this purpose. Absent an election, the foreign trust's U.S. citizen or resident beneficiaries will be taxed as distributions are made from the trust Baker & McKenzie LLP 19

20 Exceptions to covered gift/bequest Taxable gifts reported on a covered expatriate's timely filed gift tax return, and property included in the covered expatriate's gross estate and reported on the expatriate's timely filed estate tax return, provided that the gift or estate tax due is timely paid. Qualified disclaimers of property made by a covered expatriate are excepted from covered gifts/bequests. Charitable donations that would qualify for the estate or gift tax charitable deduction Baker & McKenzie LLP 20

21 Observations OVDP Program A person can use the OVDP program, including the Streamlined Procedures, for the 5-year certification requirement Baker & McKenzie LLP 21

22 Observations (continued) Entire Family Expatriation May want to consider expatriation for the entire family to avoid recipients being US citizens or residents Baker & McKenzie LLP 22

23 Observations (continued) Donee s Obligation Donee has the obligation to determine whether the gift/bequest is a covered gift/bequest. "The Treasury Department and the IRS realize that U.S. taxpayers may have difficulty determining whether they are liable for any tax under section 2801." must use diligence "the burden is on the U.S. citizen or resident to determine whether the expatriate was a covered expatriate " 2016 Baker & McKenzie LLP 23

24 Observations (continued) recipient may be unable to obtain information necessary to make the above determinations. expatriate may consent to disclosure of certain tax return information, but note that the IRS will not make the determination as to whether an expatriate was a covered expatriate. if a living expatriate donor does not authorize IRS to release relevant information, there is a rebuttable presumption that the expatriate donor is a covered expatriate. If you want to rebute the presumption, you may want to file a protective return to start the statute of limitations period Baker & McKenzie LLP 24

25 Observations (continued) May want to consider using the protective return procedure. A Treasury official noted on September 11, 2015 at a Practicing Law Institute seminar in New York that a revenue procedure is being prepared which will explain the procedure for taxpayers to get information from the IRS regarding an expatriate's tax returns in order to determine whether the transferor of the gift/bequest was a covered expatriate Baker & McKenzie LLP 25

26 My Top 3 Takeaways 1. Resident is a domicile test 2. Indirect Transfers captured 3. Recipient has burden to determine character of gifts received 2016 Baker & McKenzie LLP 26