IRS Issues Proposed Regulations on Transfer Taxes on Gifts and Bequests from Expatriates

On September 9, 2015, the Internal Revenue Service (the “IRS”) issued proposed regulations affecting taxpayers who received gifts and bequests from certain individuals who relinquished their United States citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008. The proposed regulations set forth the general rules of liability for the tax imposed by Section 2801 of the Internal Revenue Code (the “Code”), which was added by the Heroes Earnings Assistance and Relief Act of 2008.

Section 2801 of the Code imposes a tax on “covered gifts” and “covered bequests” received by a United States citizen or resident by a “covered expatriate.” For purposes of these rules, a covered gift or a covered bequest refers to any property acquired by gift or bequest from an individual who is a covered expatriate, regardless of the situs of the property and regardless of whether the property was acquired by the expatriate before or after expatriation from the United States. An individual is a “covered expatriate” if he or she expatriates on or after June 17, 2008 and (i) has an average net annual income tax liability of $124,000 (indexed for inflation) for the previous five years; (ii) has a net worth of at least $2 million; or (iii) fails to certify under penalty of perjury that he or she has complied with all U.S. tax obligations for the previous five years.

A covered gift or covered bequest is valued at the fair market value of the property on the date of receipt by the United States citizen or resident. The tax is computed by reducing the total amount of covered gifts and bequests by the per-donee gift tax annual exclusion amount currently in effect ($14,000 for 2015) and then multiplying this net amount by the highest estate or gift tax rate in effect during that calendar year (40% in 2015). The tax is reduced by any estate or gift taxes paid to a foreign country. The U.S. citizen or resident who receives the covered gift or bequest bears the liability for the tax. For purposes of these rules, domestic trusts and foreign trusts electing to be treated as domestic trusts are treated in the same manner as U.S. citizens.           

The proposed regulations set forth several exemptions from the tax. First, taxable gifts or bequests that were properly reported on an expatriate’s timely filed gift tax return or estate tax return, as the case may be, are exempt from the Section 2801 tax, provided that the gift or estate tax was timely paid. In addition, a covered expatriate’s qualified disclaimers of property are excluded from the tax, as are charitable gifts to the extent that such transfers would have qualified for the charitable deduction had the expatriate been a U.S. citizen or resident at the time of the transfer. Transfers to an expatriate’s U.S. citizen spouse are also exempt from the tax, provided that the gift or bequest, had it been given by a U.S. citizen or resident, would qualify for the estate or gift tax marital deduction. 

Taxpayers who receive gifts or bequests from covered expatriates must report such transfers on new Form 708, “U.S. Return of Gifts or Bequests from Covered Expatriates.” The IRS plans to release this form and accompanying instructions once the proposed regulations are made final. A transition period will be provided to allow taxpayers a reasonable time to file the form once it has been released. No interest will be charged for any tax years until after the due date as set forth in the final regulations has passed. 

A public hearing on the proposed regulations is scheduled for January 6, 2016. Written or electronic comments must be received no later than December 8, 2015.

Contact us if you've received a gift or bequest from a covered expatriate and think you may need to report this transfer and visit our Estate Planning webpage to learn about the services that Schneider Downs offers.

IRC §2801
IRC §877A
Proposed Treasury Regs. §28.2801-1 through §28.2801-7