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International Taxation: Agreements, Checklists & Commentary Part VI Individual Matters Chapter 21: International Trust and Estate Planning 21.05. International Estate Planning Considerations for U.S. Citizens
Checklist 21-4. International Estate and Gift Tax Planning for U.S. Citizens
For a U.S. citizens considering establishing an offshore trust, but maintaining U.S. citizenship, determine the nature of the objectives with respect to U.S. estate and gift tax matters.
q
Minimizing U.S. estate and gift taxation consequences of proposed transaction Determining any change in U.S. income tax treatment relating to assets to be included in the proposed trust arrangement Determining any desire for anonymity of existence of trust for U.S. tax purposes in light of tax return disclosure and information return requirements
Establishing anonymity for U.S. tax and legal purposes Utilizing offshore trust or corporate structures already in place Utilizing offshore trust or corporate structures to be established Ascertaining whether there is an basis for concern in the planner or other advisor concerning fraudulent conveyances under applicable U.S. creditor rights laws
For U.S. citizens considering immigration from the United States (renunciation of citizenship) to become a citizen of a foreign country, determine the nature of the objectives with respect to U.S. estate and gift tax matters.
q
Minimizing U.S. estate and gift taxation and the application of the 10-year provision in Section 2107 Minimizing U.S. income taxation and the application of the 10-year provision in Section 877 Minimizing estate and gift taxation in new home country Minimizing income taxation in new home country
Avoiding international double or multiple estate and gift taxation Establishing anonymity for new home country tax and legal purposes Establishing anonymity for U.S. tax and legal purposes Utilizing offshore trust or corporate structures already in place Utilizing offshore trust or corporate structures to be established Ascertaining whether there is a basis for concern in the planner or other advisor concerning fraudulent conveyances under applicable U.S. creditor rights laws
For U.S. citizens who are beneficiaries of a foreign trust created by other persons, determining the nature of the objectives with respect to U.S. taxation matters
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Minimizing U.S. income, estate and gift taxation consequences of the trust and distributions from it Understanding the U.S. income tax consequences of principal and income distributions from the trust Determining whether the trust could be considered a foreign grantor trust due to indirect or constructive transactions involving the beneficiary
Determining the relevance to the beneficiary of the circumstances surrounding formation of the trust Determining whether there are any potential transferee liability issues for U.S. or foreign tax purposes Determining whether there are contributions to the trust by the beneficiary potentially beneficial with respect to tax or personal planning considerations
Evaluating potential U.S. or foreign income tax planning considerations Determining whether renunciation or waiver of interest in the trust is beneficial from personal or tax planning perspectives Minimizing U.S. gift or estate tax consequences of transfer of interests in the trust
amount of the gain recognized to the transferor at the time of the transfer. 261 Any such excise tax was due and payable by the transferor at the time of the transfer, and was to be assessed, collected, and paid as provided in Regulations. The Regulations provide, among other things, that every person making a transfer to a foreign trust shall file a return on the day on which the transfer is made and pay the tax due on the transfer. 262 Because of the adverse impact of the excise tax in former Section 1491, transfers to foreign trusts were typically structured as cash transactions, unless there was little or no inherent gain in the assets transferred. The excise tax was not applicable if, at the time of transfer, the foreign trust was a grantor trust, because the grantor was deemed for U.S. tax purposes to continue to own the property.
263
In circumstances where a domestic trust became a foreign trustfor example, on the failure of a domestic trust under prior law to satisfy the conditions of the 1996 legislation 264 the Service stated that former Section 1491 applied, including the reporting obligations of former Section 1494. 265
On or before the 90th day (or such later day as prescribed in Regulations), after any reportable event, the responsible party shall
provide written notice of such event to the Service. 273 The notice shall include 1. The amount of money or other property transferred to the trust in connection with the reportable event; and 2. The identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust. 274 The term reportable event includes the following: 275 1. The creation of any foreign trust by a U.S. person; 2. The transfer of any money or property (directly or indirectly) to a foreign trust by a U.S. person, including a transfer by reason of death (other than a transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property); and
The decedent was treated as the owner of any portion of a foreign trust under the grantor trust provisions (Sections 671 through 679); or
Any portion of a foreign trust was included in the gross estate of the decedent.
The reporting requirements do not apply to deferred compensation or charitable trusts. 276 The term responsible party means 1. The grantor in the case of the creation of an inter vivos trust; 2. The transferor in the case of money or property to a foreign trust other than a transfer by reason of death; and 3. The executor of the decedent's estate in any other case. 277 Where there is a U.S. person who is treated as the grantor of a foreign trust under Sections 671 through 679, such U.S. person is responsible for ensuring the following: 1. Filing a return which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the U.S. agent for such trust, and such other information as the Service may prescribe; and 2. Such information as required by Regulations to each U.S. person who is treated as the owner of any portion of such trust or who receives (directly or indirectly) any distribution from the trust. 278 In the case of a foreign trust that does not have a U.S. agent, the Service is granted authority to determine the amounts required to be taken into account with respect to such trust by U.S. persons for U.S. tax purposes, 279 unless such trust agrees to authorize a U.S. person to act as such trust's agent with respect to request or summons by the Service to examine records or produce testimony relating to the proper amounts required to be taken into by U.S. persons with respect to such trust. 280 In addition to reporting by the transferor, or deemed grantor, of a foreign trust, there is also a reporting obligation by beneficiaries. A U.S. person who receives (directly or indirectly) any distribution from a foreign trust must make a return with respect to such trust for such year that includes: 1. The name of such trust; 2. The aggregate amount of the distributions so received from such trust during such taxable year; and 3. Such other information as the Secretary may prescribe. 281 If adequate records are not provided to enable the Service to determine the proper treatment of any distribution from a foreign trust, such distribution shall be treated as an accumulation distribution. 282 For purposes of these reporting requirements, a trust that is a U.S. person is treated as a foreign trust for purposes of the reporting requirements in Section 6048 if such trust has substantial activities, or holds substantial property, outside the United States. 283 In addition, any U.S. person (other than certain tax-exempt organizations) who receives purported gifts or bequests from foreign sources totaling more than $10,000 during the taxable year must report them to the Service. 284 The threshold for this reporting requirement is indexed for inflation. If the U.S. person fails, without reasonable cause, to report foreign gifts as required, the Service is authorized to determine the tax treatment of the unreported gifts. 285 In addition, the U.S. person is subject to a penalty equal to 5 percent of the amount of the gift for each month that the failure continues, with the total penalty not to exceed 25 percent of such amount. 286
assets.
Illustration 21-13
The situation is the same as in Illustration 21-3, 287 where John Forto is a U.S. citizen who has accumulated a significant net worth through his ownership of the stock of USCo, a U.S. corporation. USCo is in the business of manufacturing optical devices. One of these devices has been evolved into a line of cameras with the trade name Super Camera. The Super Camera has become the runaway best-selling camera in the world. Mr. Forto has accumulated a significant estate, and is concerned that some, presently unforeseen and unknown, claimant could sue him in the U.S. courts for an amount that would put his entire net worth in jeopardy. He desires to hold at least a portion of his net worth in an environment that is as safe from any such creditors as possible. In this type of situation, a foreign trust may provide the safest means of structuring the ownership of assets so that the claims of future creditors cannot reach the assets. Such uses of trusts have received significant publicity over the years, including the attention of U.S. courts in actions seeking recovery of assets placed in offshore trusts. 288 It may also be beneficial in some circumstances to consider the use of offshore partnerships or limited liability companies. 289
Section 672 provides definitions and special rules. Many of the grantor trust provisions hinge on whether certain rights are exercisable by the grantor or a nonadverse party or are exercisable without the consent of an adverse party. A nonadverse party is defined as any person who is not an adverse party. 291 The term adverse party is defined as any person having a substantial beneficial interest in the trust that would be adversely affected by the exercise or nonexercise of the power that he possesses respecting the trust. 292 A trustee is not an adverse party merely because of his interest as trustee. 293 Accordingly, notwithstanding that the trustee is an unrelated party to the settlors, Mr. and Mrs. Forto in Illustration 21-13, the trustee will not be an adverse party for purposes of Section 672, but will be treated as a nonadverse party. Section 672(e) provides that a grantor will be treated as holding any power or interest held by his or her spouse if, at the time of the creation of such power or interest, the spouse is living with the grantor. Accordingly, any reference herein to a power held by the grantor will also refer to a power held by his or her spouse. Sections 673 through 677 provide that the grantor or another person will be taxed on income of a trust under the following circumstances: 1. If the grantor has retained a reversionary interest in the trust corpus or income with a value greater than 5 percent of the value of the trust; 294 2. If the grantor or a nonadverse party has certain powers over the beneficial interest under the trust; 295 3. If certain administrative powers over the trust exist under which the grantor can or does benefit; 296 4. If the grantor or a nonadverse party has a power to revoke the trust or return the corpus to the grantor; 297 or 5. If the grantor or a nonadverse party has the power to distribute income to or for the benefit of the grantor or the grantor's spouse.
298
In the situation in Illustration 21-13, the settlors (Mr. and Mrs. Forto) will not retain a reversionary interest within the meaning of Section 673(assuming the value of the reversionary interest upon termination of the trust in the discretion of the trustee is equal to or less than 5 percent of the value of the trust), nor will they possess any administrative power over the trust within the meaning of Section 675. Further, it appears that the powers of the trustee to control the beneficial enjoyment of the trust income and corpus should not cause Mr. Forto to be treated as the owner of the trust under Section 674. It appears, however, that the trust may be treated as a grantor trust under Section 676 or Section 677. In any event, the transfer of property to the trust should also come within the provisions of Section 679, pursuant to which the grantor will be treated as the owner of the trust for U.S. tax purposes.
limited by a reasonably definite standard. However, because such power is exercisable solely by the trustee, who is not a related party nor a subordinate party who is subservient to the wishes of the grantor, such power of the trustee should not cause Mr. and Mrs. Forto to be treated as the owners of the trust pursuant to Section 674.
In Revenue Ruling 87-61, 307 the Service ruled that a transfer of appreciated property to a foreign trust by a U.S. citizen with respect to which the transferor would be treated as the owner of the trust within the meaning of Section 671 was not treated as a transfer to a foreign trust for purposes of Section 1491 because the grantor continued as the owner of the property for federal income tax purposes. The grantor was not treated as having transferred the property for purposes of Section 1491 until the grantor renounced the powers previously retained that had caused him to be treated as the owner for purposes of section 671. If the rationale of Revenue Ruling 87-61 were applied to Section 679, a grantor treated as the owner of a trust under Section 671 would not be treated as the owner under Section 679, but if he were not treated as the owner under Section 671 he would be so treated under Section 679. Although this reasoning appears circuitous, the bottom line is that the grantor of property to a foreign trust meeting all of the requirements of Section 679, as well as qualifying as a grantor trust under Sections 671 through 677, should be treated as the owner of the trust under either Section 671 or Section 679.
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A transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. 308 Consideration other than cash is taken into account at its fair market value for this purpose, any obligation of the trust, 309 any grantor or beneficiary of the trust, and any person related to any grantor or beneficiary of the trust, obligation or guaranteed by such person, will not be taken into account, except as provided in Regulations. 310 Principal payments by the trust on any such obligation referred will be taken into account in determining the portion of the trust attributable to the property transferred. 311
6. If a domestic trust is formed by a citizen or resident, and such trust becomes a foreign trust while such individual is alive, then the trust shall become subject to Section 679 as if such individual transferred to the trust on the date it became a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to the trust. 312 7. Where a foreign person is treated as the owner of any portion of a trust, and such trust has a beneficiary who is a U.S. person, such beneficiary will be treated as the grantor of such portion to the extent that the beneficiary has made a direct or indirect transfer of property (other than in sale for full and adequate consideration) to such foreign person. 313 If a transferee receives a transfer from a foreign corporation or partnership and treats such transfer as a gift or bequest for U.S. tax purposes, the Service may recharacterize such transfer as is determined necessary to prevent the avoidance of Section 672(f). 314 8. The Service has specific authority to prescribe such Regulations as may be necessary or appropriate to carry out the purposes of Section 679. 315 Accordingly, to the extent the transfer of assets by Mr. and Mrs. Forto in Illustration 21-13 is treated as a transfer to a foreign trust, they will be treated as the owner of the portion of the irrevocable trust attributable to such transfer.
(which defines foreign trust as a trust whose foreign-source income is not includable in gross income). 324 Such trust was established in, and was administered under, the laws of a foreign country, and the trustee was a foreign entity. Further, the trust corpus was located in the foreign country. Based on those facts, the Service ruled that the trust was a foreign trust. In Revenue Ruling 69-450, 325 the Service ruled that the transfer of appreciated stock to a Bermuda banking corporation as trustee of a Bermuda trust was a transfer subject to the excise tax of Section 1491 even though the grantor was treated as the owner of the entire trust under Sections 671 through 677. Such ruling was revoked by Revenue Ruling 87-61, in which the Service reasoned that because a grantor who was treated as the owner of an entire trust is considered to continue to own the trust assets, a transfer of property to a foreign grantor trust was not a transfer subject to the excise tax imposed by Section 1491. However, the grantor will be treated as having transferred property to the foreign grantor trust at the time the grantor ceases to be the owner of the trust. Thus, when the grantor renounces the powers previously retained that causes him to be treated as the owner of the trust corpus, or upon the expiration or lapse of such powers, the grantor will be treated as having made a transfer that was subject to the excise tax imposed by Section 1491 of the Codeand to the reporting requirements of Section 1494 and Regulations thereunder.
issues under pertinent U.S. law for the grantor, as well as the grantor's advisors, if there are existing creditors whose interests are adversely affected by the transfer. 336
Figure 21-1. Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign GiftsIRS Form 3520 Figure 21-2. Annual Return of Foreign Trust with a U.S. OwnerIRS Form 3520-A
An often-cited reason a U.S. citizen may desire to renounce U.S. citizenship concerns avoiding the U.S. tax system. 342 But there are any number of other reasons as well.
Illustration 21-14
The situation is the same as in Illustration 21-3, 343 where John Forto is a U.S. citizen who has accumulated a significant net worth through his ownership of the stock of USCo, a U.S. corporation. USCo manufactures optical devices, one of which has been evolved into a line of cameras with the trade name Super Camera. The Super Camera has become the runaway best-selling camera in the world. The manufacturing facilities are located in Foronia, which has provided USCo with an extremely beneficial incentive package. The business in Foronia has expanded and Mr. Forto is contemplating moving his family to Foronia to concentrate on the worldwide development of this business without having to make the arduous trips to Foronia, located on the other side of the world. One of the elements of the incentive package provided by Foronia is a complete tax amnesty for income, estate, gift, and other taxes in Foronia for Mr. Forto and his family if they became citizens of Foronia. Mr. Forto's family has tired of his long absence from their home in the United States and have decided to move to Foronia. Mr. Forto also desires to take advantage of the tax amnesty. In this illustration, Mr. Forto needs to carefully address the U.S. tax consequences of a relinquishment of his U.S. citizenship, as well as the practical difficulties that may occur in the future if the political situation in Foronia were to deteriorate. Checklist 21-5 itemizes issues concerning U.S. citizens considering expatriation.
Does the United States have an estate and gift tax treaty with the potential foreign country of citizenship or residency?
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Minimizing U.S. estate and gift taxation and the application of the 10-year provision in Section 2107 Minimizing U.S. income taxation and the application of the 10-year provision in Section 877 Minimizing estate and gift taxation in new country of citizenship or residence Minimizing income taxation in new country of citizenship or residence Avoiding international double or multiple estate and gift taxation Establishing anonymity for new home country tax and legal purposes Establishing anonymity for U.S. tax and legal purposes Utilizing offshore trust or corporate structures already in place Utilizing offshore trust or corporate structures to be established
Ascertain whether the planner or other advisor should be concerned about fraudulent conveyances under applicable U.S. creditor rights laws. Consider the U.S. income tax impact of the expatriation provisions in Section 877.
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Potential income tax impact Possible deferring of the tax's impact Possible offsetting of losses on other deductions Consequences of any existing trusts. Planning for controlled foreign corporations.
The purpose of the new provisions was to prevent U.S. tax base erosion from the expatriation of U.S. citizens and certain long-term
residents. Specifically, the legislative history notes that some very wealthy individuals each year relinquish their U.S. citizenship for the purpose of avoiding U.S. income, estate, and gift tax. The legislative history also recognizes that citizens of the United States clearly have a basic right under both U.S. and international law not only to leave the United States to live elsewhere, but also to relinquish their U.S. citizenship. The Committee does not believe that the Internal Revenue Code should be used
to stop U.S. citizens or residents from expatriating; however, the Committee also does not believe that the Code should provide a tax incentive for expatriating. 354
The HEART Act enacted a deemed market-to-market exit tax that applies to net unrealized gain if assets were sold at fair market value on the day prior to expatriation and the gain exceeds $600,000, indexed for inflation. 364 The tax may be deferred on posting adequate security. 365 The Service has provided guidance on the treatment of specific items, including deferred compensation, services performed outside the United States, tax deferred accounts, and interests in non-grantor trusts. 366
2. Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of U.S. persons or of the United States, a state or political subdivision thereof, or the District of Columbia; 368 3. Income or gain derived from a controlled foreign corporation
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If the individual losing U.S. citizenship owned or is considered as owning 369 at any time during the two-year period ending on the date of the loss of U.S. citizenship, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of such corporation, or the total value of the stock of such corporation, and
To the extent such income or gain does not exceed the earnings and profits attributable to such stock that were earned or accumulated before the loss of citizenship and during periods that such ownership requirements are met. 370
Illustration 21-15
This situation 375 is the same as in Illustration 21-14, except that Mr. Forto loses his U.S. citizenship on January 1, 1996, and is subject to Section 877. On June 30, 1997, Mr. Forto transfers the stock he owns in a U.S. corporation, USCo, to a wholly owned foreign corporation, ForCo, in a transaction that qualifies for tax-free treatment under Section 351. 376 At the time of such transfer, Mr. Forto's basis in the stock of USCo is $100,000 and the fair market value of the stock is $150,000. If Mr. Forto does not enter into a gain recognition agreement with the Service, he will be deemed to have sold the USCo stock for $150,000 on the date of the transfer, and would be subject to U.S. tax in 1997 on the $50,000 of gain realized. Alternatively, if Mr. Forto enters into a gain recognition agreement, he would not be required to recognize for U.S. tax purposes in 1997 the $50,000 of gain realized upon the transfer of the USCo stock to ForCo. However, under the gain recognition agreement, for the 10-year period ending on December 31, 2005, any income (e.g., dividends) or gain with respect to the ForCo stock would be treated as U.S. source, and therefore Mr. Forto would be subject to tax on such income or gain under Section 877. If Mr. Forto disposes of the USCo stock on January 1, 2002, Mr. Forto's gain recognition agreement would terminate on such date, and Mr. Forto would be required to recognize as U.S.-source income at that time the $50,000 of gain that he previously deferred under the gain recognition agreement. (The amount of gain required to be recognized by Mr. Forto in this situation would not be affected by any changes in the value of the USCo stock since his June 30, 1997, transfer of such stock to ForCo.)
Illustration 21-16
The situation is the same as in Illustration 21-14. Forto loses his citizenship on January 1, 1996, and is subject to Section 877. On that date Mr. Forto owns 10,000 shares of stock of a U.S. corporation, USCo, with a value of $1 million. On the same date, Mr. Forto enters into an equity swap with respect to such USCo stock with a five-year term. Under the transaction, Mr. Forto will transfer to the counter-party an amount equal to the dividends on the USCo stock
and any increase in the value of the USCo stock for the five-year period. The counter-party will transfer to Mr. Forto an amount equal to a market rate of interest on $1 million and any decrease in the value of the USCo stock for the same period. Mr. Forto's risk of loss with respect to the USCo stock is substantially diminished during the five-year period in which the equity swap is in effect, and therefore, the 10-year period under Section 877 is suspended during such period. Accordingly, if Mr. Forto sells his USCo stock for a gain on January 1, 2010, such gain would be treated as U.S.-source income taxable to Mr. Forto under Section 877. 378
whose status as a lawful permanent resident has been revoked or has been determined to have been abandoned. The Treasury must also publish in the Federal Register the names of all former U.S. citizens from whom it receives the required statements or whose names it receives under the foregoing information-sharing provisions. Section 6039C authorizes the Service to publish the names of individuals who gave up their citizenship during each fiscal quarter of the government. Such a list is published quarterly. For example, the list for the quarter ending June 30, 1998, contains a list of about 100 individuals. 388 There may be a variety of troublesome, practical consequences of a person's name appearing on the expatriation list aside from the obvious tax matters. 389
21.05[4] Estate and Gift Tax Considerations for U.S. Citizens Residing in or Moving to Offshore Jurisdictions
When a U.S. citizen resides in an offshore jurisdiction, there are also a variety of estate and gift tax considerations that must be taken into account. In order to coordinate planning between the offshore jurisdiction and the United States, there are a number of issues that will need to be considered, including the following: 1. What property is subject to tax in the offshore jurisdiction? 2. Are employee benefit plan benefits applicable to the U.S. citizen subject to transfer tax in the offshore jurisdiction? 3. What planning techniques are available to minimize the assets that are potentially subject to tax in the offshore jurisdiction? 4. Do employee benefit plans allow sufficient flexibility for appropriate planning arrangements? Another initial consideration will be whether the United States has an estate and gift tax treaty with the jurisdiction. If so, the treaty will provide considerable guidance with respect to double taxation issues. The length of the period of residence in the offshore jurisdiction may be important.
the time may come when the former citizen (now nonresident) seeks to reacquire U.S. citizenship. In such a situation, the planning
context will be similar to that of a nonresident emigrating to the United States for the first time 399 with the interesting overlay of the U.S. expatriation provisions.
Illustration 21-17
The situation is the same as in Illustration 21-3, 400 where John Forto has decided to emigrate to Foronia. It is now several years later and Mr. Forto and his family have decided to return to the United States. Over the years, Mr. Forto's company, once a U.S. corporation named USCo, also became a Foronian company, by the name of ForonCo. Mr. Forto owns all the stock in ForonCo. In such a situation, the former citizen, now nonresident, Mr. Forto would have a significant incentive to restructure his asset holdings before once again becoming a U.S. citizen. For example, he could consider forming a foreign trust before renouncing Foronian citizenship and accepting U.S. citizenship. Such a transaction would be subject to the provisions noted previously with respect to nonresidents. 401 It may also be subject to the provisions of the Code designed to protect the U.S. tax base from expatriation of its citizens. 402 As part of its efforts to deter tax-motivated expatriations, 403 Congress, in 1996, also classified as excludable for reentry into the United States any former U.S. citizen who is found by the Attorney General to have renounced U.S. citizenship for tax avoidance purposes. 404
21.05[6] Planning Where the Decedent Had Undisclosed, and Unreported, Foreign Assets (Including Trust Accounts)
An entirely different type of planning may be required where a U.S. decedent is discovered to have owned foreign assets, often as a grantor of a foreign trust, but has never satisfied U.S. reporting obligations. 405
248
TD 8955, 66 Fed. Reg. 37886 (July 20, 2001). See U.S. IRS Issues Final Regulations on Foreign Trusts with U.S. Beneficiaries, 2001 WTD 140-39 (July 19, 2001). Rules relating to Section 501(c)(3) tax-exempt status of foreign trusts were modified in response to commentaters to not require rulings, though there will be U.S. transferor notice filing requirements.
253
See generally Harrington, Planning for U.S. Beneficiaries of Foreign Trusts Under Recent Regs., 28 Est. Plan. 258 (June 2001).
254
Treas. Reg. 1.679-3(c). The related subject of gain recognition on deemed transfers of assets to a foreign trust is addressed in the Regulations under Section 684. See 21.05[3][b][ix].
257
The term U.S. person is defined in Section 7701(a)(30) to include a citizen or resident, and a domestic partnership, corporation, estate or trust, or nonresident alien electing to be treated as a resident under Section 6013(g).
259
IRC 684(a). Section 684 was enacted in the Small Business Job Protection Act of 1996.
260
The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 983 (1997), repealed the excise tax in Sections 1491 through 1494 with respect to transfers of property to foreign partnerships, replacing it with a notice requirement with respect to such transfers occurring after August 5, 1997. See 5.04[1].
261
Former IRC 1491(a). See 3.04[2][f]. Former IRC 1492 provided an exception for, among other things, taxpayers who elected under former IRC 1057 to treat such a transfer as a sale or exchange of property for an amount equal to the fair market value of the property transferred and to currently recognize the gain.
262
See Notice 96-65, 1996-2 CB 232; IRS Notice 96-60, 1996-2 CB 227.
266
In this context, such provisions are principally IRC 354 (transfer to controlled corporation) and 361 (reorganization). See U.S. International Transfer Pricing 17.06.
267
IRC 367(a)(3).
268
These types of property include property described in IRC 1221(a)(1) or 1221(a)(3) (relating to inventory and copyrights, and the like); installment obligations, accounts receivable, or similar property; foreign currency or other property denominated in foreign currency; intangible property; or property with respect to which the transferor is a lessor at the time of the transfer, except that this clause shall not apply if the transferee was the lessee. IRC 367(a)(3)(B).
269
See 19.03.
270
See Notice 97-19, 1997-1 CB 227 (providing detailed guidance with respect to IRC 877, 2501, and 2107 pending issuance of Regulations); Notice 96-60, 1996-2 CB 227 (setting out, inter alia, initial guidance on ruling requests under IRC 877).
272
IRC 6048(a).
273
IRC 6048(a)(1), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996). See generally Bruce, Foreign Trust Tax Compliance: Don't Panic, 9 J. Int'l Tax'n 24 (Jan. 1998); Lederman & Hirsh, New Tax Liabilities and Reporting Obligations Imposed on Expatriates, 84 J. Tax'n 325 (1996); Perry, New Law Changes Rules on Cross-Border Trusts, Toughens Reporting, 7 J. Int'l Tax'n 436 (1996). Prior to amendment, IRC 6048(a) required the grantor in the case of an inter vivos trust, the fiduciary in the case of a testamentary trust, or the transferor, as the case may be, to file an information return as required by the Regulations. IRC 6048(b). The civil penalty for nonfiling of the required return was 5 percent of the transfer to the trust, but not more than $1,000, unless it was shown that the failure was due to reasonable cause. The criminal penalty for failure to file was set out in IRC 7203. In addition, any trust subject to IRC 679formed by a U.S. citizen or resident and having U.S. beneficiarieshad to file a return as
required by Regulations. IRC 6048(c). The civil penalty for nonfiling of the required return was 5 percent of the value of the corpus of the trust at the end of the taxable year, but not more than $1,000, unless it was shown that the failure was due to reasonable cause. The criminal penalty for failure to file was set out in IRC 7203.
274
IRC 6048(a)(2).
275
IRC 6048(a)(3)(A).
276
IRC 6048(a)(3)(B).
277
IRC 6048(a)(4).
278
IRC 6048(b)(1).
279
IRC 6048(b)(2)(A).
280
IRC 6048(b)(2)(B). The appointment of such an agent is not, alone, to be considered as a U.S. trade or business of the trust. Id.
281
IRC 6048(c)(1).
282
IRC 6048(c)(2).
283
IRC 6048(d)(4).
284
IRC 6039F(a). The definition of a gift to a U.S. person for this purpose excludes amounts that are qualified tuition or medical payments made on behalf of the U.S. person, as defined for gift tax purposes (IRC 2503(e)(2)), and amounts that are distributions to a U.S. beneficiary of a foreign trust if such amounts are properly disclosed under the reporting requirements. IRC 6039F(b).
285
IRC 6039F(c)(1)(A). It is intended that the Treasury secretary's exercise of its authority to make such a determination will be subject to judicial review under an arbitrary or capricious standard, which provides a high degree of deference to such determination.
286
IRC 6039F(c)(1)(A).
287
See FTC v. Affordable Media LLC, 179 F3d 1228 (9th Cir. 1999) (married couple held in contempt of court for failing to return assets held in a foreign asset protection trust located in the Cook Islands).
289
See generally Azad, Asset Protection Planning with Offshore Trusts and Offshore Corporations, 12 Tax Notes Int'l 500 (Feb. 12, 1996); Bruce & Gray, Offshore Protection-of-Assets Trusts, U.S. Taxation of International Operations: Tax Ideas (P-H) 13,518 (1988); Marty-Nelson, Offshore Asset Protection Trusts: Are They Tax Neutral? 7 J. Int'l Tax'n 107 (1966).
290
IRC 671.
291
IRC 672(b).
292
IRC 672(a).
293
IRC 673.
295
IRC 674.
296
IRC 675.
297
IRC 676.
298
IRC 677.
299
IRC 674(b)(5). The Regulations provide that a power to distribute corpus for the education, support, maintenance, or health of the beneficiary; for his reasonable support and comfort; or to enable him to maintain his accustomed standard of living; or to meet an emergency, would be limited to a reasonably definite standard. Treas. Reg. 1.674(b)-1(b)(5)(i). The Regulations further provide, however, that a power to distribute corpus for the pleasure, desire, or happiness of the beneficiary is not limited by a reasonably definite standard. Id.
300
IRC 679(a)(1).
304
IRC 7701(a)(31) defines foreign trust as a trust whose foreign source income is not includable in gross income. See supra 21.03[1][d]. It appears that if a trust is established in, and administered under, the laws of a foreign country, the trustee is a foreign entity, and the trust corpus is located in the foreign country, the trust will be a foreign trust. See Rev. Rul. 87-61, 1987-2 CB 219.
305
IRC 679(c)(1).
306
IRC 679(a)(2)(A).
307
IRC 679(a)(2)(B), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996), effective in the case of transfers after February 6, 1995.
309
IRC 679(a)(3)(A)(i), 679(a)(3)(C). For this purpose, the term related is as defined in IRC 643(i)(2)(B).
310
IRC 679(a)(3)(A).
311
IRC 679(a)(3)(B).
312
IRC 679(a)(5).
313
IRC 672(f)(5), added by the Small Business Job Protection Act of 1996, HR 3448, 104th Cong., 2d Sess. (1996).
314
IRC 672(f)(4).
315
IRC 679(d).
316
See 21.02.
317
IRC 684(a). In the case of transfers after December 31, 2009, the statutory language is similar except that it includes a nonresident alien as a transferee. The provisions of Section 684 are expanded in Treas. Reg. 1.684-1, TD 8956, 65 Fed. Reg. 48198 (Aug. 7, 2000). See IRS Issues Final Regs on Gain Recognition Rules for Transfers to Foreign Trusts, 2001 WTD 140-40 (July 19, 2001). See generally Harrington, Planning for U.S. Beneficiaries of Foreign Trusts under Recent Regs, 28 Est. Plan. 258 (June 2001).
318
IRC 684(c).
320
The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 983 (1997), repealed the excise tax in Sections 1491 through 1494 with respect to transfers of property to foreign partnerships, replacing it with a notice requirement with respect to such transfers occurring after August 5, 1997. See 21.05[1][b].
322
This could occur, however, if non-U.S. currency were transferred to the trust because of exchange rate fluctuations over time.
323
IRC 668.
329
Compare HB Plant v. Comm'r, 30 BTA 133 (1934), aff'd, 76 F2d 8 (2d Cir. 1935) (holding that a beneficiary's mere right to occupy trust property did not mean that the trust's payment of maintenance expenses should be treated as distributions to the beneficiary) with Alfred I. DuPont Test. Tr. v. Comm'r, 66 TC 761 (1976), aff'd, 574 F2d 1332 (5th Cir. 1978) (calling into question the rationale of Plant, while reaching a similar conclusion).
331
IRC 6048(a).
332
IRC 6677.
333
Schedule B, Line 11 of Form 1040, and the filing of Forms 3520, 3520-A, or 926.
334
See 7.02[4].
335
FSA 199952014 (Dec. 29, 1999). Income of a trust established to hold stock of an acquired company, in order to meet regulatory requirements, is attributed to the grantor, the beneficiary of the trust for subpart F purposes (controlled foreign corporation purposes).
F.T.C. v. Affordable Media, LLC, 179 F3d 1228 (9th Cir. 1999) (upholding contempt imposed on grantors of foreign trust for failure to turn over assets as ordered by court), discussed in Asinoff, Ruling in West May Chill Use of Offshore Trusts, Wall St. J., July 12, 1999, at A24.
337
See generally McCaffrey, Tax Advantaged Traveling for You and Your Money: Expatriation and Foreign Trusts, 1996 U. Miami Inst. on Est. Planning ch. 5.
346
For background on the evolution of the issues, see Turro, Clinton Administration Proposes Anti-Abuse Provisions for Foreign Trusts, Expatriates, 10 Tax Notes Int'l 511 (Feb. 13, 1995).
348
HR 980 and 981, 104th Cong., 1st Sess (1995); S. 452 and 453, 104th Cong., 1st Sess. (1995). An extensive background document was prepared by the Joint Committee on Taxation. Joint Committee on Taxation, Issues Presented by Proposals to Modify the Tax Treatment of Expatriation, Staff, Joint Committee on Taxation (June 2, 1995).
349
See Preliminary Comments on Expatriation, Foreign Trust ProposalsComments of the American Bar Ass'n, Section of Taxation, 95 TNT 59-49 (Mar. 27, 1995); New York State Bar Ass'n Reports on Expatriate Tax Proposals, 95 TNT 118-6 (June 19, 1995).
350
See Loube, Expatriate Taxation: Politics Obscures Technical Issues, 10 Tax Notes Int'l 1377 (Apr. 17, 1995).
351
Background documents for the hearings were extensive. See Joint Committee on Taxation, Description of Background and Issues Relating to Taxation of U.S. Citizens Who Relinquish Citizenship and Long-Term Resident Aliens Who Relinquish U.S. Residency, Staff, Joint Committee on Tax'n (Mar. 27, 1995), reprinted at BNA Daily Tax Rep., Mar. 27, 1995, at L-2. The background of the legislation is discussed in Abreu, Taxing Exits, 73 Tax Notes 359 (Oct. 21, 1996).
352
See HR 1812, 104th Cong., 1st Sess. (1995) (Rep. Archer); S. 700, 104th Cong, 1st Sess. (1995) (by Sen. Moynihan).
353
HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1542 (Research Institute of America 1996). The modifications of IRC 877 are effective in the case of
See HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 15441545 (Research Institute of America 1996).
358
Specifically, IRC 877(a) is applicable to Subtitle A of the Code, which is the income tax, and Subtitle B, which is the estate and gift tax. IRC 877(a)(1).
359
IRC 877(a)(2) (flush language). The cost-of-living adjustment is as provided in IRC 1(f)(3), rounded to the nearest $1,000.
361
See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004).
362
Pub. L. No. 110-245, 122 Stat. 1624 (2008). See generally Arsenault, Surviving a HEART Attack: Expatriation and the Tax Policy Implications of the New Exit Tax, 24 Akron Tax L. J. 37, 48-50 (2009).
363
IRC 877A(g)(1)(A), referring to IRC 877(a)(2). There are exceptions for citizens with dual citizenship or persons renouncing citizenship prior to age 18.5. IRC 877A(g)(1)(B).
364
IRC 877A(a)(1).
365
IRC 877A(b).
366
See Notice 2009-85, 2009-45 IRB ; IRS Releases Guidance on Expatriates Covered Pursuant to HEART Act of 2008, BNA Daily Tax Rep., Oct. 16, 2009, at G-3.
367
IRC 877(d)(1)(A).
368
IRC 877(d)(1)(B).
369
IRC 877(d)(1)(C).
371
For example, like-kind exchanges (IRC 1031), reorganizations (IRC 368(a)), or transfers to controlled corporations (IRC 351) or partnerships (IRC 721).
372
IRC 877(d)(2)(A). In order for this provision to be applicable to property exchanged within the 10-year period (or 15 years under Regulations to be issued), the gain would otherwise have not been recognized, income from the property exchanged would have been U.S. source, and income derived from the property acquired would be from sources outside the United States. IRC 877(d)(2)(B).
373
IRC 877(d)(2)(C).
374
IRC 877(d)(2)(E). The legislative history notes, for example, that this provision could apply to a former U.S. citizen who removes appreciated artwork from the United States. HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of
the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1545 (Research Institute of America 1996).
375
HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1545-1546 (Research Institute of America 1996).
376
See 12.03[1].
377
IRC 877(d)(3).
378
HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1546 (Research Institute of America 1996).
379
IRC 877(d)(4)(a)(ii).
380
IRC 877(d)(4)(C).
381
IRC 877(d)(4)(D).
382
IRC 877(d)(4)(E).
383
HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 1547 (Research Institute of America 1996).
384
IRC 877(f).
385
IRC 6039F(c).
387
IRC 6039F(d).
388
See Quarterly Publication of Individuals Who Have Chosen to Expatriate as Required by Section 6039G, Tax Analysts Doc. 9825350 (Aug. 10, 1998).
389
Newman, How Do You Quit Being an American? With Great Difficulty, Wall St. J., Dec. 28, 1998, at A2.
390
The Service has also issued several private letter rulings. See Priv. Ltr. Ruls. 199927032 (July 19, 1999); 200219033 (Feb. 12, 2002) (principal purpose to evade U.S. tax not presumed); 200217043 (Jan. 24, 2002) (loss of long-term resident status); 200210005 (Mar. 8, 2002) (loss of U.S. citizenship by naturalized citizen); (definitive ruling that expatriation following employer transfer did not have a tax avoidance motive under Section 877); 199927013 (July 19, 1999) (no tax-avoidance motive under Section 877 where person who always lived in foreign country renounces U.S. citizenship and citizenship was by virtue of having U.S. citizen mother); 199926031 (July 19, 1999) (no tax-avoidance motive under Section 877 where dual citizen living in foreign country renounces U.S. citizenship). See also Priv. Ltr. Ruls. 9752007 (Sept. 19, 1997), 9735014 (May 29, 1997), and 9724021 (Mar. 18, 1997). In FSA 199947009 (Nov. 26, 1999), an examination team was advised that survivor benefits received by a German-born taxpayer after she renounced U.S. citizenship would be exempt from federal income tax under the U.S.German treaty provided that her renunciation did not have a tax-avoidance purpose.
392
See HR Rep. No. 736, 104th Cong., 2d Sess. (1996), reprinted in RIA's Complete Analysis of the Small Business, Health Insurance and Welfare Reform Acts of 1996 at 15421543 (Research Institute of America 1996).
395
IRC 2107(a).
396
IRC 2107(c)(2).
397
IRC 2107(e). See Notice 97-19, 1997-1 CB 394 (providing detailed guidance with respect to IRC 877, 2501, and 2107 pending issuance of Regulations). See generally Lederman & Hirsh, New Reporting Rules for Departing U.S. Persons and Property After IRS Guidance and TRA '97, 87 J. Tax'n 149 (1997).
398
See supra 21.05[1][a]. In this connection, see Ltr. Rul. 9527025, which involved a former citizen who had allowed more than 10 years to expire before repatriating. The Service ruled that IRC 2501(a)(3), concerning transfers made within 10 years of losing U.S. citizenship, was inapplicable. It also found that the formation of a foreign trust and transfer of foreign company stock, where the beneficiaries were the grantor's family, and the grantor retained the voting rights on the transferred stock, was not subject to IRC 2036(b).
403
Illegal Immigration Reform and Responsibility Act of 1996, Pub. L. No. 104-208 (Sept. 30, 1996) (effective in the case of expatriations occurring after September 29, 1996). This provision is criticized at Tilevitz & Czapiewska, Getting the Tax-Free Boot: Tax Motivated Expatriation May Preclude U.S. Visa, 70 Tax Notes 1715 (Mar. 31, 1997). See also Martin, U.S. Law Targeting Tax-Dodging Expatriates May Have Loophole, 14 Tax Notes Int'l 833 (Mar. 10, 1997). A private letter ruling has been issued under Section 877(c). Priv. Ltr. Rul. 9724021 (Mar. 18, 1997) (initial dual citizen who married a foreign spouse).
405