Expatriation
IRS Proposes New Regulations on Gifts
Tax Section of the Florida Bar
Wednesday, February 10, 2016
Abrahm W. Smith
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History
‒ Section 301 of the Heroes Earnings Assistance and
Relief Tax Act of 2008, Public Law 110-245 (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.
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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.
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Notice 2009-85 (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.
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Law
‒ Section 877 applies to individuals who expatriated
(relinquished U.S. citizenship or ceased to be lawful
permanent residents) prior to June 17, 2008.
‒ Section 877A imposes an "exit tax" on "covered
expatriates.”
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Exit Tax
‒ Deemed sale of all property on the day before
expatriation by a covered expatriate.
‒ $600,000 income threshold.
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Expatriate
‒ US citizen:

Relinquishes citizenship.
‒ Long term resident of the United States (i.e., green
card holder):

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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.
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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 2009-85 ).
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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.
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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.
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Covered Gift or Bequest
‒ Property acquired (by gift or inheritance) from a
covered expatriate.
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Proposed Regs
(REG-112997-10) (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.
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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.
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Proposed Regs (continued)
‒ All property

2801 tax applies regardless of whether the property was
acquired by the covered expatriate before or after
expatriation.
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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)
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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.
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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.
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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.
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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.
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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.
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Observations
‒ OVDP Program

A person can use the OVDP program, including the
Streamlined Procedures, for the 5-year certification
requirement.
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Observations (continued)
‒ Entire Family Expatriation

May want to consider expatriation for the entire family to
avoid recipients being US citizens or residents.
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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…"
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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.
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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.
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My Top 3 Takeaways
1. “Resident” is a domicile test
2. Indirect Transfers captured
3. Recipient has burden to determine character of gifts
received
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