Guidance Under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 28</CFR> <DEPDOC>[TD 10027]</DEPDOC> <RIN>RIN 1545-BJ43</RIN> <SUBJECT>Guidance Under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations that provide guidance on the application of a tax on United States citizens and residents, as well as certain trusts, that receive, directly or indirectly, gifts or bequests from certain individuals who relinquished United States citizenship or ceased to be lawful permanent residents of the United States. The final regulations also provide guidance on the method of reporting and paying this tax. The final regulations primarily affect United States citizens and residents, as well as certain trusts, that receive one or more such gifts or bequests. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective Date:</E> These regulations are effective January 14, 2025. <E T="03">Applicability Dates:</E> For dates of applicability, see §§ 28.2801-1(b), 28.2801-2(n), 28.2801-3(g), 28.2801-4(g), 28.2801-5(f), 28.2801-6(e), 28.2801-7(d), 28.6001-1(c), 28.6011-1(c), 28.6060-1(b), 28.6071-1(d), 28.6081-1(e), 28.6091-1(b), 28.6107-1(b), 28.6109-1(b), 28.6151-1(b), 28.6694-1(b), 28.6694-2(b), 28.6694-3(b), 28.6694-4(b), 28.6695-1(b), 28.6696-1(b), and 28.7701-1(b). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Mayer R. Samuels, Daniel J. Gespass, or Karlene M. Lesho at (202) 317-6859 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains additions and amendments to 26 CFR part 28 (Imposition of Tax on Gifts and Bequests from Covered Expatriates) addressing the application of section 2801 of the Internal Revenue Code (Code) and related provisions (the “final regulations”). The additions and amendments are issued under sections 2801, 6001, 6011, 6060, 6071, 6081, 6091, 6101, 6107, and 6109 pursuant to the express delegations of authority provided under those sections. The express delegations relied upon are referenced in the Background section of this preamble and in the Summary of Comments and Explanation of Revisions describing the individual sections of the final regulations. The final regulations are also issued under the express delegation of authority under section 7805 of the Code. <HD SOURCE="HD1">Background</HD> This document amends subchapter B of 26 CFR chapter 1 (Estate and Gift Taxes) by adding part 28 under section 2801 and by expanding several existing regulations to also apply to the filing and furnishing of returns and payment of the tax imposed by section 2801 (section 2801 tax). Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), Public Law 110-245, 122 Stat. 1624 (2008), added chapter 15 (Gifts and Bequests from Expatriates) to subtitle B of the Code (subtitle B), effective June 17, 2008. Before the addition of chapter 15, subtitle B contained chapters 11 through 14 relating to the estate tax, the gift tax, and the generation-skipping transfer (GST) tax, as well as special valuation rules applicable for purposes of subtitle B. Chapter 15 consists solely of section 2801 and imposes the section 2801 tax on certain transfers of property by gift (covered gifts) and on certain transfers of property by bequest (covered bequests) from certain individuals who expatriate on or after June 17, 2008 (covered expatriates). The section 2801 tax is imposed on each United States (U.S.) citizen or resident receiving a covered gift or covered bequest (U.S. recipient). For this purpose, domestic trusts and foreign trusts that elect to be treated as domestic trusts solely for purposes of section 2801 (electing foreign trusts) are included in the definition of a U.S. citizen. Foreign trusts that do not elect to be treated as domestic trusts for purposes of section 2801 (non-electing foreign trusts) are not U.S. citizens or residents and, therefore, do not become subject to the section 2801 tax upon receipt of covered gifts and covered bequests. Instead, the beneficiaries of non-electing foreign trusts who are U.S. citizens or residents (U.S. citizen or resident beneficiaries) become subject to the section 2801 tax upon their receipt of a distribution from a non-electing foreign trust that is attributable to covered gifts and covered bequests made to that non-electing foreign trust. The section 2801 tax will be computed on Form 708, <E T="03">United States Return of Tax for Gifts and Bequests Received from Covered Expatriates,</E> on which a U.S. recipient will report covered gifts and covered bequests received during the calendar year. If the aggregate value of the covered gifts and covered bequests received by the U.S. recipient during the calendar year exceeds the amount of the inflation-adjusted annual exclusion under section 2503(b) of the Code ($18,000 for 2024), the section 2801 tax is computed by multiplying the excess by the highest estate tax rate specified in section 2001(c) of the Code in effect on the date of receipt, and then reducing the product by any gift or estate taxes paid to a foreign country with respect to the covered gifts and covered bequests. The value of each covered gift and covered bequest is its fair market value as of the date of its receipt. On September 10, 2015, a notice of proposed rulemaking and a notice of public hearing (REG-112997-10) were published in the <E T="04">Federal Register</E> (80 FR 54447) proposing rules related to the section 2801 tax (proposed regulations). A total of sixteen comments on the proposed regulations were received and are available at <E T="03">https://www.regulations.gov</E> or upon request. A public hearing on the proposed regulations was held on January 6, 2016. After consideration of all the comments, this Treasury decision adopts the proposed regulations, with revisions, as final regulations. The revisions are discussed in the following <E T="03">Summary of Comments and Explanation of Revisions</E> section. Unless otherwise indicated in the <E T="03">Summary of Comments and Explanation of Revisions,</E> provisions of the proposed regulations for which no comments were received are adopted without substantive change. The final regulations include non-substantive modifications, including modifications that promote consistency across definitions, rules, and examples and improve the overall clarity of the guidance. Such modifications are not addressed in the <E T="03">Summary of Comments and Explanation of Revisions.</E> <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD2">1. General Comments on Section 2801 and the Tax-Neutral Objective</HD> The Department of the Treasury (Treasury Department) and the IRS received several general comments on section 2801. One comment objects to the enactment of section 2801, opining that the section 2801 tax is unnecessary, infringes on privacy rights, and unfairly applies to former long-term permanent residents. Other comments object by pointing out several ways in which the statutory provisions of section 2801 are not tax neutral, treat expatriates more harshly than if they had remained subject to U.S. gift and estate taxes, and thus violate what the commenters described as the intent of Congress in enacting section 2801 to make expatriation a tax-neutral event with regard to U.S. transfer taxes. Some comments request changes and additions to the proposed regulations to create a more tax-neutral outcome than under the statute. The Background section of the preamble of the proposed regulations describes the history of the addition of chapter 15 and section 2801 to the Code and references the idea, as explained in a report of the House Ways and Means Committee regarding an earlier, pre-HEART Act, bill to enact chapter 15 and section 2801, that the decision to relinquish citizenship ought to be “tax neutral.” <E T="03">See</E> H.R. Rep. No. 110-431, at 113 (2007). More specifically, the report states that an individual's decision to relinquish citizenship or terminate long-term residency should not affect the total amount of taxes imposed; that is, the decision should be “tax neutral.” The report further states that, if U.S. estate or gift taxes are avoided with respect to a transfer of property to a U.S. person by reason of the expatriation of the donor, it is appropriate for the recipient to be subject to a tax similar to the transfer tax that the donor or donor's estate would have been subject to, had the donor not expatriated. <E T="03">Id.</E> at 114. Despite the language in the report, section 2801 imposes a tax on the receipt by a U.S. citizen or resident of certain gifts or bequests which does not equal, and in some cases is not similar to, the tax that would have been imposed on the transfer of such gifts or bequests by a U.S. transferor (that is, one who had not expatriated), as illustrated by a comparison of the relevant statutory provisions of chapter 11 (estate tax), chapter 12 (gift tax), and chapter 13 (GST tax), with chapter 15 (section 2801 tax). Obvious dissimilarities between section 2801 and the provisions of chapters 11 through 13 include the absence in chapter 15 of an applicable credit amount that can be applied to offset or reduce the estate or gift tax liability (see sections 2010 and 2505 of the Code, for which transfers of up to $13.99 million (the 2025 inflation-adjusted amount) over a lifetime may be offset for purposes of gift and estate taxes) and the absence of a GST tax for covered gifts and covered bequests t ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 276k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━