Category Archives: Gift tax

“With Liberty and Justice (and Death Taxes) for All” …. Biden Proposal Changes the Taxation Game for Gifts and Inheritances (Part I)

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Today’s post is in two parts and was written by Virginia La Torre Jeker, J.D. John Richardson, J.D.

On March 28, President Joe Biden released the FY2023 Budget, also known as the Green Book, available here. The Green Book is not proposed legislation, but it might be viewed as a kind of reading of the tea leaves showing what may lie ahead in the not-too-distant future. Today’s post will discuss a Green Book proposal that would change the tax rules for unrealized capital gains when assets are gifted or passed at death.

This is the second time this proposal has been put forth by the Biden Administration. It may be sitting on the shelf for now, but the proposal is an enticing revenue-raiser and helps meet what society has been viewing as a call for a “fairer” tax code, by targeting higher-income and asset wealthy taxpayers. We bet it goes through in one form or another.
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Renunciation is a process of transitioning from US citizen to nonresident alien. How does this affect your tax situation?

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On June 25, 2020 Dr. Karen Alpert and I did a series of podcasts where we discussed how renunciation will affect your interaction with the US tax system. The key point is that you will still be taxable by the United States on US source income. What does that mean? Under what circumstances could renunciation of US citizenship actually increase your US tax liability?

John Richardson – Follow me on Twitter @ExpatriationLaw

Part 6 of series: Why this Toronto based International Tax specialist always asks whether there are any U.S. taxpayers in the family

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Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:

You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.

Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.

Tax Connections has published a large number of posts that I have written over the years (yes, hard to believe it has been years). As you may know I oppose FATCA, U.S. citizenship-based taxation and the use of FATCA to impose U.S. taxation on tax residents of other countries.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
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This is the sixth of a series of posts that reflect views and experiences of Americans abroad who are experiencing the reality of living as an American abroad in an FBAR and FATCA world. (The first post is here.) The second post is here. The third post is here. The fourth post is here. The fifth post is here. I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
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The last post in this series made the point that U.S. “citizenship-based taxation” impacts people who are dual citizens and tax residents of other countries. Many of of these people do NOT view themselves as U.S. citizens at all. The suggestion that they are U.S. citizens is not welcome and is (because U.S. citizens are subject to a vast regulatory scheme) an intrusion in their lives. Fair enough.

Most of the posts in this series describe the effect of U.S. regulation on those who ARE U.S. citizens. What about the effect of “citizenship-based taxation” on those who are NOT U.S. citizens? The marriage of Meghan Markle to Prince Harry has generated an awareness of the regulatory requirements on U.S. citizens who live outside the United States. This is only part of the problem. To focus on how U.S. citizenship-based taxation affects ONLY U.S. citizens is selfish and misguided. After all, by marrying Prince Harry, Meghan Markle is now part of a family which includes non-resident aliens. As I recently suggested on Twitter:

My thinking along these lines began with:

What about Internal Revenue Code Section 318? This would deem “Baby Sussex” to be (for IRS purposes) the owner of any the shares of any U.K. corporations that Harry might own. This is only one of many instances where (to put it simply) the U.S. citizenship of one family member can become a problem for the whole family. In any event, this series really needs a post, describing what could happen, when a U.S. citizen becomes part of what is otherwise, a family of “non-resident aliens”.

In order to assist with this, I realized that I needed the input of a “U.S. Tax Anthropologist”. I turned to Peter Megoudis who is the director of the expat tax division at Trowbridge. Peter astutely recognised that the United States invented the concept of the “expat”. See the following video clip.

I asked Peter if he would share the results of his research on how one U.S. citizen family member could impact the whole family. In other words: How do the rules of U.S. “citizenship-based taxation” affect people who are not U.S. citizens, but have chosen to interact with U.S. citizens?

Peter replied to me with the following …

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The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

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Prologue

Do you recognise yourself?

You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.

The Internal Revenue Code: You can’t leave home without it!

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Considering renouncing US citizenship? #citizide – There are times when US citizenship can save you from foreign taxes!

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Should other nations be permitted to impose taxation on U.S. citizens or corporations?

At first blush, the question sounds absurd. Is there something about being a U.S. citizen that should exempt individuals from taxation in or by a another country? Some time ago, this question was explored in a discussion on a Facebook group. Interestingly, most participants thought the discussion was absurd and did not take it seriously. But truth can be stranger than fiction. When it comes to taxation there can be some benefits to being a U.S. citizen. In fact, in certain cases, U.S. citizenship can act as a “cloaking device” – a device that shields you from taxation in another country.


The two certainties are “death and taxes” …

It’s in the area of “death” where U.S. citizenship can be helpful. Sometimes it can be to your benefit to die as a U.S. citizen. Sometimes U.S. citizenship can be helpful when somebody dies leaving you part of their estate.
What follows are some categories where U.S. citizenship can protect you from taxation. These possibilities should be considered prior to renouncing U.S. citizenship.
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#Greencard abandonment: The safe disposal of the US "permanent resident" visa without triggering the S. 877A Expatriation Tax

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https://www.taxation.co.uk/Articles/2018/04/24/337897/us-expatriate-tax-conference-pt-2
What follows is a summary of a presentation I made in March of 2018 in London, UK:
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"Tax residence" for US Estate and Gift and "tax treaty tiebreakers with overlapping domicile

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Introduction – Two kinds of tax systems – Two kinds of “tax residency”
Title 26, the Internal Revenue Code of the United States is composed of twelve subtitles. Subtitle A deals with “Income Taxes”. Subtitle B deals with “Estate and Gift Taxes” AKA the “transfer tax regime”. The two subtitles are administered separately. They also have different definitions of “tax residence”.
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Domicile as a basis for tax residency: How to have @taxresidency where you may not live

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What is domicile?
About domicile …
Domicile is an old “common law” concept. Domicile is NOT the same as “residency” (although it might include residency). Domicile is NOT the same as “citizenship” (although one could be a citizen of the country where one is domiciled). Domicile is a concept that refers to one’s permanent home and point of reference. Different jurisdictions might have differing definitions of domicile. It is also a concept that is relevant for a variety of purposes.
Why might domicile matter?


Domicile 101 – Different kinds of domicile …


Learning about domicile …
Much has been written about domicile. Here is a fantastic article written on domicile that was presented in 2011 at an ABA convention. It doesn’t get better than this:
domicile ABA Meeting 2011
Let me offer 5 key points from this article:


Can a person have domicile in more than one place for tax purposes?
Of course you can be domiciled in more than one place for tax purposes! In fact:


Domicile as the definition of “tax residency” for U.S. Estate and Gift tax purposes
How do we know that “residence” for Estate and Gift Tax purposes means “domicile”?
The answer is found in the Treasury Regulations – Specifically Reg. 25.2501-1(b) which defines “residency” for Estate and Gift Tax purposes as follows:

(b)Resident. A resident is an individual who has his domicile in the United States at the time of the gift. For this purpose the United States includes the States and the District of Columbia. The term also includes the Territories of Alaska and Hawaii prior to admission as a State. See section 7701(a)(9). All other individuals are nonresidents. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of moving therefrom. Residence without the requisite intention to remain indefinitely will not constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.

Please note that different jurisdictions may define “domicile” differently.
Conclusion …
“Domicile” is largely a “subjective” concept that is proven by “objective” evidence.
Domicile matters!
John Richardson

Part 9: Responding to the Sec. 965 “transition tax”: From the "Pax Americana" to the "Tax Americana"

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This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
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Part 11 – S. 2801 of the Internal Revenue Code is NOT a S. 877A "Exit Tax", but a punishment for the "sins of the father"

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Updated September 12, 2015 – the IRS has issued “proposed rules”  governing the issue of “The sins of the father”.

Here the proposed rules from September 9, 2015:

IRS-Sec.-2801-2015-22574 (1)

2015-22574

IRS Sec. 2801 2015-22574

IRS S. 2801 Guidance 2015-22574

The above tweet references the following comment to Part 9 of this “Exit Tax” series.

I know many tax compliant, patriotic Americans who have renounced. Many have done so seeing the $2m threshold approaching, to protect their families and get on with their lives. All with heavy hearts.
You did not mention the additional burden on those who renounce who have US citizen relatives–the tax their relatives are supposed to pay on receiving a gift or bequest from a covered expatriate. More and more will be covered expatriates as the $2m gets smaller by reason of inflation and currency change. Although the IRS promises to give guidance on this unenforceable “succession” tax that punishes the children for the acts of their parents, so far, since 2008, we are still waiting for it. The reason for the delay is that there is probably no way of identifying those donors or deceased persons who were covered expatriates. Will the US take a FATCA approach and assume every foreign donor or deceased person is a covered expatriate unless the US recipient can demonstrate otherwise?? Certainly this law proves your point that an exit tax reflects the morality of a nation.

Thanks for the comment. S. 2801 is NOT part of the “Exit Tax” Regime. The “Exit Tax” punishes “covered expatriates” for relinquishing U.S. citizenship. S. 2801 is to inflict further punishment after relinquishment on both the “covered expatriate” and his heirs. You will see that S. 2801 exists for one and only one purpose – the punishment of “expatriation”.

The definition of “covered expatriate” is covered in Part 3 of this series of Posts about the S. 877A “Exit Tax”.

Yes, this post will focus on Internal Revenue Code S. 2801 punishment for the “Sins of the fathers“.

Exodus 20:1-26
And God spoke all these words, saying, “I am the Lord your God, who brought you out of the land of Egypt, out of the house of slavery. “You shall have no other gods before me. “You shall not make for yourself a carved image, or any likeness of anything that is in heaven above, or that is in the earth beneath, or that is in the water under the earth. You shall not bow down to them or serve them, for I the Lord your God am a jealous God, visiting the iniquity of the fathers on the children to the third and the fourth generation of those who hate me, …

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