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Pre-U.S. immigration estate planning for nonresident aliens.

When an individual immigrates to the U.S. and becomes a resident alien (RA), he becomes subject to Federal income taxation under Regs. Sec. 1.871-1 (a) as if he were a U.S. citizen, however, the Federal estate and gift tax treatment of RAs and U.S. citizens differs, as does the Federal income, estate and gift tax treatment of nonresident aliens (NRAs) and RAs. This article explains the distinction between an NRA for income tax purposes and for estate and gift tax purposes, and highlights the estate and gift tax planning opportunities available to an NRA before and after immigration.

Taxpayers H and W are used to illustrate these concepts. H and W are residents and citizens of Q, a foreign country. While they wish to join their relatives who legally reside in the U.S., they are not yet ready to leave Q, because H is involved in a project at work that is expected to last a year. In anticipation of their change of residency, H and W have received "green cards" from the U.S. Immigration and Naturalization Service (INS); accordingly, they can come to the U.S. at their convenience after winding up their affairs in Q.

Defining NRA for

Income Tax Purposes

Sec. 7701 (b)(1)(B) defines an NRA for income tax purposes as an individual who is neither a U.S. citizen nor resident. An NRA not engaged in business,in the U.S. is taxed at a flat 30% rate under Sec. 871(a) only on fixed or determinable annual or periodical (FDAP) income from U.S. sources. FDAP income generally includes, under Sec. 871(a)(1)(A), interest, dividends, rents, salaries, wages, premiums, annuities, remunerations and emoluments. However, an NRA's portfolio interest and original issue discount (as defined in Sec. 1273) are not subject to Federal income taxation, under Sec. 871 (h) and (a)(1)(A). An NRA's sales of intangibles (e.g., patients, copyrights, secret processes and formulas, goodwill, trademarks, etc.) are subject to Federal income taxation, under Sec. 871 (a)(1)(D), if not effectively connected with the conduct of a U.S. trade or business. Net capital gains from U.S. sources are taxed if the NRA is present in the U.S. for 183 days or more during the tax year.(1)

To ensure collection of income tax from amounts paid to NRAs, Sec. 1441 provides that all persons having the "control, receipt, custody, disposal, or payment of any of the items of income" specified in Sec. 1441(b) must withhold 30% tax on amounts paid to the NRA. Generally, withholding is required on the same income items that are subject to Federal income taxation under Sec. 871.

Defining RA for Income Tax Purposes

An alien is an RA if he meets one of three tests set forth in Sec. 7701(b)(1)(A). Under Sec. 7701(b)(1)(A)(i), an alien is an RA if "lawfully admitted for permanent residence." H and W have green cards; thus, they have been lawfully admitted to the U.S. for permanent residence and will be subject to Federal income taxation from the first day they are physically present in the U.S.,(2) no matter how many days they are present there during the year.

Because H and W hold green cards, they should use extreme caution in choosing the date on which to first arrive in the U.S. As long as they do not enter the U.S. after obtaining their green cards, they will not be RAs for income tax purposes; however, once they arrive in the U.S. (even if only to visit relatives), they will be taxed as Ras until they give up their green cards, even if they thereafter spend time outside the U.S.

Example 1: T, a citizen and resident of foreign country M, has recently received a green card. T has no definite plans to permanently relocate to the U.S., nor has T separated from his employment in M, sold his home there, or done anything else to indicate an intent to relocate to the U.S. T travels to the U.S. to visit his sister two weeks after receiving his green card, remains for five days and then returns to M. T is an RA for Federal income tax purposes from his date of arrival in the U.S.

An alien is treated as an PA for income tax purposes simply by possessing a green card if he was a U.S. resident in the preceding calendar year (provided such status has not been revoked or administratively or judicially determined to have been abandoned(3)). After having been lawfully admitted for permanent residence, an individual will continue to be taxed as an RA until the issuance of a final judicial order, even if he no longer meets INS requirements to continue to hold a green card. If the alien does not intend to enter the U.S. permanently, he should wait before entering for the first time; after a green card is issued, the then-RA is taxed on worldwide income under Regs. Sec. 1.1-1(a)(1) as if he were a U.S. citizen.

An individual may also be classified as an RA under Regs. Sec. 1.1-1(a)(1) by meeting the "substantial presence" test of Sec. 7701(b)(1)(A)(ii) and (b)(3) or by electing to be treated as an RA under Sec. 7701(b)(1)(A)(iii) and (b)(4). An alien meets the substantial presence test if he is present in the U.S. for at least 31 days during the tax year and for at least 183 days in the consecutive three-year period ending with the current year. The 183-day test counts all days of presence in the current year, one-third of such days in the immediately preceding year and one-sixth of such days in the second preceding year. According to Sec. 7701(b)(2)(A)(iii) and Regs. Sec. 301.7701(b)-4(a), the residency starting date for an alien who qualifies as an RA via the substantial presence test is the first day in the current calendar year of physical presence in the U.S.

Example 2: T, a citizen and resident of M, does not have a green card. T travels to the U.S. on business and is physically present there for 183 days during 1996. T is an RA for income tax purposes from the day he first arrives in the U.S.

Example 3: The facts are the same as in Example 2, except that T spends only 110 days in the U.S. during 1996. In addition, T spent 150 days during 1995 and 150 days during 1994 in the U.S. T is an RA from his first day of physical presence in the U.S. during 1996 (110 days + 50 days (150 x 1/3) + 25 days (150 X 1/6) = 185 days).

Once one qualifies as an RA under the substantial presence test, such status continues until the last day of the calendar year, according to Sec. 7701(b)(2)(B) and Regs. Sec. 301.7701(b)-4(b)(1); however, if an individual qualifies as an RA during the succeeding calendar year, RA status continues. If an individual is not an RA during the succeeding calendar year and can establish that for the remainder of the current calendar year he had a tax home in, and closer connection to, a foreign country, RA status will terminate on the last day of physical presence in the U.S., under Regs. Sec. 301.7701(b)-4(b)(2).

Example 4: The facts are the same as in Example 3. T returns to M on Oct. 31, 1996, maintains a permanent home there and works at a fulltime job. T's RA status terminates on that date, his last day of physical presence in the U.S.

Example 5: The facts are the same as in Example 4, except that T returns to the U.S. for 190 days in 1997. Because T again meets the substantial presence test, his RA status continues into 1997.

Under Sec. 7701(b)(4), an alien can elect to be treated as an RA for a calendar year (the "election year") preceding the calendar year in which he satisfies the substantial presence test if certain conditions set forth in Regs. Sec. 301.7701(b)-4(c)(3) are met. To qualify for the election, the alien has to be present in the U.S. for at least 31 consecutive days in the election year.

NRA Estate Taxation

Hand W jointly own a home in Q worth $1 million and have $750,000 in liquid assets (i.e., cash, stocks, bonds and mutual funds); H also owns a $250,000 life insurance policy.

For Federal estate tax purposes, the gross estate of an NRA who is not a U.S. citizen consists solely of property situated in the U.S., under Sec. 2103.[4] Neither H nor W would have an estate tax liability, as the situs of all their property is outside the U.S.

In determining an NRA's gross estate, under Sec. 2104 and Regs. Sec. 20.2104-1(a)(1) and (2), property situated in the U.S. generally consists of real and tangible personal property located in the U.S., domestic stock, debt obligations of any U.S. person (as defined in Sec. 7701(a)(30)) or governmental unit, and transfers (within the meaning of Secs. 2035-2038) made within three years of death if the property had a U.S. situs either at the time of transfer or death.

Under Sec. 2105 and Regs. Sec. 20.2105-1, property situated without the U.S. generally consists of real and tangible personal property located outside of the U.S., bank deposits (no matter the situs) not effectively connected with a U.S. trade or business, life insurance proceeds, foreign stock, and debt obligations the interest on which would be eligible for exemption under Sec. 871(h)(1) as U.S.-source portfolio interest received by an NRA were the interest received by the NRA at the time of death.

If an NRA decedent is the settlor of a revocable trust [5] or creates an irrevocable trust but retains a reversionary interest, [6] he will be deemed to directly own the trust assets. For estate tax purposes, the situs of trust property in such cases turns on the situs of the individual assets, under Secs. 2104 and 2105.

If H and W died currently, their Federal gross estates would exclude the value of their home in Q, H's life insurance proceeds (even if the policy was underwritten by a U.S. insurance company), and the value of any bank deposits held in U.S. banks. If H's and W's liquid assets were invested in U.S. stocks, bonds or mutual funds, however, they would be includible for estate tax purposes because they have a U.S. situs. Thus, H and W may want to convert such assets to certificates of deposits in U.S. banks; the expected rate of return on the investments will be a factor to consider.

Defining RA for Estate and Gift Tax Purposes

Hand W are going to relocate to the U.S. As was discussed, an individual is an RA for income tax purposes if he has a green card; however, under Regs. Secs. 20.0-1(b) and 25.2501-1(b), for estate and gift tax purposes, an alien individual must be domiciled in the U.S. to be an RA. An individual is domiciled in the U.S. if he intends to reside there indefinitely (or permanently).

An alien who is present in the U.S. for at least 183 days in a tax year, but has a definite present intention of returning to a foreign domicile, may be an RA for Federal income tax purposes, but not for estate and gift tax purposes.

Example 6: The facts are the same as in Example 1. T is an RA for income tax purposes, but is an NRA for estate and gift tax purposes, because he has no definite plans to remain in the U.S. after the visit. Example 7: V, a citizen and resident of foreign country Z, does not have a green card. V travels to the U.S. for medical treatment on Jan. 1, 1996; he departs on Aug. 1, 1996 and returns to Z indefinitely. For income tax purposes, V is an RA during 1996 because he was present in the U.S. for 213 days, but is an NRA for estate and gift tax purposes because he never intended to be permanently domiciled in the U.S.

Estate Taxation of RAs

After H and W have relocated to the U.S. and established domicile, all of their assets, no matter where located, will be includible in their Federal gross estates. Further, even though they are now RAs for both income and estate and gift tax purposes, because they are not citizens, Sec. 2056(d)(1) denies use of the marital deduction unless, under Sec. 2056(d)(2), property passes to the surviving spouse in a qualified domestic trust (QDOT) (as defined in Sec. 2056A). According to Sec. 2056A(b)(1), a QDOT secures the payment of the estate tax by taxing any distribution from the trust before the surviving spouses death and taxing the trust property remaining at that spouse's death. Under Sec. 2056A(b)(7), any tax paid by the QDOT is treated as paid under Sec. 2001 with respect to the decedents estate.

Planning Opportunities

H and W should carefully review their estate plan before immigrating to the U.S. Before establishing domicile in the U.S., they have great flexibility in estate planning, because, under Sec. 2501(a)(2), gifts of intangible property by NRAs (other than expatriates) are not subject to Federal gift tax. Before H and W become domiciled in the U.S., gift tax will apply only to their gifts of real or tangible personal property located in the U.S., under Sec. 2511(a).

If H and W own U.S. stocks, bonds or mutual funds, these items most likely will be includible in their gross estates, whether or not they are domiciled in the U.S. However, they may make gifts of such intangible property without incurring gift tax. Once they immigrate to the U.S., this opportunity is lost.

Thus, there is considerable latitude in estate and gift tax planning for an NRA prior to immigrating to the U.S. An NRA can make gifts of intangible property without incurring gift tax. If an NRA died owning U.S.-situs intangible assets (e.g., domestic stocks and bonds), such assets will be includible in his estate.

H and W have two children: D is a U. S. resident; S resides outside the U.S. and has no current intention of immigrating. After H and W establish U.S. domicile, all of their assets are includible in their Federal gross estates. Are there planning opportunities before they establish U.S. domicile?

Grantor Trusts

To the extent that H and W do not need their intangible assets, they can give them to their children, either directly or via a trust. For example, H and W could establish a "defective" trust with a "friendly" trustee, and thus, have access to the income and corpus of their investment portfolio without subjecting it to Federal transfer taxes.(7) With a "defective" trust, the grantors intent is that trust income will be taxed to him, while the corpus will be excluded from his Federal gross estate. This is particularly beneficial in the case of an individual who is an NRA for income tax purposes, because income from non-U.S. sources will not be subject to income tax and corpus will be excluded from the gross estate after the NRA has become an PA for estate and gift tax purposes.

Typically, a trust is "defective" if the grantor has any of the powers set forth in Sec. 677; however, if such power (e.g., a retained life estate) results in the grantor's retention of an interest, the corpus would be includible in an Ras gross estate under Sec. 2036. If there was an agreement or understanding that the trustee would distribute income to the grantor, the corpus could be included in the gross estate under Sec. 2036, even though the decedent technically did not retain a right to the income.(8)

A proposed amendment to the Sec. 672(f) foreign grantor trust rules is contained in Section 9553 of the Revenue Reconciliation Bill of 1996 (RRB '96).(9) This provision would eliminate or severely restrict the use of a grantor trust by an NRA by applying the grantor trust rules only to the extent such application results in current income inclusion by a U.S. citizen, resident or corporation. If the proposal were adopted, a defective trust under current rules would be a taxable entity, because the grantor trust rules would no longer apply. The proposal grandfathers trusts in existence on Sept. 19, 1995. The Dole-Roth and Domenici-Wellstone amendments to the Health Insurance Reform Act,(10) as released on Apr. 18, 1996, contained foreign grantor trust provisions identical to those proposed in the RRB '96.

Under current rules, H and W could implement a defective trust by including themselves among the class of income beneficiaries, but with income distributable only at the trustees discretion. H and W must ensure that trust income can be paid to them without the consent of an adverse party, and so must carefully select the trustee.

Example 8: H and W, as NRAs, establish in irrevocable U.S. trust funded with $50,000 cash. The trust instrument provides that the trustee can distribute income at his discretion, without the consent of any other party, among a class of beneficiaries that includes H and W. Corpus is divided evenly among Hs' and W's lineal descendants on trust termination. The trustee is H's and W's attorney. Because the trust is funded with an intangible asset, there is no gift tax. For income tax purposes, the trust is a grantor trust under Sec. 677(a) and H and W will be taxed on FDAP income the trust receives. Amounts the trustee pays to H and W while they are NRAs will be subject to 30% withholding under Sec. 1441; however, because H and W have not retained an interest in the trust that would be taxable under Sec. 2033 or 2035-2038, the corpus will not be includible in either H's or W's gross estate, even if they are domiciled in the U.S. at death.

There are several advantages to grantor trust treatment. First, as long as the grantors are NRAs for income tax purposes, only U.S.-source FDAP will be taxable to them. Further, provided they are not deemed to have retained a life estate in the trust property via an understanding that income would be distributed to them,(11) the corpus should not be includible in their Federal gross estates. Moreover, the transfer will not be a taxable gift if it is completed prior to H and W establishing U.S. domicile, because, as was noted, gifts of intangible property by an NRA are not subject to gift tax.

Nongrantor Trusts

If, instead, S and D are remainder interest holders and are the trustees, the trust could be set up so that income could only be distributed to H and W with the consent of an adverse party (i.e., S or D). If the trust fails to qualify as a grantor trust but qualifies as a domestic trust, it will be subject to income tax; the trust can avoid such tax (at rates as high as 39.6% for 1996 income in excess of $7,900 by distributing its income.

Example 9: The facts are the same as in Example 8, except the trustee must secure the consent of D, who is a remainder interest holder. Because D's remainder interest is adverse to H and W's income interest and income can be distributed to H and W only with D's consent, the trust is not a grantor trust, but is a complex trust. The estate and gift tax consequences are identical to those in Example 8. However, the income tax treatment differs, because the trust will pay tax on any income not distributed during the year.

Because a complex trust is less likely to make regular distributions to the grantors, it is also less likely that they would be deemed to have retained an interest in corpus that would be includible in their gross estates under Sec. 2036. Because the grantors are only subject to income tax to the extent they actually receive distributions, they avoid the regular distributions that would be made to them to cover the income tax burden associated with a grantor trust.

Withholding Rules

Whether the trust qualifies as a grantor, simple or complex trust, under Sec. 1441(a), 30% income tax withholding will be required if H and W are paid before they are RAs. Sec. 1441(a) includes fiduciaries among the class of persons responsible for withholding, Regs. Sec. 1.1441-3(g) indicates that income of a grantor trust created by an RA is subject to withholding even though the trust fiduciary or beneficiaries are U.S. citizens or residents and regardless of whether the beneficiaries are exempt from income tax. Under Regs. Sec. 1.1441-7(a), the trustee is the withholding agent for this purpose, the withholding requirement arises when income is actually paid to the NRA, according to Regs. Sec. 1.1441-1.

Property Distributions

Foreign-situs real and tangible personal property require special attention. Because real and tangible personal property located outside the U.S. may be given gift tax free prior to establishing a U.S. domicile, it should either be sold, given away or placed in trust before H and W enter the U.S. If the property is sold, the sales proceeds should be included in the planning for intangible assets.

An NRAs estate is not allowed the Sec. 2010(a) $192,800 unified credit, but generally is allowed a $13,000 credit under Sec. 2102(c)(1) against the estate tax imposed by Sec. 2101. This credit offsets the first $60,000 of estate tax. Thus, if an NRA owns real and for tangible personal property in the U.S., special attention should be given to die estate tax implications.

H and W should evaluate their estate planning goals relative to the property they wish to leave to their relatives who are (1) U.S. residents for estate and gift tax purposes and (2) outside the U S. and have no intention of immigrating. H and W can give property to their relatives before they are domiciled in the U.S. without incurring gift tax, as long as the property is not U.S.-situs real or tangible personal property.

Gift Tax Planning

Because S has no intention of immigrating to the U.S., H and W should provide for him before immigrating to avoid gift tax. For example, while H and W are NRAs for gift tax purposes, they can create a trust with S as the remainder interest holder; as long as they retain no Secs. 2036-2038 powers, the trust property will be a completed gift to S for Federal estate tax purposes and escape Federal transfer taxes. If H and W wait until they have changed domicile, however, the tax-free portion of the gift will be limited to the $10,000 Sec. 2503(b) annual exclusion.

Because property passing to D, a U.S. resident, will eventually be taxed, H and W may wish to use a generation-skipping trust while still domiciled in Q. This will provide for D and avoid estate taxation on amounts transferred by them.

Prop. Regs. Sec. 26.2663-2 clarifies the taxation of direct skips, taxable distributions and taxable terminations. For generation-skipping transfer (GST) tax purposes, a transfer by an NRA is a direct skip only to the extent that the property is subject to Federal estate and gift taxation.

Example 10:(12) T transfers $50,000 in a U.S. bank to GC; both T and GC are NRAs. The funds are not subject to the GST tax because the gift is not subject to gift tax. Alternatively, T's transfer of $50,000 of U.S-situs real estate to GC would be subject to gift tax; thus, the transfer would qualify as a direct skip for GST tax purposes.

Prop. Regs. Sec. 26.2663-2(b)(3) provides that GST tax applies to a taxable distribution or taxable termination only to the extent the initial transfer of property by the NRA transferor to the trust was subject to Federal estate or gift tax.

Example 11: T creates an irrevocable trust funded with $50,000. The transfer is not subject to gift tax; any subsequent distribution from the trust would not be subject to either gift or GST tax, even if T later becomes an RA.

Example 12: The facts are the same as in Example 8, except that T becomes domiciled in the U.S. after funding the trust. The trustee distributes $10,000 of corpus to T's grandson, B, a U.S. resident. Because the initial gift was not subject to gift tax, the transfer to B is not subject to the GST tax.

Example 13: The facts are the same as in Example 12, except that the trust was funded with U.S.-situs real estate that is distributed to B on trust termination. Because T's transfer of the property to the trust was subject to gift tax, the taxable termination is subject to the GST tax.

Gift Tax Marital Deduction

Under Sec. 2523(i), there is no unlimited gift tax marital deduction (GTMD) when the donee spouse is not a U.S. citizen; Sec. 2523(i)(2) caps the deduction at $100,000. Thus, as much planning as possible should be done before U.S. domicile is established.

To qualify for the deduction, the gift must be a gift of a present interest; thus, when one spouse sets up an inter vivos trust providing income to the other spouse, if the reminder passes to anyone other than the spouse (and the spouse does not have an inter vivos or testamentary general power of appointment(13)), the interest is not a present interest eligible for the GTMD. If the donee spouse is a U.S. citizen, however, a qualified terminable interest property (QTIP) election may be made under Sec. 2523(f) and the amount transferred will be eligible for the GTMD.

If the donee spouse is not a U.S. citizen, the QTIP election is not available and the transfer in trust will be a taxable gift to the donor spouse. Further, the amount transferred will not be eligible for the Sec. 2523(i)(2) $100,000 exclusion, because the income interest is a terminable interest in property. If the donee spouse is not a U.S. citizen and the requirements of Regs. Sec. 25.2523(e)-1(a) are otherwise met, the $100,000 exclusion will be available.

Example 14:(14) In 1996, T, an RA, transfers $500,000 of property in trust to his spouse S, mother RA. The trust instrument provides that income is payable to S at least quarterly and S has a testamentary general power to appoint corpus. The transfer to S qualifies for the Sec. 2523 marital deduction but for Sec. 2523(i)(1), because S is not a U.S. citizen. Because S has a life income interest in the trust, S has a present interest in a portion of the trust. Accordingly, T may exclude the present value of S's income interest (up to $100,000) from T's total 1996 calendar-year gifts.

Example 15:(15) The facts are the same as in Example 14, except that S does not have a testamentary general power to appoint corpus. Instead, T's child, C, has a remainder interest in the trust. If S were a U.S. citizen, the transfer would qualify for the GTMD if a QTIP election was made under Sec. 2523(f)(4). However, because S is not a U.S. citizen, T may not make a QTIP election. Accordingly, the gift does not qualify for the GTMD. The $100,000 annual exclusion under Sec. 2523(i)(2) is not available with respect to T's transfer in trust and T may not exclude the present value of S's income interest in excess of $10,000 from T's total 1996 calendar-year gifts.

Conclusion

In summary, there is a difference in the definition of an RA for income tax purposes and for estate and gift tax purposes, see the table at right. For income tax purposes, mere possession of a green card will qualify the alien as an RA after he enters the U.S. with the card. For estate and gift tax purposes, the alien will not be an RA unless he is domiciled in the U.S. As long as the alien is an NRA, only gifts of U.S.-situs real or tangible personal property will be subject to gift tax. An NRAs estate, however, will include all of his U.S.-situs assets, including intangible assets that could have been gifted tax free prior to death. Finally, after an NRA is domiciled in the U.S., his gross estate will include all assets that would be includible if he were a U.S. citizen. If a decedents spouse is not a U.S. citizen, however, the estate can only take a marital deduction for property passing through a QDOT.

Because of the foregoing, an NRA should consult with a tax adviser regarding Federal estate and gift taxes before becoming domiciled in the U.S. An NRA has great latitude in estate and gift tax planning before establishing such domicile, but after such domicile is established, he is subject to the same restrictions on transfers as is a U.S. citizen.

EXECUTIVE SUMMARY

[] An alien becomes a resident alien by holding a green card and will be subject to Federal income taxation on worldwide income from the first day of physical presence in the U.S. [] A nonresident alien is subject to income tax only on certain classes of U.S.-source income. [] Income and estate tax can be minimized by using a grantor trust, but proposed legislation may eradicate use of this technique. [] Estate planning should be completed before immigration, to maximize opportunities and minimize taxes.

Definitions and Taxation of NRAs and RAs

Income Taxation

[] NRA - an alien individual who is not a U.S. citizen or resident (Sec. 7701(b)(1)(B)); flat 30% withholding applies to (1) U.S.-source FDAP income if NRA is not engaged in a U.S. trade or business, (2) proceeds from sales of intangibles and (3) capital gains (if NRA is present in U.S. for at least 183 days in the tax year).

[] RA - an alien individual meeting one of the tests under Sec. 7701(b)(1)(A):

1. Lawfully admitted for permanent residence (i.e., holds a green card) (Sec. 7701(b)(1)(A)(i); taxed from first day of physical presence in the U.S. 2. Meets substantial presence test (Sec. 7701(b)(1)(A)(ii)); taxed from first day of physical presence in the U.S. 3. Elects to be treated as an RA (Sec. 7701(b)(1)(A)(iii)); taxed as of beginning of year for which election is made.

An RA is taxed on worldwide income as if a U.S. citizen (Regs. Sec. 1.871-1(a).

Estate Taxation

[] NRA - an alien individual not domiciled in the U.S., the gross estate of an NRA who is not a U.S. citizen consists solely of property situated in the U.S. (Secs. 2103-2105).

[] RA - an alien individual domiciled in the U.S. (i.e., intends to reside there indefinitely or permanently) (Regs. Sec. 20.0-1(b)); gross estate includes all assets, no matter where located (Sec. 2101).

Gift Taxation

[] NRA - an alien individual not domiciled in the U.S., gifts of intangibles are not subject to gift tax (Sec. 2501(a)(2)); gift tax applies only to gifts of U.S.-situs real or tangible personal property (Sec. 2511(a)).

[] RA - an alien individual domiciled in the U.S. (i.e., intends to reside there indefinitely or permanently) (Regs. Sec. 25.2501-1(b)); gift tax applies to all transfers (Regs. Sec. 25.501-1(a)(1)).

(1) Sec. 865 provides special source rules for sales of personal property; source will be determined according to the residence of the seller. Exceptions are provided for depreciable personal property, inventory, certain intangible property and certain sales by a U.S. resident of stock in a foreign affiliate. (2) Regs. Sec. 301.7701(b)-4(a) indicates that, for an alien who was not a U.S. resident during the preceding calendar year and who meets the "green card" test in the current year, the residency starting date is the first day during the year in which the individual is physically present in the U.S. as a lawful permanent resident. An NRA can receive a green card without being present in the U.S.; in such cases, the residency starting date is generally the day on which the NRA first arrives in the U.S. after obtaining a green card. (3) Sec. 7701(b)(6); Regs. Sec. 301.7701(b)-1(b). Resident status is terminated under Regs. Sec. 301.7701(b)-1(b)(2) if a final administrative or judicial order of exclusion or deportation is issued. For this purpose, a "final judicial order" is one no longer subject to appeal to a higher court of competent jurisdiction. (4) Sec. 2104 defines property within the U.S.; Sec. 2105 defines property without the U.S. (5) Rev. Rul. 55-163, 1995-1 CB 674. (6) Rev. Rul. 82-193, 1982-2 CB 219. (7) Sec. 672(f) treats a U.S. beneficiary of a foreign grantor trust as the grantor to the extent of gifts he has made (less the Sec. 2503(b) exclusion) to the foreign grantor. (8) Regs. Sec. 20.2036-1(a); Est. of Daniel McNichol, 265 F2d 667 (3d Cir. 195)(3 AFTR2d 1838, 59-1 USTC [paragraph]), cert. denied; Est. of Marie J. Nicol, 56 TC 179 (1971); Est. of Ethel M. Bullock, TC Memo 1960-204. (9) See General Explanation of the Administration's Revenue Proposals, Revenue (10) S. 1028, 104th Cong., 2d Sess. (1996). (11) McNichol, note 8; Est of Maria M. Coxe Skinner, 316 F2d517 (3d Cir. 1963) (11 AFTR2d 1855, 63-1 USTC [paragraph] 12, 140). (12) Adapted from Regs. Sec. 26.2663-2(e)(1), Example 1. (13) Under Sec. 2523 and Regs. Sec. 25.2523(e)-1 the marital deduction is available when the donee spouse is a U.S. citizen and the five requirements of Regs. Sec. 25.2523(e)-1(a) are met: 1. The donee spouse is entitled for life to all income from the entire interest or a specific portion of the entire interest. 2. The income is payable to the donee spouse at least annually. 3. The donee spouse has the power to appoint the entire interest or the specific portion to either herself or her estate. 4. The power in the donee spouse is exercisable by her alone and in all events. 5. The entire interest or specific portion is not subject to a power in any other person to appoint any part to any person other than the donee spouse. (14) Adapted from Regs. Sec. 25.2523(i)-1(d), Example 3.
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Author:Herzog, Keith E.
Publication:The Tax Adviser
Date:Sep 1, 1996
Words:5987
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