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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 28

[TD 10027]

RIN 1545-BJ43

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

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

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.

DATES:

Effective Date:

These regulations are effective January 14, 2025.

Applicability Dates:

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).

FOR FURTHER INFORMATION CONTACT:

Mayer R. Samuels, Daniel J. Gespass, or Karlene M. Lesho at (202) 317-6859 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

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.

Background

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,

United States Return of Tax for Gifts and Bequests Received from Covered Expatriates,

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

Federal Register

(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

https://www.regulations.gov

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

Summary of Comments and Explanation of Revisions

section. Unless otherwise indicated in the

Summary of Comments and Explanation of Revisions,

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

Summary of Comments and Explanation of Revisions.

Summary of Comments and Explanation of Revisions

1. General Comments on Section 2801 and the Tax-Neutral Objective

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.”

See

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.

Id.

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 to a U.S. recipient who is a skip person (see section 2601 of the Code, imposing an additional transfer tax on GSTs). There are many other dissimilarities between section 2801 and the other transfer tax provisions.

The role of the Treasury Department and the IRS is to implement section 2801, as enacted by the HEART Act. Thus, to the extent the comments suggest changes to the statutory text of chapter 15 and section 2801, the Treasury Department and the IRS do not further address those comments in this preamble. To the extent the comments suggest changes or additions to the proposed regulations to create a more tax-neutral outcome, the Treasury Department and the IRS have responded to specific comments as the relevant issues are discussed in this preamble, and in doing so considered both the statutory language of section 2801 and the scope of regulatory authority granted by Congress.

2. Definitions

A. Expatriate and Covered Expatriate

Section 2801(f) and proposed § 28.2801-2(h) define the term

covered expatriate

by reference to section 877A(g)(1) of the Code. Proposed § 28.2801-2(h) defines the term

expatriate

by reference to section 877A(g)(2). Proposed § 28.2801-2(h) further provides that, if an expatriate meets the definition of a covered expatriate, the expatriate is considered a covered expatriate for purposes of section 2801 at all times after the expatriation date, except during any period beginning after the expatriation date during which such individual is subject to United States estate or gift tax (estate or gift tax) as a U.S. citizen or resident. For this exception, the proposed regulations cite to section 877A(g)(1)(C) of the Code, which indicates that an individual will not be treated as a covered expatriate for certain purposes during the time that they are subject to tax as a U.S. citizen or resident.

Section 877A relies on the income tax definition of the term

resident

as described in section 7701(b)(1)(A). Section 28.2801-2(b) of the proposed regulations, however, applies the estate and gift tax rules under chapters 11 and 12 of subtitle B to define U.S. resident for purposes of section 2801, which also is in subtitle B, thereby providing consistency across the provisions.

One comment suggests that the exception in proposed § 28.2801-2(h), which excludes an expatriate from being treated as a covered expatriate during any period in which the expatriate is subject to estate or gift tax, creates a coherent structure for purposes of section 2801, but leaves open the possibility that an individual could be a covered expatriate for purposes of section 877A but not for purposes of section 2801 and vice versa. The comment states that this result seems to conflict with sections 2801(f) and 877A(g)(1)(C) and suggests that the final regulations provide that an expatriate who is deemed to be an income tax resident of the U.S. will be deemed not to be a covered expatriate. Another comment expresses support for the rule in proposed § 28.2801-2(h) as arguably necessary because applying sections 2801(f) and 877A(g)(1)(C) using the income tax definition of U.S. resident would create a convenient and simple way to avoid imposition of the section 2801 tax. For instance, a covered expatriate could become an income tax resident in one year during which such person does not also satisfy the transfer tax definition of

resident.

During that year, the covered expatriate could make gifts that would not be subject to gift tax. The following year, the covered expatriate could terminate the covered expatriate's income tax residency, thereby allowing the gifts to completely escape transfer taxation. The Treasury Department and the IRS agree with the latter comment that using the transfer tax definition of

resident

for the exception in proposed § 28.2801-2(h) avoids creating an opportunity to circumvent the section 2801 tax. Further, section 2801 is a transfer tax and is part of subtitle B; section 7701(b) of the Code specifically provides that the definitions in section 7701(b)(1) do not apply for purposes of subtitle B. Accordingly, applying the definition of

resident

under subtitle B for purposes of this transfer tax under section 2801 and the corresponding regulations is consistent with the purpose of the statute. Moreover, as one comment acknowledges, the use of the transfer tax definition is consistent with the concept of neutrality because it eliminates the avoidance of estate and gift tax that otherwise would result from expatriation. For these reasons, the final regulations adopt the transfer tax definition of U.S. resident without change.

One comment points out that the date on which a person loses U.S. citizenship was changed by the HEART Act. The comment explains that this change could create ambiguity as to the exact date of a taxpayer's expatriation under certain circumstances. The comment requests clarification of how that date is determined for persons who had determined that they had expatriated before the effective date of the HEART Act, and for those with dual citizenship under section 7701(a)(50)(B). The

Treasury Department and the IRS agree that such clarification would be both appropriate and helpful. Such clarification, however, would impact significantly more issues than those related to the section 2801 tax, and would be better addressed in guidance under sections 877A and 7701, rather than in regulations under section 2801. This issue is, therefore, beyond the scope of these final regulations. Accordingly, the final regulations adopt the language in proposed § 28.2801-2(h) without change.

B. Foreign Trust and Domestic Trust

Section 2801(a) provides that the section 2801 tax is imposed on a covered gift or covered bequest received by a U.S. citizen or resident. Section 2801(e)(4)(A) and (B)(iii) explains that a domestic trust or an electing foreign trust that receives a covered gift or covered bequest is treated as a U.S. citizen for the purposes of section 2801. If a covered gift or covered bequest is received by a non-electing foreign trust, however, section 2801(e)(4)(B)(i) provides that the section 2801 tax is imposed on any distribution attributable to the covered gift or covered bequest from the trust to a U.S. citizen or resident. Therefore, it is important to properly classify a trust receiving a covered gift or covered bequest as either a domestic or foreign trust in order to determine the identity of the U.S. citizen or resident liable for, and the timing of, payment of the section 2801 tax. Section 28.2801-2(c) and (d)(1) of the proposed regulations defines the terms

domestic trust

and

foreign trust

by reference to section 7701(a)(30)(E) and (31)(B), respectively. No comments were received regarding the definitions of domestic trust or foreign trust. These final regulations maintain the same definitions as in the proposed regulations.

C. Covered Bequest

Section 2801(e)(1)(B) defines a covered bequest as any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate. The proposed regulations define covered bequest in section 28.2801-2(f) and confirm that this definition includes any property acquired directly or indirectly by reason of the death of a covered expatriate, regardless of the situs of such property and whether such property was acquired by the covered expatriate before or after the covered expatriate's expatriation from the United States. Proposed § 28.2801-3(b), which contains additional rules and exceptions applicable to covered bequests, provides that property acquired by reason of the death of a covered expatriate for purposes of the definition of covered bequest in § 28.2801-2(f) includes any property that would have been includible in the gross estate of the covered expatriate under chapter 11 of subtitle B had the covered expatriate been a U.S. citizen at the time of death.

One comment acknowledges that including property that would have been includible in the gross estate of the covered expatriate had the covered expatriate been a U.S. citizen at the time of death appears to be consistent with legislative intent. However, the comment expresses concern that the definition of covered bequest in § 28.2801-2(f), which includes all property passing by reason of the decedent's death, was too broad. The comment points out that not all property passing by reason of a decedent's death would be includible in the decedent's gross estate. The comment provides, as an example, property passing to a child from a trust created by a grandparent after a term measured by a now deceased parent's life. The comment suggests revising the definition of covered bequest in § 28.2801-2(f) to include property acquired by reason of the death of a covered expatriate, but only to the extent the property would have been included in the gross estate of the covered expatriate had the covered expatriate been a United States citizen immediately before death.

The comment correctly observes that including any property acquired directly or indirectly by reason of the death of a covered expatriate may inappropriately subject property to section 2801 tax, such as in the example provided by the comment (assuming the facts do not support an indirect gift). However, the suggestion to limit the definition of covered bequest to property acquired by reason of the death of a covered expatriate that would have been included in the gross estate of the covered expatriate is too narrow. Such a definition, for example, would wrongly exclude property that would otherwise be included in the gross estate of a covered expatriate even though the property was not acquired on the death of the covered expatriate (for example, under section 2035, which increases the gross estate by the value of certain property transferred within the 3-year period ending on the date of the covered expatriate's death). The comment's suggested definition also would exclude all distributions made by reason of the death of a covered expatriate from non-electing foreign trusts to the extent the distributions are attributable to covered gifts and covered bequests made to the foreign trust on or after June 17, 2008. Under section 2801(e)(4)(B)(i), a distribution from a non-electing foreign trust that is attributable to a covered gift or covered bequest made to the trust is subject to section 2801 tax in the same manner as if the distribution were a covered gift or covered bequest. When such a distribution is made by reason of a death of a covered expatriate, the distribution is more similar to a covered bequest described in section 2801(e)(1)(B) than a covered gift described in section 2801(e)(1)(A) and, therefore, is appropriately classified as a covered bequest.

To address the concern expressed in the comment as to property that would not have been included in the gross estate of the decedent, the definition of covered bequest in the final regulations instead describes three categories of property that are included in the definition of covered bequest. The first category includes in the definition of covered bequest property acquired by a recipient on or after June 17, 2008, directly or indirectly by reason of the death of a covered expatriate but only to the extent the property would have been included in the covered expatriate's gross estate if the covered expatriate had been a U.S. citizen immediately before death. The second category includes in the definition property received from a covered expatriate that would have been included in the covered expatriate's estate, even if not acquired directly or indirectly by reason of the death of a covered expatriate, for example property includible under section 2035. The third category includes in the definition distributions made by reason of the death of a covered expatriate from a non-electing foreign trust to the extent the distributions are attributable to covered gifts and covered bequests made to the foreign trust on or after June 17, 2008.

D. Indirect Acquisition of Property

A covered gift or covered bequest is defined in section 2801(e) as any property acquired directly or indirectly by gift from or by reason of the death of a covered expatriate. Using transfer tax principles, § 28.2801-2(i) of the proposed regulations identifies the transfers that constitute indirect acquisitions of property, to include property (1) acquired through ownership of an interest in a corporation or other entity, (2) acquired through one or more foreign trusts, entities, or persons not subject to the section 2801 tax, (3) paid in satisfaction of a debt or liability, (4) acquired

through a power of appointment over property not in trust granted by a covered expatriate to a non-covered expatriate, and (5) acquired as a result of any other indirect transfer by a covered expatriate. Comments were received with respect to each example.

One comment states that the examples of an indirect acquisition of property in § 28.2801-2(i)(2) and (3) of the proposed regulations go too far in that they are not limited by the extent to which the interest indirectly received is attributable to a covered gift or covered bequest. Although these examples illustrate the definition of “indirect acquisition of property” for purposes of the 2801 tax, this definition is relevant only to the extent that the indirect acquisition is of an interest in a covered gift or covered bequest. When the definition of indirect acquisition is applied in relation to a covered gift or covered bequest, the appropriate limitation is applied. As a result, no change is needed in the final regulations to achieve the limitation sought by the commenter.

Several comments observe that the rule in § 28.2801-2(i)(1) of the proposed regulations is consistent with the rule in § 25.2511-1(h)(1) of the Gift Tax Regulations, which describes the gift tax consequences of a transfer made to a corporation. One comment requests that proposed § 28.2801-2(i)(1) be revised to clarify the metrics used for determining a U.S. citizen or resident owner's share of a covered gift or covered bequest made to the entity. For instance, the commenter noted that an owner of an interest in an entity could have a mix of interests and/or rights in capital, profits, voting, distribution, liquidation, etc., and suggested that the final regulations permit taxpayers to use any reasonable method to account for these interests and rights. The Treasury Department and the IRS note that this issue is not unique to section 2801; the same issue arises in the gift tax context under chapter 12.

See, e.g.,

§ 25.2511-1(h)(1) (extent of a shareholder's interest relevant to determine the gift tax consequences of a transfer made by a corporation to another shareholder). Given the broader, more factual nature of determining the extent of an owner's interest and rights in an entity, this issue is better addressed under the Gift Tax Regulations, and therefore is beyond the scope of these final regulations. As a result, this suggestion is not adopted.

Several comments state that the illustrations in proposed § 28.2801-2(i)(2), (3), and (5) are overbroad. In particular, the comments state that the illustrations in § 28.2801-2(i)(2) (regarding property acquired through one or more persons not subject to the section 2801 tax) and (3) (regarding property paid in satisfaction of a debt or liability) are not tethered to any consideration of timing or gratuitous intent. One comment observes that the proposed definition would require a recipient to trace a potentially long chain of title to determine whether the property received would be a covered gift or covered bequest to that recipient. Another comment states that a non-covered expatriate family member of the covered expatriate and the U.S. recipient should not be considered an intermediary of the covered expatriate if that family member had dominion and control over the property and acted independently of the covered expatriate. Two comments suggest replacing § 28.2801-2(i)(2) and (5) of the proposed regulations with a rule that would include, as an indirect acquisition, only property acquired pursuant to a plan, one of the principal purposes of which is the avoidance of transfer tax, similar to the rules in §§ 1.643(h)-1 and 1.679-3(c) of the Income Tax Regulations. The rules in §§ 1.643(h)-1 and 1.679-3(c) employ a substance over form approach with respect to certain transfers made through an intermediary.

These final regulations modify, in part, the definition of indirect acquisition of property to address some of the concerns regarding proposed § 28.2801-2(i)(2), (3), and (5) as expressed in the comments. The Treasury Department and the IRS agree that the illustrations in § 28.2801-2(i)(2) and (5) of the proposed regulations may capture transfers that, in some cases, are not truly indirect transfers and should not be subject to tax under section 2801. Thus, the final regulations replace the rules in proposed § 28.2801-2(i)(2) and (5) with a single illustration that refers to an acquisition that is, in substance, a covered gift or covered bequest from a covered expatriate. In addition, the final regulations add a more general description of property that is gratuitously passed from or conferred by the covered expatriate through another person or entity, and the rules in proposed § 28.2801-2(i)(1) through (5) are converted in the final regulations to a nonexclusive list of illustrations describing the application of the definition for purposes of section 2801. The suggestion is not adopted to replace the rule in proposed § 28.2801-2(i)(2) and (5), applicable to acquisitions of property, with a rule that would add a principal purpose of tax avoidance test applicable to distributions from and to foreign trusts, similar to the rules in §§ 1.643(h)-1 and 1.679-3(c). As with other interpretations of terms in section 2801 (for example, U.S. resident), applying transfer tax principles to section 2801 is the better interpretation of the statute both because section 2801 is a transfer tax, and the intent of the transferor generally is irrelevant for transfer tax purposes.

Finally, comments recommend narrowing the scope of proposed § 28.2801-2(i)(4) to include only property acquired pursuant to a non-covered expatriate's non-general power of appointment (as opposed to all types of powers of appointment) granted by a covered expatriate over property not in trust. Such a change would ensure that the exercise, release, or lapse of a non-covered expatriate's general power of appointment over property not in trust would not be a covered gift or covered bequest, which the commenters contend is consistent with the general gift tax treatment of the holder of a general power of appointment as the owner of the property subject to the power. If the commenters' recommendation were adopted, it would allow a covered expatriate to avoid the section 2801 tax by granting a general power of appointment over non-trust property to a person who is neither a covered expatriate nor a U.S. citizen or resident, but who will exercise or release the power or allow it to lapse in favor of a U.S. citizen or resident. Thus, the final regulations continue to describe the acquisition of property pursuant to a non-covered expatriate's power of appointment (whether general or non-general) granted by a covered expatriate over property not in trust as an example of an indirect acquisition of property for purposes of section 2801. The final regulations clarify, however, that acquiring property pursuant to a power of appointment means as the result of an exercise, release, or lapse of that power, without regard to the de minimis exceptions in section 2041(b)(2) or 2514(e). This latter clarification is necessary because section 2801(c) provides the only

de minimis

exception to the imposition of section 2801 tax.

E. Other Definitions

Several comments suggest other revisions to § 28.2801-2 of the proposed regulations to make the regulations more user friendly, including using consistent terminology. Those suggestions include the replacement of

citizen or resident of the United States

with the term used in the statute,

U.S. citizen or resident,

the addition of a definition of the term

non-electing foreign trust,

and the correction of the reference in the definition of the term

general power of appointment

to section 2041(b)(1) (rather than section 2041(b)) to clarify that the exclusions for lapses and certain pre-1943 powers under section 2041(b)(2) and (3), respectively, do not apply for purposes of section 2801. These suggestions have been adopted and the appropriate changes are reflected in the final regulations. The suggestion that other terms (such as

gift

and

charitable remainder trust

) used throughout the proposed regulations, as well as other terms unique to section 2801 that are defined elsewhere in the proposed regulations (in the particular section where each is relevant), either be defined in § 28.2801-2 or referred to by cross-references, has not been adopted. Several such terms are defined elsewhere in the Code or in the corresponding regulations, and those that are specific to a particular issue under section 2801 are defined and applied in the discussion of that particular issue in the relevant section of the regulations in an effort to make the regulations more readily understood.

3. Exceptions to Definitions of Covered Gift and Covered Bequest

A. Transfers Otherwise Subject to Gift or Estate Tax

Section 2801(e)(2)(A) and (B) excepts from the definitions of covered gift and covered bequest, respectively, any taxable gift by a covered expatriate and any property included in the gross estate of a covered expatriate, if such property is reported on a timely filed gift or estate tax return (timely filed requirement).

One comment suggests that a covered expatriate be allowed to treat transferred property as a transfer of a U.S. situs asset, report the transfer on a timely filed gift or estate tax return, and thereby avoid the transfer being a covered gift or covered bequest. By reducing the effective tax rate on the transfer, the comment states that this approach would be consistent with the tax neutrality intended at enactment of section 2801.

1

These final regulations do not adopt the commenter's suggestion, because it is inconsistent with section 2801. Additionally, if adopted, such a filing in effect would override the provisions of sections 2511(a) (applying the gift tax only to transfers by nonresident, noncitizens of property situated within the United States) and 2103 (including in the gross estate of nonresident, noncitizens only that part of property that is situated within the United States at the time of death) for certain transfers by covered expatriates, a result not contemplated by the statutory language of section 2801. While section 2801 allows a foreign trust to elect to be treated as a domestic trust, there is no indication that Congress intended to allow other elections that would operate in the way suggested by this commenter.

1

For a discussion of the “tax neutral” objective stated in H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill, see part 1 of the

Summary of Comments and Explanation of Revisions

section of this preamble.

i. Timely Paid Requirement

For property reported on the covered expatriate's gift or estate tax return to be excluded from the definition of a covered gift or covered bequest, § 28.2801-3(c)(1) and (2) of the proposed regulations requires not only the timely filing of that return, but also the timely payment of the tax shown on that return (timely paid requirement).

Comments state that the timely paid requirement should be eliminated because there is no statutory basis for imposing that requirement. Comments also note that the timely paid requirement would cause a double tax to be imposed on a single transfer if the gift or estate tax is not timely paid: gift or estate tax due from the covered expatriate or covered expatriate's estate, as well as section 2801 tax due from the U.S. recipient of that property. As to the latter comment, the Treasury Department and the IRS note that the potential for imposing tax on both the covered expatriate or the covered expatriate's estate and the U.S. citizen or resident receiving the covered gift or covered bequest is already created by the timely filed requirement under section 2801(e)(2)(A) and (B), which would deny the exception if the gift or estate tax return is filed late. Like the timely filed requirement, the timely paid requirement limits the potential for tax avoidance by ensuring that an excepted transfer is timely reported and that the tax on such excepted transfer is timely paid by the covered expatriate, over whom it may be difficult for the IRS to assert jurisdiction to enforce that tax liability.

Providing a timely paid requirement is not beyond the Treasury Department and IRS's general regulatory authority to implement the Congressional mandate of section 2801, including addressing compliance concerns. However, the Treasury Department and the IRS have considered other existing gift and estate tax enforcement mechanisms which also could address compliance concerns, such as under subtitle F of the Code and the ability of the IRS to collect the tax liability of the covered expatriate or covered expatriate's estate from any transferee of the property. See section 6324 of the Code (establishing special estate and gift tax liens that are separate and distinct from the general tax lien) and section 6901 of the Code (providing transferee gift tax or estate tax liability is to be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as the tax imposed on the decedent or donor). Further, a timely paid requirement could present administrability and finality challenges—for example, when the amount paid with the return differs from the amount that is ultimately owed due to a valuation change or other adjustment after examination. In view of the above, the final regulations adopt the commenters' suggestion to eliminate the timely paid requirement as it relates to this exception from the definitions of covered gift and covered bequest.

ii. Both Section 2801 Tax and Gift or Estate Tax on Same Transfer

As discussed in part 3.A.i. of the

Summary of Comments and Explanation of Revisions

section of this preamble, a late filing of a gift or estate tax return by a covered expatriate or covered expatriate's estate prevents the transferred property from being excluded from the definition of a covered gift or covered bequest and may lead to the imposition of gift or estate tax as well as the imposition of the section 2801 tax on the same transfer of that property. Further, both the gift or estate tax and the section 2801 tax ultimately may be payable by the U.S. citizen or resident if transferee liability is imposed if the covered expatriate or covered expatriate's estate fails to pay the gift or estate tax due. See sections 6324(a)(2) and (b) and 6901.

Comments suggest that the final regulations provide a remedy to avoid the payment, on the same transfer, of both gift or estate tax by the covered expatriate or covered expatriate's estate and the section 2801 tax by the U.S. citizen or resident receiving the covered gift or covered bequest. The comments suggest alternative proposals to be added to the final regulations, including (a) providing for a refund to a U.S. citizen or resident who paid the section 2801 tax when gift or estate tax has been paid by a covered expatriate or covered expatriate's estate; (b) providing a credit or refund to the U.S. citizen or resident, or the covered expatriate or covered expatriate's estate, of whichever of those taxes is paid last; and (c) eliminating the timely filed requirement if the gift or estate tax is paid by the covered expatriate or the covered expatriate's estate prior to the due date of Form 708.

Section 2801(e)(2)(A) and (B) excepts from the definitions of covered gift and covered bequest, and thus from liability for the section 2801 tax, property reported on a timely filed gift or estate tax return. These sections explicitly provide an exception only for property shown on a timely filed return, and any exception from tax for covered gifts or covered bequests not reported on a timely return would ignore and give no meaning to the timely filed language in section 2801. Accordingly, eliminating liability for the section 2801 tax when the transfer of such property is not timely reported by a covered expatriate or covered expatriate's estate on a gift or estate tax return is contrary to the statute. Thus, despite the potential for the imposition of either estate or gift tax on the transfer of such property as well as the imposition of the section 2801 tax on the recipient's acquisition of such property, these final regulations do not adopt the suggestions of the comments.

Similarly, one comment suggests that a recipient who paid the U.S. gift or estate tax liability of the donor or decedent due to transferee liability should have a credit for those taxes against the recipient's section 2801 tax liability. These final regulations do not adopt this comment for the following reasons. First, a credit given to the recipient for gift or estate tax paid pursuant to transferee liability could incentivize the transferor subject to gift or estate tax to resist payment and force collection from the recipient. Second, section 2801 (unlike section 1446(d) of the Code,

2

for example) does not provide for such a credit.

2

Section 1446(d) provides a credit under section 33 of the Code for a foreign partner's share of the withholding tax paid by the partnership under section 1446.

Finally, in response to a comment,

Example 2

in proposed § 28.2801-3(f) is updated in the final regulations to clarify that, under the facts of the example, the covered expatriate's estate must file an estate tax return (Form 706-NA,

United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States

), and pay the estate tax with respect to certain property, despite the requirement that the son of the covered expatriate in that example file Form 708 and pay the section 2801 tax with respect to the same property.

B. Property Subject to Section 2801 Tax Both as Covered Gift and as Covered Bequest

Noting that a U.S. citizen or resident may receive property that constitutes a covered gift and, subsequently, a covered bequest, a comment suggests that the definition of covered bequest should exclude any property treated as acquired by reason of the death of a covered expatriate if the property previously was subject to the section 2801 tax as a covered gift from the same covered expatriate. For instance, when a covered expatriate transfers a remainder interest in real property to a U.S. recipient and retains a life estate, the value of the remainder interest is a covered gift, and the value of the entire real property is a covered bequest at the covered expatriate's death. See section 2036(a)(1).

The Treasury Department and the IRS are sympathetic to the commenter's concern that the same property could be subject to section 2801 tax first as a covered gift and subsequently as a covered bequest acquired from the same covered expatriate, and agree there should be no such duplication of the liability under section 2801. However, rather than excluding from the definition of covered bequest any property previously subject to the section 2801 tax as a covered gift, it is appropriate and more in line with the structure of the transfer tax system to exclude instead the value of the covered gift that was previously subject to section 2801 tax from the value of the covered bequest of that same property. In this way, similar to the way that section 2001(b) does not subject to estate tax the value of a gift that was previously subject to gift tax, the value already subjected to section 2801 would not be retaxed and the computation of the section 2801 tax would be able to properly take into account the post-gift appreciation in the value of the transferred property through the U.S. persons' receipt of the covered bequest. Accordingly, § 28.2801-3(c)(3) of the final regulations includes a rule that limits the value of a covered bequest to the amount that exceeds the value of the covered gift to which the section 2801 tax previously applied.

C. Transfers to Spouse

Section 2801(e)(3) excepts from the definitions of covered gift and covered bequest a gift or bequest that would qualify for a marital deduction under section 2056 or 2523 if the donor or decedent were a U.S. person.

i. QDOT and QTIP Elections for Non-U.S. Situs Property

Under proposed § 28.2801-3(c)(4), the exception to the definitions of covered gift and covered bequest for transfers to a spouse that are dependent upon the making of a qualified terminable interest (QTIP) or qualified domestic trust (QDOT) election only applies if a valid QTIP or QDOT election in fact is made. Because these are elective choices with different tax consequences, the desire to make the election cannot be presumed in all cases.

Many of the comments received on the proposed rule requiring the making of a valid QTIP or QDOT election concern non-U.S. situs property. The comments received generally fall into two categories: those comments that conclude that a covered expatriate or a covered expatriate's executor may make a valid QTIP or QDOT election with respect to only U.S. situs property; and those comments that conclude that a QTIP or QDOT election also may be made with respect to non-U.S. situs property and request guidance on how such an election might be made with respect to non-U.S. situs property. With respect to the former, the comments state that a covered expatriate or a covered expatriate's estate is limited to making a QTIP or QDOT election with respect to U.S. situs property because only the transfer of U.S. situs property by a covered expatriate is subject to U.S. gift and estate taxation under sections 2511(a) and 2103. With respect to the latter, different comments suggest various methods of allowing a QTIP or QDOT election to be made with respect to non-U.S. situs property, including on a Form 706-NA filed by a trust, on a Form 708 filed by a U.S. recipient, and by a trust that is a U.S. recipient of a foreign non-electing trust.

The Treasury Department and the IRS agree with the comments in the first category that, for the exception to the definitions of covered gift and covered bequest to apply under section 2801(e)(3), a covered expatriate or a covered expatriate's estate is limited to making a QTIP or QDOT election with respect to only U.S. situs property. Section 2801(e)(3) provides no basis for allowing a QTIP or QDOT election to be made for property that is not subject to U.S. gift or estate tax, and, furthermore, it provides no mechanism for making the election and no indication that the IRS should create such a mechanism through regulations. In addition, adopting the position of the latter comments and providing a method to make a QTIP or QDOT election for non-U.S. situs property (in addition to U.S. situs property) would be inconsistent with the QTIP and QDOT statutory provisions that defer, but do not eliminate, transfer tax on property qualifying for the marital deduction. If such a rule were adopted so that such property would not be subject to section 2801 tax upon the initial gift or bequest

by the covered expatriate, such property also would not be subject to gift or estate tax under section 2519, 2044, or 2056A(b) upon any disposition or distribution or on the death of the covered expatriate's spouse. Consequently, covered expatriates and the estates of covered expatriates would be afforded more favorable transfer tax treatment than that available to U.S. citizens. The Treasury Department and the IRS also note that a covered expatriate may obtain the benefits of the exception in section 2801(e)(3) with respect to non-U.S. situs property by making an outright gift or bequest of that property to a U.S. citizen spouse, or a bequest to a trust described in section 2056(b)(5) that provides the surviving spouse with both a life estate and a general power of appointment. For these reasons, the final regulations retain the proposed rule that requires a valid QTIP and/or QDOT election in order for property to qualify for this exception to the definitions of covered gift and covered bequest, and the regulations further clarify that such an election can be made only with respect to property subject to gift or estate tax, that is, only with respect to U.S. situs property.

ii. Distributions From Non-Electing Foreign Trusts

Transfers from a covered expatriate to a non-electing foreign trust are covered gifts or covered bequests, but are not subject to the tax under section 2801 until a distribution is made from that trust. Specifically, section 2801 imposes the tax on distributions from that trust to a U.S. recipient to the extent those distributions are attributable to the covered gifts or covered bequests contributed to the trust.

A few comments suggest that, for transfers to a non-electing foreign trust, section 2801(e)(4)(B)(i) supports applying the marital exception at the time of the distribution from the non-electing foreign trust to the U.S. spouse, because that is when tax under section 2801 tax is imposed. Recognizing that the marital deduction is applied at the time of the transfer giving rise to gift or estate tax, these comments contend that this approach would be consistent with transfer tax principles. These comments also state that this approach would be consistent with the goal of tax neutrality as applied to surviving spouses, in that the imposition of the section 2801 tax should not depend upon whether a non-electing foreign trust (that would qualify for the marital deduction) is interposed between the donor or decedent and the receipt by the surviving spouse. See part 1 of the

Summary of Comments and Explanation of Revisions

section of this preamble for a discussion of the “tax neutral” objective stated in H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill. The comments acknowledge that, under their interpretation, a transfer of property to a non-electing foreign trust would be treated differently than a transfer of property to a domestic trust or an electing foreign trust; however, they posited that the difference is justified by the timing of the transfer taxable under section 2801. Specifically, the comments point out that by its express terms, the statute treats a non-electing trust differently with regard to the timing of the imposition of the tax and the payee of that tax.

The Treasury Department and the IRS have carefully considered the merits and implications of the suggestion to apply the marital exception at the time of the distribution from the non-electing foreign trust. The proper interpretation of section 2801(e)(3) and (4)(B)(i), however, does not permit the creation of a special rule for non-electing foreign trusts that would provide an opportunity for a marital exception at the time of a distribution from the trust. Unlike the marital deduction for estate and gift taxes, the exception for marital transfers under section 2801 is an exception to the definitions of covered gift and covered bequest. Those definitions apply to determine whether a contribution to a non-electing foreign trust is a covered gift or covered bequest, and thus the availability of that exception is determined as of the time of the covered expatriate's funding of the non-electing foreign trust. For this reason, even though the U.S. spouse's receipt of property attributable to the covered gift or covered bequest occurs and becomes taxable under section 2801 only upon its distribution out of the trust, the availability of the marital exception cannot be applied instead at the time of the distribution from that trust.

Two other comments suggest that a distribution from a non-electing foreign trust to a U.S. citizen or resident spouse should be treated as an indirect gift or bequest to which the exception could be applied. However, to do so would imply that all trust distributions are indirect transfers, which would go too far. In addition, if such an indirect transfer would have qualified for the transfer tax marital deduction at all, it effectively would override section 2801(e)(4), would confer a tax advantage on a covered expatriate that is unavailable to a U.S. person, and would be (as one comment concludes) overly generous. For example, a transfer of non-U.S. situs property by a covered expatriate at death outright to the covered expatriate's U.S. citizen spouse is not a covered bequest, because such transfer would have qualified for the estate tax marital deduction if the covered expatriate were a U.S. person. Similarly, a transfer of non-U.S. situs property by a covered expatriate at death to a non-electing foreign trust that qualifies for the estate tax marital deduction under section 2056(b)(5) is not a covered bequest because such transfer would have qualified for the estate tax marital deduction if the covered expatriate were a U.S. person. In these situations, because the contributions to the trust are not covered bequests, not only are distributions from the non-electing foreign trust to the covered expatriate's U.S. citizen spouse not subject to the section 2801 tax pursuant to the exception in section 2801(e)(3), but distributions to the remainder beneficiary upon such spouse's death also are not subject to the section 2801 tax. By contrast, a transfer of non-U.S. situs property from a covered expatriate at death to a trust for the benefit of the covered expatriate's U.S. citizen spouse and U.S. citizen children is a covered bequest because such transfer would not have qualified for the estate tax marital deduction if the covered expatriate were a U.S. person. If such trust is a non-electing foreign trust, the section 2801 tax is not payable until there is a distribution to a U.S. citizen or resident. When the trust makes a distribution to the covered expatriate's U.S. citizen spouse, that spouse is liable for the section 2801 tax because the distribution is attributable to a covered bequest and is taxed “in the same manner as if such distribution were a covered gift or covered bequest.” Section 2801(e)(4)(B)(i).

These final regulations explicitly address the application of the section 2801(e)(3) exception to the definition of covered gift or covered bequest in § 28.2801-3(c)(5) and in

Example 2

to § 28.2801-5(e).

D. Transfers to Charity

To the extent a gift or bequest would qualify for a charitable deduction under section 2055 or 2522 if the donor or decedent were a U.S. citizen or resident, such gift or bequest is excepted under section 2801(e)(3) and § 28.2801-3(c)(3) of the proposed regulations from the definitions of covered gift and covered bequest. Regarding distributions to qualifying charitable organizations from a non-electing foreign trust, a few comments assert that section 2801(e)(4)(B)(i) supports applying the exception at the time of distribution and explain that this would avoid imposing

the section 2801 tax on a U.S. charity. The comments explain that their analysis regarding the marital exception, which is set forth in part 3.C.ii. of the

Summary of Comments and Explanation of Revisions

section of this preamble, applies equally to the charitable exception. Because this exception depends upon the contribution to the trust being eligible for a transfer tax charitable deduction, and for the reasons described in part 3.C.ii. of the

Summary of Comments and Explanation of Revisions

section of this preamble, these final regulations have not adopted the interpretation advanced by the comments.

Section 28.2801-4(a)(2)(iii) of the proposed regulations provides that a domestic trust qualifying as a charitable remainder trust (as that term is defined in § 1.664-1(a)(1)(iii)(

a

)) is subject to section 2801 when it receives a covered gift or covered bequest, and that the charitable remainderman's share of each transfer to the charitable remainder trust is not a covered gift or covered bequest. The proposed regulations further provide that, to compute the amount of covered gifts and covered bequests taxable to the charitable remainder trust for a calendar year, the charitable remainder trust will (A) calculate, in accordance with the regulations under section 664 and as of the date of the trust's receipt of the contribution, the value of the remainder interest in each contribution received in such calendar year that would have been a covered gift or covered bequest without regard to section 2801(e)(3), (B) subtract the remainder interest in each such contribution from the amount of that contribution to compute the annuity or unitrust (income) interest in that contribution, and (C) add the total of such income interests, each of which is the portion of the contribution that constitutes a covered gift or covered bequest to the trust.

One comment notes that the proposed regulations do not indicate whether the payment of section 2801 tax by a charitable remainder trust is disregarded in computing the amount of annuity or unitrust distributions and in determining whether the 10 percent minimum remainder requirement in section 664(d)(1)(D) and (2)(D) and the probability of exhaustion test described in Rev. Rul. 70-452, 1970-2 C.B. 199, are satisfied. The comment observes that, if the tax imposed by section 2801 were considered in determining whether the 10 percent minimum remainder requirement and probability of exhaustion tests are satisfied, then most trusts that owe tax under section 2801 are likely to be disqualified as a charitable remainder trust. The comment also observes, however, that, if the tax is not considered in determining the annuity amount, then the charitable remainder will be overvalued.

One comment points out that the proposed regulations do not provide guidance on whether a charitable remainder trust's payment of section 2801 tax should be allocated to income or principal for the purpose of determining the character of distributions under section 664(b) and § 1.664-1(d)(2).

The proposed regulations also do not contain any guidance on how a domestic trust or electing foreign trust that qualifies as a charitable lead trust under section 2055(e)(2)(B) or 2522(c)(2)(B) is to compute the 2801 tax. Several comments suggest that the final regulations provide that a charitable lead trust should compute the section 2801 tax in a similar manner to a charitable remainder trust, such that the charitable lead interest could be subtracted from the total value of the covered gift or bequest to determine the amount that is subject to the section 2801 tax.

As the comments note, the proposed regulations do not provide any rules on the effect of a charitable remainder trust's tax payment on the trust's qualification under section 664. This is a complex and foundational issue, such that final rules regarding charitable remainder trusts should not be promulgated without further consideration and an opportunity for notice and comment. Additionally, as the comments point out, the proposed regulations do not provide any rules on charitable lead trusts, and, therefore, final rules regarding charitable lead trusts should not be promulgated without further consideration and an opportunity for notice and comment. Accordingly, § 28.2801-4(a)(2)(iii) of the final regulations is reserved for these purposes.

4. Computation of Section 2801 Tax

Under section 2801(a) and (c), the section 2801 tax is determined by reducing the total value of covered gifts and covered bequests received by a U.S. recipient during the calendar year by the dollar amount of the per-donee exclusion in effect under section 2503(b) for that calendar year ($18,000 in 2024) (section 2801(c) amount), and then multiplying the net amount by the highest estate or gift tax rate in effect during that calendar year (40 percent in 2024). The reference in section 2801(c) to section 2503(b) has the sole purpose of defining the amount by which to reduce the aggregate value of covered gifts and covered bequests received by a U.S. citizen or resident during the calendar year, as acknowledged in the comments. Under section 2801(d), the resulting tax then is reduced by any estate or gift tax paid to a foreign country with regard to such covered gifts and covered bequests. Section 28.2801-4(b) (on the computation of the section 2801 tax) and 28.2801-4(e) (on the reduction of the section 2801 tax for foreign gift or estate tax paid) of the proposed regulations are consistent with these statutory rules.

A. Effective Tax Rate

Several comments note that the effective tax rate of the section 2801 tax on a covered gift is much higher than the effective tax rate for a gift subject to gift tax because the base on which the section 2801 tax is imposed includes the amount of the section 2801 tax payable by the U.S. recipient (making it “tax inclusive”) while the base on which the gift tax is imposed does not include the amount of the gift tax payable by the donor (making it “tax exclusive”). These comments contend that this result is a deviation from Congress' stated goal of tax neutrality, and one comment suggests that the final regulations allow a covered expatriate instead to elect to treat a gift as a transfer of U.S. situs property, to reduce the effective section 2801 tax rate on the covered gift.

As discussed in part 1 of the

Summary of Comments and Explanation of Revisions

section of this preamble, section 2801 imposes a tax that does not equal, and in some cases is not similar to, the tax that would have been imposed on the same transfer by a U.S. transferor. The effective tax rate on covered gifts under section 2801 as compared to the effective tax rate on taxable gifts under chapter 12 is another example of this. While Congress could have allowed a covered expatriate to elect to treat a covered gift of non-U.S. situs property as a transfer of U.S. situs property, it did not do so. (But see section 2801(e)(4)(B)(iii) allowing foreign trusts to elect to be treated as a domestic trust for purposes of section 2801). The statute does not provide any reasonable regulatory interpretation that the section 2801 tax on covered gifts should be levied on less than the entire amount of the covered gift, and the statute does not contemplate a regulatory rule allowing for a deduction or exclusion to estimate a tax exclusive section 2801 tax rate. Accordingly, these final regulations do not adopt the commenters' suggestion as it would be contrary to the statute.

B. Section 2801(c) Amount

Section 28.2801-3(d) of the proposed regulations provides that the recipient of a covered gift or covered bequest made to a trust is the trust and not any individual who holds a general power of appointment or power of withdrawal over trust property. Several comments recommend that the final regulations treat a transfer to a trust as a transfer to an individual to the extent of the individual's general power or withdrawal right. The comments acknowledge that this would increase the section 2801(c) amount available to shield a covered gift or covered bequest from the section 2801 tax when multiple individuals have withdrawal rights, but state this treatment is consistent with the treatment of withdrawal rights under gift tax principles and thus furthers the statutory goal of tax neutrality. See part 1 of the

Summary of Comments and Explanation of Revisions

section of this preamble for a discussion of the “tax neutral” objective stated in H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill. One comment suggests that there is no authority to deny the status of recipient to the holder of a withdrawal right. For the reasons stated below, these final regulations do not adopt the commenters' recommendation.

The holder of a withdrawal right over trust property is the holder of a general power of appointment. For gift tax purposes, neither the grant nor the receipt of a general power of appointment is treated as a taxable gift; rather, it is the possession of such a power at death, or the exercise or release of such a power that is a taxable event for gift and estate tax purposes. Thus, the proposed treatment of a general power of appointment—that is, not as the receipt of a covered gift or bequest—is consistent with transfer tax principles. In addition, while section 2801 is silent on the treatment of general powers of appointment, section 2801(e)(4) provides specific rules applicable to a covered gift or covered bequest made to a domestic or electing foreign trust: specifically, the section 2801 tax is imposed on the recipient trust. Implementing the recommendation proposed by the commenters would violate the provisions of section 2801(e)(4)(A)(ii) requiring that the tax imposed on a covered gift or covered bequest made to a domestic trust be paid by that trust. By, in effect, defining the donee domestic trust as the recipient of the covered gift or covered bequest, the statute imposes the filing and tax payment obligations on the domestic trust, regardless of the identity and rights of the trust beneficiaries. As a result, the receipt of property by the domestic trust does not have to be reported by and taxed to both the trust and each holder of a general power of appointment or withdrawal right over trust property. Treating each such power holder as an additional recipient at the time of the trust contribution would add administrative complexity and burden both to taxpayers and the IRS.

Similarly, under section 2801(e)(4)(B), it is the recipient of a distribution from a non-electing foreign trust who is treated as the recipient of the covered gift or covered bequest to the trust. No section 2801 tax is imposed on covered gifts or covered bequests to a non-electing foreign trust until a trust distribution is made to a U.S. recipient. It is the property distribution pursuant to the exercise, release, or lapse of a general power of appointment over such a trust, rather than the grant of such a power, that is a distribution triggering the imposition of the section 2801 tax.

As a result, in the case of a transfer to a trust, a domestic trust is the recipient who is entitled to reduce the value of a covered gift or covered bequest received during the calendar year by the section 2801(c) amount. These rules also apply to an electing foreign trust.

Finally, comments request guidance for trusts in the potential situation where a domestic trust or an electing foreign trust may be unable to pay the section 2801 tax upon the exercise of an individual withdrawal right. Such a situation, where the trustee is faced with balancing the obligation to satisfy tax obligations with the duty to make distributions as directed by the trust instrument, is not unique to the section 2801 tax (for example, an obligation to satisfy an estate tax obligation may conflict with a specific bequest, or an obligation to satisfy a GST tax obligation may conflict with a distribution provision to a trust beneficiary). Given the broader issues concerning a trustee's duty to administer a trust, such issues are better addressed in more comprehensive regulations and are therefore beyond the scope of these final regulations.

C. Foreign Gift or Estate Tax

Consistent with section 2801(d), § 28.2801-4(e) of the proposed regulations provides that the section 2801 tax is reduced by the amount of any gift or estate tax paid to a foreign country with respect to a covered gift or covered bequest. Pointing to section 2014(a), which allows a credit against estate tax for any estate, inheritance, legacy, or succession taxes paid to any foreign country, two comments suggest that, in the interest of tax neutrality, these final regulations also allow a reduction for any foreign tax imposed on a covered gift or covered bequest that is similar to, but imposed in lieu of, a gift or estate tax, such as an inheritance tax or a deemed capital gains tax. See part 1 of the

Summary of Comments and Explanation of Revisions

section of this preamble for a discussion of the “tax neutral” objective stated in H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill. These final regulations do not adopt the commenters' suggestion, because the plain language of section 2801(d) unambiguously limits the reduction to the amount of gift or estate tax paid to a foreign country with respect to a covered gift or covered bequest and does not contain the kind of statutory language that appears in section 2014.

A comment also suggests that these final regulations allow a refund of the section 2801 tax if foreign gift or estate tax is paid after payment of the section 2801 tax. In such a scenario, a refund is available under section 6511 if the U.S. recipient files a claim for refund or a protective claim for refund on or before the expiration of the applicable period of limitations. To confirm the U.S. recipient's ability to file a protective claim for refund, paragraph (e)(2) is added to § 28.2801-4 of the final regulations.

5. Value of a Covered Gift or Covered Bequest

Section 28.2801-4(c) of the proposed regulations defines value using transfer tax principles, including the special valuation rules of chapter 14 (sections 2701 through 2704). Several comments recommend that the final regulations be amended to disregard chapter 14. Alternatively, the comments suggest that the value of a covered gift should be determined by subtracting from the value of the covered gift the total value of any interest retained by a covered expatriate donor, without regard to section 2701 or 2702. The comments posit that, because the section 2801 tax is payable by the recipient, unlike the gift and estate taxes that are payable by the donor or decedent's estate, the requested deviation from the usual gift tax valuation rules is necessary. However, like the gift and estate taxes, the section 2801 tax is a transfer tax. The transfer tax valuation rules, therefore, including the special valuation rules of chapter 14, apply to value the property subject to section 2801. The section 2801 tax is imposed

on transfers that otherwise would have escaped gift or estate taxation as a consequence of the donor's or decedent's expatriation. Revising the section 2801 regulations in the suggested manner would decrease the value of a covered gift to which sections 2701 and 2702 apply below what otherwise would have been its gift tax value had the covered expatriate been a U.S. citizen. This result is inconsistent with the intended purpose of section 2801, and Congress did not provide an exception for the special valuation rules. Thus, the requested revisions are not adopted.

One comment suggests that sections 2701 and 2702 should not apply in determining the tax liability of a covered bequest, because those sections have no applicability to the estate tax. While the Treasury Department and the IRS acknowledge that sections 2701 and 2702 generally apply only to inter vivos transfers, section 2701(d) provides in certain circumstances for a potential increase in the taxable estate of a transferor. Accordingly, the final regulations provide that the special valuation rules under chapter 14 apply only to the extent those rules are applicable to the specific transfer.

6. Date of Receipt of a Covered Gift or a Covered Bequest

Under § 28.2801-4(d)(2) of the proposed regulations, the date of receipt of a covered gift, which is the date the section 2801 tax is imposed, generally is determined by reference to the date of the gift under chapter 12 principles, as if the covered expatriate had been a U.S. citizen at the time of the transfer. In the event of a transfer of assets by a covered expatriate to a domestic revocable trust, proposed § 28.2801-4(d)(2) provides that the date of receipt of the transfer is the date the covered expatriate relinquishes the right to revoke the trust. Proposed § 28.2801-4(d)(3) provides that the date of receipt of a covered bequest generally is the date the property is distributed from the covered expatriate's estate or revocable trust, unless the interest passes by operation of law or beneficiary designation, in which case the date of receipt is the date of the decedent's death. Comments recommend changing the rules regarding the date of receipt for both covered gifts and covered bequests.

With respect to the date of receipt of a covered gift, comments point out that the date on which a covered expatriate makes a gift often is not the same date on which the property is received by the U.S. citizen or resident donee. A discrepancy between those dates can impact a recipient's ability to pay the section 2801 tax liability because the recipient may not yet have received the economic benefit of the gifted property. Comments suggest different methods of determining the date of receipt: (1) the date of “actual” receipt; (2) the date an interest in property becomes possessory; or (3) the date of distribution to the U.S. citizen or resident. The third method is intended to be comparable to the proposed rule for the date of receipt of a covered bequest. A few comments also suggest that the rule determining the date of receipt for purposes of the section 2801 tax should distinguish between receipt of a present interest in property and receipt of a future interest in property. Finally, a comment requests that the final regulations further elaborate on the date of receipt when a transfer of assets to a domestic revocable trust is an incomplete gift, pointing out that relinquishment of the right to revoke the trust may not be the trigger that completes the gift.

With respect to the date of receipt of a covered bequest, some comments object to treating interests passing by operation of law or beneficiary designation as received on the date of death, rather than on the date property is distributed to the recipient. Comments note that a decedent's property devolves to heirs at death by operation of law in civil law jurisdictions, even though significant time may elapse before the heirs' interests become possessory. Again, this delay could impact a recipient's ability to pay the section 2801 tax. To address these concerns, a few comments suggest defining the date of receipt of a covered bequest as the date of actual receipt by the recipient, whether a distribution from a decedent's estate or revocable trust or the transfer of property by operation of law, beneficiary designation, or other contractual arrangement. Another comment suggests that, if the date of receipt of a covered bequest is not changed from that identified in the proposed regulations, the final regulations should include an election to defer payment of the section 2801 tax and interest until the recipient's interest becomes possessory. Still another comment suggests that, because a date of death valuation is likely to be performed on inherited assets for non-section 2801 purposes, recipients should be able to elect to treat a covered bequest as received as of the date of death rather than the date of actual distribution to avoid the need for additional appraisals.

Defining the date of receipt of both a covered gift and a covered bequest as the date on which the recipient obtains actual receipt or a possessory interest in the transferred property would eliminate the concern regarding the recipient's ability to pay the section 2801 tax, particularly in civil law jurisdictions where property passes by operation of law to heirs at death but distribution is delayed for a period during administration of the decedent's estate. However, such a definition outside of the context of a distribution from a decedent's estate or revocable trust would raise other issues and administrability concerns. For instance, in some cases it may be difficult to determine the date of actual receipt of a covered gift or covered bequest, such as the receipt of a remainder interest in property or, in the case of a delay in distribution of property after title has vested in a civil law jurisdiction during the period of administration. In cases where property is distributed or an interest becomes possessory long after the transfer by the covered expatriate, it may be difficult for the recipient to obtain the information needed to determine whether the transfer is subject to the section 2801 tax and otherwise comply with reporting and paying the section 2801 tax. Further, such a definition could open the door to possible manipulation of the date of receipt and potential abuse, such as planning designed to ensure a covered gift or covered bequest is considered non-possessory for an extended period to delay and possibly defeat any section 2801 tax liability.

In most instances, the lengthy amount of time between the date of receipt and the due date of the return and payment of the section 2801 tax, which generally is 17.5 months after the close of the year in which the covered gift or covered bequest is received, should be sufficient to allow a U.S. recipient to make necessary arrangements to timely report and pay any section 2801 tax liability. See § 28.6071-1(a). Moreover, the rules for transfers in trust satisfactorily resolve the potential problems for many situations of deferred possession.

However, for future interests in property that are not held in a trust (for example, a remainder interest in real property), the Treasury Department and the IRS appreciate the administrative and valuation concerns with the proposed definitions of the date of receipt. In view of these concerns, § 28.2801-4(d)(8)(i) of the final regulations includes a special rule providing that the date of receipt of a covered gift or covered bequest of a future interest in property that is not held in trust is the earlier of (1) the date the future interest is disposed of by the U.S. recipient or (2) the date that is the later of the date that the interest vests

in the U.S. recipient or the date that the last term interest in the property held by an intervening recipient terminates. Further, to assist recipients both in achieving finality regarding the section 2801 tax liability and in avoiding the potential for administrative hurdles caused by a long delay in receipt, § 28.2801-4(d)(8)(ii) of the final regulations provides that the U.S. recipient of a covered gift or covered bequest of a future interest in property not held in trust may elect to treat the covered gift or covered bequest as having been received on the date of receipt of the gift or on the covered expatriate's date of death, respectively. To the extent a domestic or electing foreign trust receives or may eventually receive a covered gift or covered bequest that is a future interest in property that is not in trust, such domestic or electing foreign trust may take advantage of this election.

Finally, to provide further clarification on the date of receipt of a transfer to a domestic trust or an electing foreign trust that is an incomplete gift, a new paragraph is added in § 28.2801-4(d)(4) of the final regulations. In the event of a transfer by a covered expatriate to a revocable domestic trust or electing foreign trust, the date of receipt by the trust is the later of (1) the date the right to revoke the trust is relinquished or extinguished and (2) the date of extinguishment of all powers over or interests in the trust that would prevent the transfer from being a competed transfer for gift tax purposes. In the event of a transfer by a covered expatriate to an irrevocable domestic trust or electing foreign trust over or in which the covered expatriate retains powers or interests that prevents the transfer from being complete, the trust receives the transfer on the date all of such powers or interests are extinguished.

7. Non-Electing Foreign Trusts

The section 2801 tax applies to a distribution attributable to a covered gift or covered bequest to a U.S. citizen or resident from a non-electing foreign trust. See section 2801(e)(4)(B)(i).

A. Distributions

Section 28.2801-5(b) of the proposed regulations defines the term

distribution

broadly to include any direct, indirect, or constructive transfer from a non-electing foreign trust, including each disbursement from such non-electing foreign trust pursuant to the exercise, release, or lapse of a power of appointment. In response to some comments, the final regulations clarify that a distribution includes a transfer to the extent made for less than full and adequate consideration in money or money's worth.

Several comments request clarification as to whether the uncompensated use of trust property by, or a loan from a non-electing foreign trust to, a U.S. citizen or resident would constitute a distribution for section 2801 tax purposes and point out that these are treated as distributions for income tax purposes under section 643(i). The comments recommend that neither one be treated as a distribution for purposes of section 2801 and request that the final regulations explicitly state that the deemed distribution rules of section 643(i) do not apply for purposes of section 2801. The comments suggest that, because there is no specific statutory direction to vary from the ordinary definition of distribution, the deemed distribution rules of section 643(i) should not be used to interpret the term as used in section 2801. The Treasury Department and the IRS agree with the latter recommendation to clarify that the deemed distribution rules of section 643(i) are not adopted as part of the definition of a distribution for purposes of section 2801(e)(4)(B)(i). However, that does not mean that a loan or use of property cannot be a distribution and thus a covered gift. To the extent that a loan from, or the use of property of, a non-electing foreign trust constitutes a gift under chapter 12 of the Code, then the portion of that loan or use received by a U.S. recipient constitutes a distribution and thus a covered gift to the extent of the trust's section 2801 ratio. The final regulations include this clarification.

One comment recommends that the final regulations provide that a loan from a foreign trust which is a qualified obligation under section 643(i) and Notice 97-34, 1997-1 C.B. 422, should not be treated as a distribution for section 2801 tax purposes (even if it otherwise would be treated as a distribution using gift tax principles). The final regulations provide, as other comments suggest, that distribution should not be interpreted using principles from section 643(i), because Congress did not indicate that such standards should be used. Consistent with this approach of not using section 643(i) principles, the suggestion to exclude from the definition of a covered gift or bequest this particular category of loans described in section 643(i) is not adopted. Comments also recommend that the final regulations clarify that the uncompensated use of trust property that is de minimis, whether determined by duration or value, does not constitute a distribution, noting that it is costly, impractical, and time-consuming to value the use of property. Because foreign trusts with U.S. beneficiaries already must determine these values for income tax purposes (given that there is no de minimis exception under section 643(i)), taxpayers are not subject to any additional administrative burden. Accordingly, this recommendation has not been adopted.

B. Section 2801 Ratio

Section 28.2801-5(c) of the proposed regulations provides that the amount of the distribution attributable to a covered gift or covered bequest is determined by multiplying the distribution by a ratio (section 2801 ratio) that is redetermined after each contribution to the non-electing foreign trust. The proposed regulations explain how to compute the section 2801 ratio and provide that each distribution from the non-electing foreign trust is considered to be made proportionally, without any tracing to particular property.

i. Calculating the Section 2801 Ratio

While acknowledging that the proposed method for determining the section 2801 ratio is based on the existing method for determining the inclusion ratio of a trust for GST tax purposes, several comments nonetheless object to this methodology, saying that its complexity, particularly the requirement to revalue trust property at each contribution, would discourage compliance. Comments offer multiple suggestions to avoid the complications of a section 2801 ratio of more than zero but less than one. Some suggestions involve recognizing separate accounting or separate shares within, or the severance of, a single trust so that separate section 2801 ratios could apply to the separate shares. For instance, such an approach could allow a non-electing foreign trust to utilize separate accounting for the portion of the trust that consists of only covered gifts and covered bequests (similar to separate accounting in the GST context under section 2654(b) and § 26.2654-1(a)(2) of the Generation-Skipping Transfer Tax Regulations for portions of a trust attributable to transfers from different transferors). Another approach could allow a non-electing foreign trust to treat a covered gift or covered bequest earmarked for a particular beneficiary as a separate share with a distinct section 2801 ratio (similar to separate share rules utilized for other tax purposes such as § 26.2654-1(a)(1) and §§ 1.672(f)-3(b)(3) and (d) and 1.663(c)-3 of the Income Tax Regulations). Another approach could allow the trustee to sever a trust with a mixed

section 2801 ratio into two separate trusts, each with a section 2801 ratio of either zero or one, using the same method provided for qualified severances in section 2642(a)(3) and § 26.2642-6.

The Treasury Department and the IRS recognize that, in the absence of an election by the foreign trust to be treated as an electing foreign trust, computing and re-computing the section 2801 ratio in the event of additional contributions may pose challenges to U.S. distributees unless the non-electing foreign trust has a section 2801 ratio of either one or zero. Nevertheless, a rule recognizing separate section 2801 ratios in the event of separate accounting, separate shares, or a severance of a single non-electing foreign trust presents administrability and enforcement concerns. For instance, because of the lack of jurisdiction over a foreign trust, it will be difficult to verify whether a single trust consists of substantially separate and independent shares with no commingling of trust assets and whether a qualified severance was done in a manner that complies with rules similar to § 26.2642-6. Although certain reporting and other administrative requirements are imposed in order for separate accounting, separate shares, and qualified severances to be recognized, no similar reporting or other administrative requirements could be enforced against the trustee of a non-electing foreign trust. Furthermore, the proposal to allow for separate accounts that are not actually separated into different shares or trusts similar to section 2654(b) would not eliminate the need for revaluation at each contribution, because revaluation would be necessary after each contribution in order to determine the portion of the trust allocable to each account. See § 26.2654-1(a)(2)(ii) (requiring the computation of a fraction that utilizes fair market valuations of the trust as well as of the portions treated as separate trusts). Accordingly, the final regulations do not adopt the commenters' suggestions related to separate accountings similar to that provided in section 2654(b) and § 26.2654-1(a)(2), separate shares similar in concept to those recognized in § 26.2654-1(a)(1) and §§ 1.672(f)-3(b)(3) and (d) and 1.663(c)-3, or severance of a single trust similar to qualified severances described in section 2642(a)(3) and § 26.2642-6.

Another comment suggests allowing a non-electing foreign trust to treat as a separate share gifts and bequests received prior to the effective date of section 2801. As is explained in part 7.B.ii. of the

Summary of Comments and Explanation of Revisions

section of the preamble, such receipts are not included in the definition of a covered gift or covered bequest. Because the final regulations provide that such receipts are merely another example of noncovered receipts, this suggestion is not adopted for the same administrability concerns identified in the prior paragraph. See § 28.2801-2(f) and -2(g) and

Example 3

of § 28.2801-5(e) of these final regulations.

One comment suggests that separate accounting for the purpose of recognizing separate section 2801 ratios be permitted in the event a covered expatriate's contributions to a non-electing foreign trust can be traced to specific assets. Another comment recommends that the final regulations adopt a rule that would treat a distribution from a non-electing foreign trust as made either first or last from a covered gift or covered bequest, similar to the income tax treatment of certain inventory under sections 471 and 472, or in a manner analogous to the tiers applicable to distributions from a charitable remainder trust. Requiring the tracing or tracking of specific trust assets has the potential to be more onerous to administer than the section 2801 ratio, especially as trust property produces income, is reinvested, or otherwise changes form over time, and to the extent it is commingled or reinvested with other assets. Additionally, because the IRS has no jurisdiction over the foreign trustee, it would be difficult to verify that the assets were being traced or tracked properly. Given these administrability concerns, these suggestions are not adopted.

One comment suggests that the final regulations permit a non-electing foreign trust to use the value of each contribution to the trust as of the date of its contribution to compute the section 2801 ratio, thus eliminating the need for revaluations at the time of each subsequent contribution. However, as the comment acknowledges, computing the section 2801 ratio using contributed values is a less desirable alternative because, although simpler to administer, it would be far from accurate, so this suggestion has not been adopted.

The Treasury Department and the IRS recognize that calculation of a foreign trust's section 2801 ratio may be complicated when a single trust receives contributions attributable to both covered gifts or covered bequests and non-covered gifts or non-covered bequests at different points in time. In some circumstances, the complexity can be eliminated by establishing separate trusts and making covered gifts or covered bequests to one trust and non-covered gifts and non-covered bequests to the other trust. The Treasury Department and the IRS recognize that this might not always be possible or practical, particularly in the event of one or more transfers to a non-electing foreign trust as a result of the death of a covered expatriate. However, for the reasons previously stated, the final regulations retain the section 2801 ratio concepts enumerated in the proposed regulations.

ii. Inadequate Information To Calculate Section 2801 Ratio

Section 28.2801-5(c)(3) of the proposed regulations provides that, if the trustee of the foreign trust does not have sufficient books and records to calculate the section 2801 ratio, or if the U.S. recipient is unable to obtain the necessary information with regard to the foreign trust, the U.S. recipient must proceed upon the assumption that the entire distribution for purposes of section 2801 is attributable to a covered gift or covered bequest. Some comments object to this assumption, contending that it is unduly harsh in that U.S. recipients of foreign trust distributions may be unable to determine the section 2801 ratio despite their best efforts. Comments also suggest applying a presumption under which property acquired by a non-electing foreign trust prior to June 17, 2008, would be presumed not to be a covered gift or covered bequest, and property acquired on or after that date would be presumed to be a covered gift or covered bequest.

The Treasury Department and the IRS are persuaded that the entire trust should not be assumed to have a section 2801 ratio of one merely because the U.S. recipient cannot determine whether certain transfers are attributable to covered gifts and covered bequests. Accordingly, the final regulations retain the rule in the proposed regulations, but clarify that the assumption applies only to the extent the section 2801 ratio cannot be substantiated. See § 28.2801-5(c)(3) of these final regulations. For instance, even if the U.S. recipient lacks adequate information to determine whether certain transfers to a non-electing foreign trust are covered gifts or covered bequests, the U.S. recipient can still treat other transfers to the non-electing foreign trust as not being covered gifts or covered bequests if the U.S. recipient has adequate information to show that those transfers are not covered gifts or covered bequests. Additionally, the final regulations clarify that the assumption that a distribution is attributable to a covered gift or covered bequest can be rebutted

to the extent the taxpayer can supply information sufficient to persuade the Commissioner that the assumption is not correct.

As to the suggestion to apply a presumption about property acquired by a non-electing foreign trust prior to the effective date of section 2801, the Treasury Department and the IRS agree that the final regulations should clarify the status of pre-enactment contributions to non-electing foreign trusts. However, rather than a presumption, the final regulations update the definitions of covered gift and covered bequest to clarify that such terms include only gifts and bequests made to the non-electing foreign trust after the effective date of section 2801. Thus, property attributable to a covered gift or covered bequest does not include pre-section 2801 contributions to the non-electing foreign trust. See § 28.2801-2(f) and -2(g) and

Example 3

of § 28.2801-5(e) of these final regulations.

Other comments propose that a U.S. recipient of a distribution from a non-electing foreign trust may use any reasonable method to estimate the section 2801 ratio based on the information available, such as affidavits from persons with relevant knowledge and reasonable assumptions regarding growth rates, contributions, and other pertinent information. The adequacy of the method and information used to compute the section 2801 ratio to avoid application of the assumption is most appropriately determined on a case-by-case basis. Accordingly, these final regulations do not contain a detailed list of the types of information, and the combinations thereof, that may be used to calculate the section 2801 ratio and rebut the presumption in § 28.2801-5(c)(3) of the final regulations.

One comment suggests that the burden to establish the section 2801 ratio should shift to the IRS if the U.S. recipient (i) affirms under penalties of perjury that best attempts were made to obtain necessary information, (ii) discloses all relevant information that the U.S. recipient has to the IRS, and (iii) identifies parties believed to have the necessary information. The Treasury Department and the IRS acknowledge that U.S. recipients of distributions from non-electing foreign trusts whose trustees do not keep proper records, or who do not cooperate with the U.S. recipients, may end up computing their section 2801 tax using an overstated section 2801 ratio. However, because all the information is in the hands of the trustees of the foreign trust (over which the IRS is unlikely to have any jurisdiction) and the IRS has limited ability to independently determine the section 2801 ratio of a non-electing foreign trust, leaving the burden of proof with the U.S. recipient more likely ensures that section 2801 tax is levied on all covered gifts and covered bequests. Accordingly, the final regulations do not adopt the suggestion to shift the burden in establishing the section 2801 ratio to the IRS.

iii. Impact of Section 2801(c) Amount on Section 2801 Ratio

One comment requests clarification on when a section 2801 tax is deemed to have been paid and suggests that an example be added to the final regulations. Section 28.2801-5(c)(2) of the proposed regulations provides that, once a section 2801 tax has been timely paid on property that thereafter remains in a foreign trust, that property is no longer considered to be, or to be attributable to, a covered gift or covered bequest to the foreign trust for purposes of determining the trust's section 2801 ratio. Section 28.2801-5(c)(2) of the proposed regulations further provides that a section 2801 tax is deemed to have been timely paid on amounts for which no section 2801 tax was due as long as those amounts were reported as a covered gift or covered bequest on a timely filed Form 708. The final regulations clarify in § 28.2801-5(c)(1) that, because a non-electing foreign trust itself is not taxed on its receipt of covered gifts and covered bequests, the trust is not entitled to the exclusion under section 2801(c); instead, the section 2801(c) exclusion is allowed to the U.S. recipient with regard to distributions from the non-electing foreign trust. In addition, the final regulations expand an example to illustrate this situation. See

Example 4

of § 28.2801-5(e) of the final regulations. In addition, section 28.2801-5(c)(2) of the final regulations also is modified to provide that section 2801 tax is deemed to have been timely paid on amounts for which no section 2801 tax was due as a result of the section 2801(c) amount, whether or not those amounts were reported as a covered gift or covered bequest on a timely filed Form 708.

C. Income Tax Deduction for Section 2801 Tax on Certain Distributions

Section 2801(e)(4)(B)(ii) allows a U.S. recipient of a distribution from a non-electing foreign trust to deduct under section 164 the section 2801 tax imposed on the portion of the distribution included in the U.S. recipient's gross income for the year. Section 28.2801-4(a)(3)(ii) of the proposed regulations provides instructions for calculating the amount of this deduction. That income tax deduction is available for the year in which the section 2801 tax is paid. Commenters questioned whether an accumulation distribution, taxable to a U.S. person in a given year, is to be included in this reference to “gross income” when computing this deduction.

Section 662(a), in effect, determines how to determine the portion of a trust's distributable net income (DNI) that is taxable to each beneficiary of the trust in a given year. That section provides that the gross income of a beneficiary of a complex trust includes both amounts required to be distributed to the beneficiary and amounts properly distributed to the beneficiary. That section and § 1.662(a)-3(c) provide that a beneficiary receiving such a distribution in a given year will recognize the distribution as gross income only to the extent the distribution is made out of the trust's DNI for the year.

Under section 665, a foreign trust's distribution to a beneficiary of income that exceeds that trust's DNI for the year is a distribution of income earned by the trust in a prior year, which is an accumulation distribution that is comprised of undistributed net income (UNI). That amount, therefore, would not be included in the reference to gross income as used in section 662(a).

Section 667(a) provides that a beneficiary receiving such an accumulation distribution must include that distribution as income in the year the distribution is received but must compute the tax on that distribution (to the extent it would have been included in the beneficiary's income under section 662) as though it had been received in a preceding taxable year. Section 667 provides the mechanism to compute the applicable income tax and interest charge on the distribution (throwback tax).

One comment suggests that the final regulations permit a deduction under section 164 of the full amount of the section 2801 tax paid on an accumulation distribution. The comments observe that, if any portion of a distribution from a non-electing foreign trust is attributable to a covered gift or covered bequest and is an accumulation distribution, the aggregate amount of the section 2801 tax and the throwback tax might exceed the amount of the distribution.

Other comments suggest limiting the total tax liability under section 2801 and the throwback tax on a specific distribution to the amount of the distribution. One comment suggests this

might be achieved by reducing the amount of the distribution that is treated as an accumulation distribution. The final regulations do not adopt the commenters' suggestions that involve limiting the total tax liability, other than through a deduction under section 164 as provided in section 2801(e)(4)(B)(ii) and described above. There is no mechanism under the income tax rules to re-classify an accumulation distribution as DNI because an accumulation distribution is, by definition, income in excess of DNI. Section 2801 does not limit the total tax liability under that section or the throwback tax.

Although section 2801(e)(4)(B)(ii) uses the term

gross income,

that section merely limits the available tax deduction to tax paid on income that was subjected to income tax. The reference to gross income does not reference any particular definition of that term and thus does not appear to create a distinction between different types of taxable income. For that reason, the final regulations provide that the reference to gross income in this section includes all forms of income subject to income tax in that year, including an accumulation distribution.

Section 28.2801-4(a)(3)(ii) of the proposed regulations provides that the deduction under section 164 provided in section 2801(e)(4)(B)(ii) is available in the year in which the tax is paid or accrued. As a result, a cash method taxpayer will be entitled to the deduction only in the tax year in which the section 2801 tax is paid. Several comments suggest that the deduction instead should be available to a cash method taxpayer in the year the distribution is received and subject to income tax. The final regulations do not adopt this suggestion for the following reasons. Both section 2801(e)(4)(B)(ii) and section 164(a) allow the deduction only in the year in which the tax is paid or accrued, and references in the Code to items accrued generally do not apply to cash basis taxpayers. Congress has not provided a special rule (such as section 164(b)(4)(B) or 691(c), for example) allowing the deduction in the year of the distribution. Additionally, allowing the deduction in the year of the distribution for cash method taxpayers would be administratively difficult because the section 2801 tax for a distribution from a non-electing foreign trust attributable to a covered gift or covered bequest generally is due in the calendar year after the income tax attributable to that distribution is due (17.5 months after the close of the calendar year of receipt versus 3.5 months after the close of the calendar year). Although the deduction for section 2801 tax paid cannot be taken against the income carried out from the distribution attributable to the covered gift or bequest, the deduction can be taken against income in the year the section 2801 tax is paid (including against distributions of accumulated income). Accordingly, the final regulations retain the rule in the proposed regulations that the deduction under section 164 is available only in the year the section 2801 tax is paid or accrued.

8. Election by Foreign Trust To Be Treated as Domestic Trust

Section 2801(e)(4)(B)(iii) allows a foreign trust to elect to be treated as a domestic trust solely for purposes of section 2801. That election may be revoked with the consent of the Secretary of the Treasury or her delegate, but also may be terminated by the trust's failure to comply with the requirements for maintaining a valid election. An election to be treated as a domestic trust causes the electing foreign trust to become liable for the section 2801 tax liability on covered gifts and covered bequests received by the trust, thus relieving each U.S. citizen or resident receiving a trust distribution attributable to such covered gifts or bequests from that tax liability.

A. Reporting Requirements

Section 28.2801-5(d)(4) of the proposed regulations provides that the trustee of an electing foreign trust must file a timely Form 708 annually either to report and pay the section 2801 tax on all covered gifts and covered bequests received by the trust during the calendar year, or to certify that the electing foreign trust did not receive any covered gifts or covered bequests during the calendar year. One comment requests that the final regulations eliminate the requirement to file a Form 708 for years in which no covered gift or covered bequest was received. The Treasury Department and the IRS agree that the trustee's requirement to certify annually that the electing foreign trust did not receive any covered gifts or bequests creates a burden that outweighs the benefit to the enforcement and administration of the section 2801 tax. Accordingly, the final regulations do not require annual reporting for electing foreign trusts. Instead, reporting will be required only by an electing foreign trust for years in which the total value of the covered gifts and covered bequests received by the electing foreign trust in that year exceeds the section 2801(c) amount for that year.

Section 28.2801-5(d)(3)(ii) of the proposed regulations details the requirements for a valid election. Among these is the requirement to notify and provide to the IRS information on each U.S. citizen or resident who is a permissible distributee of the trust. For this purpose, a permissible distributee is a U.S. citizen or resident who either may or must receive trust distributions, has a right (whether current or future) to withdraw income or principal from the trust, or would have been so described if either the trust or the interest of all persons so described had just terminated. Comments observe that this requirement is burdensome, infringes upon disclosure and privacy standards, and requests information that is not required to ensure that the tax is adequately administered. One comment suggests revising the requirements for making the election to be treated as a domestic trust so that only beneficiaries that have received distributions during the relevant period must be identified on Form 708. Another comment suggests adopting the standards devised for the Foreign Account Tax Compliance Act (FATCA) information reporting under sections 1471 and 1472, so that only beneficiaries who actually receive a distribution or who have a mandatory payment right during the relevant period must be identified on Form 708.

It is necessary for the trustee to provide information to the IRS on all U.S. citizens or residents who may receive distributions from the trust, because those persons may have to pay tax under section 2801 if the election terminates. Although the Treasury Department and the IRS are sensitive to the policy concerns of the commenters, this concern is outweighed by the IRS's need to obtain information from the trustee that would be necessary to assure the collection of tax should the election terminate. Additionally, because the final regulations do not require annual filings in the absence of the receipt of a covered gift or covered bequest by the electing foreign trust, as the proposed regulations did, an electing foreign trust's most recent return may be filed many years before the termination of the election (for example, if the election terminates for failure to pay 2801 tax or to file a return in a year that a contribution is made to the trust). In that event, the commenter's request would deprive the IRS of needed information about the actual distributees in the year of the termination of the election. Accordingly, the final regulations retain

the definition of permissible distributee under the proposed regulations.

Section 28.2801-5(d)(3)(iv) of the final regulations confirms that the appointment of the required U.S. agent is made by filing Form 2848,

Power of Attorney and Declaration of Representative,

or as may be directed otherwise in IRS forms or publications. Merely confirming the name and identifying information of that agent on the electing trust's Form 708 is not sufficient for this purpose.

B. Termination of Electing Foreign Trust Status

Under § 28.2801-5(d)(5)(ii) of the proposed regulations, an election to be treated as a domestic trust is terminated by the failure of the foreign trust to timely file Form 708 or timely pay any required section 2801 tax. The termination is effective as of the first day of the calendar year for which the failure occurs.

A comment suggests that the trustee of an electing foreign trust should be permitted to cure the late filing of Form 708 and/or late payment of the section 2801 tax to avoid the retroactive termination of the foreign trust's election to be treated as a domestic trust for purposes of the section 2801 tax. The comment contends that an opportunity to cure is needed to avoid placing a reporting burden on a U.S. citizen or resident who received a distribution during the year for which the election is being terminated.

As provided in paragraph 8.A. of the

Summary of Comments and Explanation of Revisions

section of this preamble, the final regulations do not require annual filings for electing foreign trusts for years in which the electing foreign trust receives no covered gifts or covered bequests. Accordingly, under the final regulations, an electing foreign trust's election will not terminate for the failure to file a Form 708 for such a year. The final regulations, however, require that, unless the total value of the covered gifts and covered bequests received by the electing foreign trust in a calendar year does not exceed the section 2801(c) amount, the trustee of an electing foreign trust must report all covered gifts and covered bequests received during that calendar year on a timely filed Form 708 and timely pay the section 2801 tax in full. Because the IRS may lack jurisdiction to assess tax on a foreign trustee, voluntary payment by the foreign trustee is the only way to ensure collection of section 2801 tax on an electing foreign trust. If the foreign trustee fails to pay the section 2801 tax, then the section 2801 tax must be collected from the U.S. recipient to ensure collection. Providing a grace period to file a return and make a payment of tax beyond the original due date of the required return to provide the suggested opportunity to cure is not tenable because the identity of the taxpayer during this period would be uncertain, creating confusion and delaying finality as to whether the U.S. beneficiaries of the trust or the trustee of the trust is responsible for the payment of the section 2801 tax. In addition, providing such a grace period could encourage trustees to delay payment to the end of the grace period, notwithstanding that the original due date for such payment already is more than 17.5 months after the close of the year in which the covered gift or covered bequest was received. For these reasons, the regulations provide that, unless the total value of the covered gifts and covered bequests received by the electing foreign trust in a calendar year does not exceed the section 2801(c) amount, the failure to report all covered gifts and covered bequests received on a timely filed Form 708 or to timely pay the section 2801 tax in full will result in the termination of the foreign trust's election. The final regulations in § 28.2801-5(d)(5)(ii)(A)(

3

) further provide a method for the trust to affirmatively terminate its election to be treated as a domestic trust for purposes of section 2801.

C. Dispute as to Amount of Section 2801 Tax Owed

Section 28.2801-5(d)(6)(i) of the proposed regulations describes the process for resolving or otherwise accounting for proposed adjustments to the amount of the section 2801 tax owed by an electing foreign trust. The proposed procedure entails the IRS notifying the trustee of the foreign trust of the additional tax due, including any penalties and interest, and the due date of payment. If the trustee of the electing foreign trust and the IRS are unable to come to an agreement and the trustee fails to timely pay the additional tax and other asserted amounts by the stated due date, then the election is terminated retroactively, effective as of January 1 of the year for which the Form 708 was filed and is converted as of that same date to an imperfect election. Any additional value determined by the IRS on which the foreign trust did not timely pay the section 2801 tax then is treated as a covered gift or covered bequest to the trust and should be taken into account as a covered gift or covered bequest by a U.S. recipient in computing the section 2801 ratio applicable to any distribution from the trust, although that valuation adjustment is an issue that may be challenged or otherwise resolved on examination of that U.S. recipient's Form 708 reporting a distribution.

Comments suggest that the final regulations provide the same opportunity, procedures, and rights to the electing foreign trust as are applicable to any other U.S. taxpayer, with regard to any challenge to the IRS's determination of value. One comment recommends that the IRS issue a statutory notice of deficiency to make possible these administrative and judicial review processes. Another comment suggests that allowing the electing foreign trust to resolve these valuation issues with the IRS would avoid the possibility that different trust beneficiaries might reach different resolutions of the same issue as their individual Forms 708 are separately examined by the IRS.

Establishing a statutory notice of deficiency process for resolving or otherwise addressing proposed adjustments to the amount of the section 2801 tax owed by an electing foreign trust would have a harmful effect on the IRS's ability to collect any unpaid deficiency, even a deficiency that has been reduced to judgment, given the IRS's lack of jurisdiction over the trustees and assets of a foreign trust. Additionally, if the foreign trust in such a situation refuses to pay the deficiency, it is not clear that the IRS would have the ability to assert transferee liability against a U.S. citizen or resident receiving distributions from the trust under section 6901 or 31 U.S.C. 3713. Therefore, allowing the continued validity of the election despite an unresolved dispute or unpaid tax and issuing a statutory notice of deficiency would jeopardize the IRS's ability to collect the unpaid deficiency from either the foreign trust or the U.S. recipient of a trust distribution.

Given the jurisdictional limitations and because the statute contemplates that the section 2801 tax will be paid by the electing foreign trust, the proposed procedures for handling disputes involving electing foreign trusts are the practical approach and strike the appropriate balance of fairness, administrability, and enforcement of the section 2801 tax. However, the final regulations improve administrability by clarifying in § 28.2801-5(d)(6)(i) that the payment of any additional amount of section 2801 tax must be made either by the due date specified in the letter or the due date otherwise agreed to by the Commissioner. Note that the procedures as finalized also include the availability of a reasonable cause defense to the

imposition of failure to file and failure to pay penalties under section 6651 on the U.S. recipient's obligations with regard to distributions made from the trust. See, for example, § 28.2801-5(d)(6)(iii)(C) of the final regulations. Thus, the request of the commenters is not adopted.

9. Income Tax Effects of Section 2801 Tax

A. Income Tax Basis

Section 28.2801-6(a) of the proposed regulations provides that the recipient's basis in property received as a covered gift is determined under section 1015. The proposed regulations further provide that section 1015(d) does not apply to increase the basis in a covered gift by the amount of the section 2801 tax paid with respect to that covered gift. Several comments state that a basis increase should be allowed for the section 2801 tax paid with respect to a covered gift based on simple fairness and to serve the statutory goal of tax neutrality. One comment acknowledges that section 1015(d) is inapplicable to section 2801 because section 1015(d) applies only to gift taxes paid under chapter 12 of the Code, not to the taxes on covered gifts defined in chapter 15. However, this comment states that section 164 does apply to increase basis in property received as a covered gift by the amount of the section 2801 tax paid because section 164(a) treats taxes that have been paid but are not deductible under section 164 as part of the acquisition cost of the property. As such, the comment concludes that payment of the section 2801 tax does increase the recipient's basis in the property.

The comment is correct that the basis adjustment available under section 1015(d) is applicable only to gift tax paid under chapter 12. Section 2801 does not apply the rule of section 1015(d) to the section 2801 tax, which is in chapter 15 of subtitle B of the Code. However, neither does section 164 provide for an increase in the basis of property received as a covered gift by the amount of the section 2801 tax paid. The flush language in section 164(a) clarifies the treatment of certain taxes (other than those enumerated in section 164(a)) that are incurred in a trade or business or in an income-producing activity and are connected with the acquisition or disposition of property. Specifically, such taxes are treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.

See

H. Conf. Rept. 99-841 (Vol. 2), at II-20 (1986), 1986-3 C.B. 20 (Vol. 4);

Sleiman

v.

Commissioner,

T.C. Memo. 1997-530 at 10. The section 2801 tax paid on the receipt of a covered gift or covered bequest does not come within this description because, by its nature, it is not a tax that is incurred in a trade or business or an income-producing activity.

The Treasury Department and the IRS understand the general proposition of the commenters that allowing a basis increase for the section 2801 tax paid with respect to a covered gift would be consistent with the rule in section 1015(d) that takes gift tax paid into account and thus would further serve the goal of tax neutrality and that such a rule might more fairly represent the acquisition cost of property received in a covered bequest. However, in order to create a special rule for an adjustment to the basis in property subject to the section 2801 tax, a statutory amendment to section 1015, 2801, or other statutory authority would be needed.

B. Deduction for Portion of Section 2801 Tax Paid Attributable to Income in Respect of a Decedent

Section 691(c)(1) provides that a person who includes an amount of income in respect of a decedent (IRD) in gross income under section 691(a) is allowed as an income tax deduction, for the same taxable year, a portion of the estate tax paid by reason of the inclusion of that IRD in the decedent's gross estate. A comment likens the estate tax paid to the section 2801 tax paid and suggests that, in the interest of tax neutrality, the final regulations should allow a U.S. recipient to deduct from gross income the portion of the section 2801 tax paid with respect to an item of IRD, when the amount of IRD is included in the U.S. recipient's gross income for the same taxable year.

Although estate tax may be similar to section 2801 tax on the receipt of a covered bequest, in section 691(c)(2)(A), Congress explicitly defined the term

estate tax

for purposes of that section as the tax imposed on the estate of a decedent under section 2001 or 2101, and did not include analogous taxes imposed under other sections of the Code such as section 2801. Furthermore, where Congress believed that a deduction for section 2801 taxes paid is appropriate, it provided for that deduction explicitly. While section 2801(e)(4)(B)(ii) provides for an income tax deduction under section 164 for a certain amount of section 2801 tax imposed on a distribution from a non-electing foreign trust included in gross income that is attributable to a covered gift or covered bequest, Congress did not provide an income tax deduction under section 691(c) for section 2801 tax that is attributable to IRD.

Additionally, the method for computing the deduction under section 691(c)(2) for estate taxes paid uses variables that are not applicable to the tax under section 2801. For instance, section 691(c)(1)(A) provides a deduction based on the “net value” for estate tax purposes of all items of IRD described in section 691(a). Section 691(c)(2)(C) provides that the net value shall be an amount equal to the excess of the estate tax over the estate tax computed without including in the gross estate such net value. Therefore, there would be no way to calculate the amount of an IRD deduction for section 2801 tax paid using the rules provided under section 691. Accordingly, in order to establish a similar regime for section 2801, the final regulations would need to contain a new set of comprehensive rules for determining the amount of a deduction against items of IRD for section 2801 tax paid.

For these reasons, adopting the commenter's suggestion would be both impractical and beyond what is provided by statute.

10. Information Reporting Under Sections 6039F and 6048(c)

Generally, sections 6039F and 6048(c), respectively, require each U.S. person (as defined for income tax purposes) who receives a gift or bequest from a foreign person or a distribution from a foreign trust to report such receipt or transaction by filing Form 3520,

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

However, § 28.2801-6(c)(1) and (2) of the proposed regulations provides that, for purposes of the information reporting provisions of sections 6039F and 6048(c),

U.S. person

is defined to include a U.S. citizen or resident, as that term is defined in proposed § 28.2801-2(b), which adopts the gift and estate tax meaning of the term resident under subtitle B, based on domicile.

Several comments request that the final regulations revise the rule in § 28.2801-6(c) of the proposed regulations to reflect that the reporting requirements under sections 6039F and 6048(c) apply to U.S. residents as the term

U.S. person

is defined for income tax purposes. See section 7701(a)(30) and (b)(1)(A). Under this suggestion, the scope of the reporting requirements on Form 3520 would not be expanded to individuals who are U.S. residents for transfer tax purposes but not for income tax purposes. The comments point out that these taxpayers who are U.S. residents only for transfer tax purposes

are the same persons (other than an electing foreign trust) who will be required to file a Form 708 to report the receipt of a covered gift or covered bequest and thus that the proposed expanded scope of the reporting requirements would be duplicative and would serve no tax enforcement purpose. Consequently, the comments contend that the expanded scope of the reporting requirements would serve only to add complexity and burden to information reporting and to increase the risk of the imposition of penalties.

The Treasury Department and the IRS agree that the definition of U.S. person under section 7701(b)(1)(A) is the appropriate definition for purposes of the information reporting requirements under sections 6039F and 6048. Accordingly, the final regulations provide that the information reporting requirements in sections 6039F and 6048(c) apply only to U.S. persons within the meaning of section 7701(a)(30), and thus only apply to recipients of a covered gift or covered bequest who are U.S. persons for income tax purposes. See § 28.2801-6(c)(1) and (2) of the final regulations. This will include all U.S. citizens and domestic trusts receiving covered gifts and covered bequests, as well as U.S. residents as defined for income tax purposes.

11. Determining Responsibility Under Section 2801

The proposed regulations confirm, in § 28.2801-7(a), that it is the responsibility of the U.S. recipient of a gift or bequest from an expatriate, or a distribution from a trust funded at least in part by an expatriate, to determine whether the expatriate is a covered expatriate and whether the gift or bequest is a covered gift or covered bequest. Proposed § 28.2801-7(b)(1) further provides that, in some circumstances to be described in IRB guidance, the IRS may be permitted to disclose return or return information of the donor or decedent expatriate upon the request of a U.S. citizen or resident in receipt of a gift or bequest from such expatriate. In the event of a living donor expatriate, § 28.2801-7(b)(2) of the proposed regulations creates a rebuttable presumption that the donor is a covered expatriate and that the gift is a covered gift if donor does not authorize the disclosure of the donor's relevant return information.

The proposed rule further provides that a recipient may file a protective Form 708 in accordance with procedures set forth in proposed § 28.6011-1(b), to start the running of the period of limitations for the assessment of any section 2801 tax in the event the recipient reasonably concludes that a gift or bequest is not subject to section 2801.

Several comments request guidance and suggest additional rules as to how a U.S. citizen or resident receiving a gift or bequest may avoid penalties and interest for nonpayment or underpayment of the section 2801 tax if the U.S. recipient incorrectly concludes that section 2801 does not apply. The comments ask how a recipient can satisfy its responsibility to ascertain whether the donor or decedent is a covered expatriate, and how to determine whether the gift or bequest is a covered gift or covered bequest. These comments note that the ability to comply is based on access to a donor's private information that the IRS may not be able to provide. These comments predict that the U.S. recipient of a gift or bequest may encounter significant impediments to gathering the necessary information about the donor or decedent. Thus, the comments request that the rebuttable presumption be eliminated, and that the final regulations provide a safe harbor for making covered expatriate determinations based on facts reasonably available to the recipient.

Comments also request that the final regulations elaborate on the acceptable criteria necessary to satisfy the due diligence requirement for filing a protective Form 708 as set forth in § 28.6011-1(b) of the proposed regulations, to start the running of the period of limitations for the assessment of any section 2801 tax, and to avoid penalties. For instance, some comments suggest that reliance on a certification as to covered expatriate status provided by the living donor or the decedent's estate should be sufficient, unless the U.S. recipient has reason to believe the certification is false. Alternatively, the comment suggests that the expatriate be required, on the Form 8854,

Initial and Annual Expatriation Statement,

filed at the time of expatriating, to authorize the IRS to disclose the relevant return information to each U.S. recipient of a gift from that expatriate. Another comment suggests that requesting certain information from the IRS and carrying out a background check on the donor or decedent should be sufficient for these purposes. Comments also suggest the creation of a searchable database of Forms 8854 that would allow the identification of covered expatriates. One comment suggests requiring the IRS to have a good faith basis for alleging that a donor or decedent is a covered expatriate before assessing a section 2801 tax because, otherwise, the IRS would be forcing recipients to prove a negative even where the IRS may have actual evidence to the contrary. Finally, another comment suggests creating a presumption in the final regulations that a donor is not a covered expatriate if the donor files a Form 709,

United States Gift (and Generation-Skipping Transfer) Tax Return

and provides a copy to the U.S. recipient.

The Treasury Department and the IRS carefully considered during the development and drafting of the proposed regulations the potential difficulty a U.S. recipient may face in obtaining the information necessary to determine whether it has a tax obligation under section 2801. For the reasons stated below, the final regulations do not adopt the commenters' suggestions.

Regarding a certification as to covered expatriate status or a background check to establish that a gift or bequest is not a covered gift or covered bequest from a covered expatriate, requesting information from the donor or decedent's estate and the IRS is the most tenable option because of the factual nature of the determination and jurisdictional limitations with respect to the expatriate. For instance, although a certification from the donor or the decedent's estate provides some evidence of covered expatriate status, the particular facts in a given situation may cause the IRS to require corroborating information (for example, in the event of conflicting information discovered during examination or otherwise). As to the relevance of the filing of a Form 709 by an expatriate, the filing of a Form 709 does not suggest a determination as to covered expatriate status, although a timely filing supports a determination that a gift or bequest is excepted from the definition of a covered gift or covered bequest.

A comment suggests eliminating the rebuttable presumption in proposed § 28.2801-7(b)(2) based on the contention that neither section 2801 nor the general rule-making authority provided in section 7805(a) authorize creating a rule that requires U.S. recipients of gifts and bequests to demand proof of a living donor's status. The Treasury Department and the IRS do not agree that providing a rebuttable presumption that, in certain circumstances, a living donor is a covered expatriate is beyond its regulatory authority for implementing the Congressional mandate of section 2801. A rebuttable presumption is not a mandate or final determination. Rather, a rebuttable presumption provides an opportunity and an incentive for the

recipient to overcome the presumption through the exercise of due diligence. It is the recipient's responsibility to determine whether section 2801 tax liability applies to a transfer received from a donor or decedent's estate. In the absence of evidence sufficient to allow the recipient to determine whether the donor is a covered expatriate, if the living donor refuses to cooperate or otherwise fails to authorize the disclosure of relevant return information, the presumption is reasonable.

Finally, additional comments suggest that the IRS take action beyond issuing final regulations to make the information about the covered expatriate status of the donor or decedent more readily accessible. Specifically, comments suggest creating and administering a searchable and secure registry or database of expatriates and covered expatriates; modifying certain IRS forms (for example, Forms 8821,

Tax Information Authorization,

or Form W-8 BEN,

Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

), or creating new ones, to ensure only limited information relevant to the covered expatriate status of the donor or decedent is provided to the recipient. This would require the reconsideration of the retention policies and procedures of certain tax forms because section 2801 could require access to decades-old tax information.

The Treasury Department and the IRS understand the potential difficulties underlying the commenters' concerns. However, the resolution of these concerns also must take into account both the IRS's resource constraints and disclosure and privacy concerns. Additional procedures, as requested by the commenters, may be forthcoming in guidance published in the Internal Revenue Bulletin.

12. Recordkeeping Requirements

Section 28.6001-1 of the proposed regulations provides that all documents and vouchers used in preparing the Form 708 must be retained by the person required to file the return so as to be available for inspection whenever required. A comment suggests that this retention standard be clarified, because it is open-ended and appears not to bear any relation to the three-to-six-year period of limitations for assessment for such return prescribed in section 6501.

The retention standard in § 28.6001-1(a) of the proposed regulations is the same as the retention standard for both the estate and gift taxes under §§ 20.6001-1(a) and 25.6001-1(a), respectively. This expansive standard is appropriate for estate and gift tax, because the records associated with estate and gift tax returns can be relevant many years later in the context of a GST tax return, a surviving spouse's gift and/or estate tax return, and income tax basis, well after the period of limitations for assessment under section 6501 has expired for such returns. Additionally, because the gift tax and estate tax computations are cumulative in nature, the records associated with gift tax returns filed during life may be relevant many years later in the preparation and filing of the estate tax return.

The section 2801 tax is less likely than the estate and gift taxes to have application for as long a period of time after the period of limitations for assessment has expired. Therefore, upon consideration of the comments, the Treasury Department and the IRS agree that a less expansive retention standard is appropriate for the section 2801 tax. Accordingly, the final regulations adopt the more limited income tax retention standard under § 1.6001-1(e), which requires documentation be retained so long as the contents thereof may become material in the administration of any internal revenue law.

13. Miscellaneous

A. Power of Appointment Over Property Not in Trust

Various sections of the proposed regulations refer to a power of appointment over property that is not in trust. Multiple comments request an example, explaining that a power of appointment typically is over trust property. For purposes of the Code, the classification of an arrangement as a trust is determined under § 301.7701-4 rather than under local law. Consequently, an arrangement that is classified as a trust under local law may not be a trust under the Code. Such an arrangement may include a grant of a power to an individual that is in substance a power of appointment but, because the arrangement does not constitute a trust under the Code, the power of appointment is over property that is not in trust. This is merely one example but, given the variety of arrangements worldwide that are available to a covered expatriate seeking to transfer property by gift or by reason of death, there may be several others. Because the determination of whether a certain arrangement is a power of appointment not in trust is fact specific, the final regulations do not include specific examples of a power of appointment over property that is not in trust.

B. Estate and Gift Tax Treaties

The proposed regulations do not address the effect of estate and gift tax treaties on the section 2801 tax, except to explicitly state in several examples that the covered expatriate in the example resides in a non-treaty country. Several comments request guidance on the application of estate and gift tax treaties to section 2801 when a gift or bequest is made by a covered expatriate domiciled in a treaty country. One comment requests that the final regulations provide that section 2801 does not apply to property transfers by covered expatriates domiciled in a treaty country.

Neither the statutory language nor the legislative history of section 2801 provides any indication of Congressional intent concerning the effect of existing estate and gift treaties on the application of section 2801. In the absence of specific language overriding treaties, statutes generally are to work in harmony with existing treaties but, with the exception of certain treaty obligations in effect on August 16, 1954, neither the treaty nor the statute has preferential status. See section 7852(d). The U.S. currently has estate and gift tax treaties with Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom and estate tax-only treaties with Finland, Greece, Ireland, Italy, the Netherlands, South Africa, and Switzerland. There are also estate tax provisions in the U.S.-Canada income tax treaty. The effect of a particular treaty on the application of section 2801 to a gift or bequest by a covered expatriate in a treaty country must be evaluated on a case-by-case basis when a particular transfer falls within the reach of both section 2801 and an estate or gift tax treaty. Any unresolved issue at that time as to the effect of a particular treaty may be elevated under the competent authority procedures. In view of the above, the final regulations do not include guidance on the effect of existing gift and estate tax treaties on the application of section 2801.

C. Correction in § 28.2801-6(b)

Section 28.2801-6(b) of the proposed regulations clarifies the applicability of the GST tax to certain section 2801 transfers. A comment points out that the last sentence of § 28.2801-6(b) of the proposed regulations mistakenly refers to the failure to timely file and pay the section 2801 tax and suggests this language be replaced with a reference to the failure to timely file and pay the estate or gift tax under chapters 11 and 12, respectively. In the final regulations,

the last sentence of § 28.2801-6(b) is revised to refer to the failure to timely file an estate or gift tax return. See § 28.2801-3(c)(1) and (2) of the final regulations and part 3.A.i. of the

Summary of Comments and Explanation of Revisions

section of this preamble (discussing the accepted recommendation of commenters to remove the timely paid requirement from these final regulations).

Effect on Other Documents

Announcement 2009-57, 2009-29 I.R.B. 158, is obsolete as of January 14, 2025.

Special Analyses

1. Regulatory Planning and Review

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

2. Paperwork Reduction Act

The collection of information contained in these final regulations under section 2801 is reported on Form 708,

United States Return of Tax for Gifts and Bequests Received from Covered Expatriates,

and has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2309. The collection of information in these final regulations is in §§ 28.2801-4(e), 28.2801-5(d), 28.6001-1, and 28.6011-1.

The collection of information in § 28.2801-4(e) is required to enable the IRS to verify that the U.S. citizens or residents who receive covered gifts and covered bequests are entitled to reduce the section 2801 tax by certain foreign taxes paid with respect to such gifts and bequests and, if so, the amount of the reduction. The collection of information is required to obtain a benefit. The likely respondents are individuals, domestic trusts, and electing foreign trusts.

The collection of information in § 28.2801-5(d) is required to notify the IRS and certain U.S. citizen or resident beneficiaries of a foreign trust that the foreign trust is electing to be treated as a domestic trust for purposes of section 2801. It also is required for the IRS to verify the proper amount of the section 2801 tax due. This alerts the IRS and the U.S. citizen or resident beneficiaries that the foreign trust will be liable for payment of the section 2801 tax while the election is in effect. This collection of information is necessary for the proper performance of IRS functions in the collection of the section 2801 tax. This collection of information is required to obtain a benefit. The likely respondents are foreign trusts.

The collection of information in § 28.6001-1 is required for the IRS to verify the books and records pertaining to covered gifts and covered bequests and for the proper performance of IRS functions in the collection of the section 2801 tax. It also is required to verify the receipt of covered gifts and covered bequests by U.S. citizens or residents and the value of such gifts and bequests. This collection of information is mandatory. The likely respondents are individuals and trusts.

The collection of information in § 28.6011-1 is required for the IRS to verify the receipt of covered gifts and covered bequests and other information relevant to the tax imposed under section 2801. This collection of information is necessary for the proper performance of IRS functions in the collection of the section 2801 tax. This collection of information is mandatory. The likely respondents are individuals and trusts.

Estimated total annual reporting burden:

6,000 hours.

Estimated average annual burden hours per respondent:

1 hour to prepare and attach documentation to Form 708 for the reduction of the section 2801 tax for foreign taxes paid; 2 hours to elect to treat a foreign trust as a domestic trust and notify the U.S. citizen or resident beneficiaries; 1 hour to notify the U.S. citizen or resident beneficiaries that the election is terminated; and 2 hours to prepare taxpayer records and the Form 708 to report the section 2801 tax.

Estimated number of respondents:

1,000.

Estimated annual frequency of responses:

Annually or less.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number.

Books and records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

3. Regulatory Flexibility Act

It is hereby certified that the collection of information contained in these regulations will not have a significant economic impact on a substantial number of small entities. These regulations do not affect small entities because they apply to individuals and certain trusts. Thus, the number of affected small entities is not substantial.

4. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The final regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

5. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive Order.

6. Congressional Review Act

Pursuant to the Congressional Review Act (5 U.S.C. 801

et seq.

), the Office of Information and Regulatory Affairs designated this rule as not a major rule, as defined by 5 U.S.C. 804(2).

Availability of Documents

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at

https://www.irs.gov.

Drafting Information

The principal authors of these regulations are Mayer R. Samuels, Daniel J. Gespass, and S. Eva Wolf of the Office of the Associate Chief Counsel (Passthroughs and Special Industries).

However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 28

Taxes, Expatriate gifts and bequests, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, the Treasury Department and the IRS amend 26 CFR subchapter B as follows:

Paragraph 1.

Part 28 is added to read as follows:

PART 28—IMPOSITION OF TAX ON GIFTS AND BEQUESTS FROM COVERED EXPATRIATES

Authority:

26 U.S.C. 7805.

Section 28.2801-0 through 28.2801-7 also issued under 26 U.S.C. 2801.

Section 28.6001-1 also issued under 26 U.S.C. 6001.

Section 28.6011(a)-1 also issued under 26 U.S.C. 6011 and 6011(a).

Section 28.6060-1 also issued under 26 U.S.C. 6060 and 6060(a).

Section 28.6071(a)-1 also issued under 26 U.S.C. 6071 and 6071(a).

Section 28.6081-1 also issued under 26 U.S.C. 6081 and 6081(a).

Section 28.6091-1 also issued under 26 U.S.C. 6091 and 6091(a).

Section 28.6101-1 also issued under 26 U.S.C. 6101.

Section 28.6107-1 also issued under 26 U.S.C. 6107 and 6107(c).

Section 28.6109-1 also issued under 26 U.S.C. 6109 and 6109(a).

Section 28.6151-1 also issued under 26 U.S.C. 6151.

Section 28.6694-1 through 28.6694-4 also issued under 26 U.S.C. 6694.

Section 28.6695-1 also issued under 26 U.S.C. 6695.

Section 28.6696-1 also issued under 26 U.S.C. 6696 and 6696(c).

Section 28.7701-1 also issued under 26 U.S.C. 7701.

Sec.

28.2801-0

Table of contents.

28.2801-1

Tax on certain gifts and bequests from covered expatriates.

28.2801-2

Definitions.

28.2801-3

Rules and exceptions applicable to covered gifts and covered bequests.

28.2801-4

Liability for and payment of tax on covered gifts and covered bequests; computation of tax.

28.2801-5

Foreign trusts.

28.2801-6

Special rules and cross-references.

28.2801-7

Determining responsibility under section 2801.

28.6001-1

Records required to be kept.

28.6011-1

Returns.

28.6060-1

Reporting requirements for tax return preparers.

28.6071-1

Time for filing returns.

28.6081-1

Extension of time for filing returns reporting gifts and bequests from covered expatriates.

28.6091-1

Place for filing returns.

28.6101-1

Period covered by returns.

28.6107-1

Tax return preparer must furnish copy of return or claim for refund to taxpayer and must retain a copy or record.

28.6109-1

Tax return preparers furnishing identifying numbers for returns or claims for refund.

28.6151-1

Time and place for paying tax shown on returns.

28.6694-1

Section 6694 penalties applicable to return preparer.

28.6694-2

Penalties for understatement due to an unreasonable position.

28.6694-3

Penalty for understatement due to willful, reckless, or intentional conduct.

28.6694-4

Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.

28.6695-1

Other assessable penalties with respect to the preparation of tax returns for other persons.

28.6696-1

Claims for credit or refund by tax return preparers and appraisers.

28.7701-1

Tax return preparer.

PART 28—IMPOSITION OF TAX ON GIFTS AND BEQUESTS FROM COVERED EXPATRIATES

§ 28.2801-0

Table of contents.

This section lists the headings in §§ 28.2801-1 through 28.2801-7.

§ 28.2801-1 Tax on certain gifts and bequests from covered expatriates.

(a) In general.

(b) Applicability date.

§ 28.2801-2 Definitions.

(a) Overview.

(b) U.S. citizen or resident.

(c) Domestic trust.

(d) Foreign trust.

(1) In general.

(2) Electing foreign trust.

(3) Non-electing foreign trust.

(e) U.S. recipient.

(f) Covered bequest.

(g) Covered gift.

(h) Expatriate and covered expatriate.

(i) Indirect acquisition of property.

(j) Power of appointment.

(k) Section 2801 tax.

(l) Section 2801(c) amount.

(m) Statutory references.

(1) Code.

(2) Subtitle B.

(n) Applicability date.

§ 28.2801-3 Rules and exceptions applicable to covered gifts and covered bequests.

(a) Covered gift.

(b) Covered bequest.

(c) Exceptions to covered gift and covered bequest.

(1) Reported taxable gifts.

(2) Property reported as subject to estate tax.

(3) Covered bequest previously subject to section 2801 tax as a covered gift.

(4) Transfers to charity.

(5) Transfers to spouse.

(6) Qualified disclaimers.

(d) Covered gifts and covered bequests made in trust.

(e) Powers of appointment.

(1) Covered expatriate as holder of power.

(2) Covered expatriate as grantor of power.

(f) Examples.

(g) Applicability date.

§ 28.2801-4 Liability for and payment of tax on covered gifts and covered bequests; computation of tax.

(a) Liability for tax.

(1) U.S. citizen or resident.

(2) Domestic trust.

(i) In general.

(ii) Generation-skipping transfer tax.

(iii) [Reserved].

(iv) Migrated foreign trust.

(3) Foreign trust.

(i) In general.

(ii) Income tax deduction.

(b) Computation of tax.

(1) In general.

(2) Net covered gifts and covered bequests.

(c) Value of covered gift or covered bequest.

(d) Date of receipt.

(1) In general.

(2) Covered gift.

(3) Covered bequest.

(4) Domestic trusts and electing foreign trusts.

(5) Non-electing foreign trusts.

(6) Powers of appointment.

(i) Covered expatriate as holder of power.

(ii) Covered expatriate as grantor of power.

(7) Indirect receipts.

(8) Future interest in property not in trust.

(i) Date of receipt.

(ii) Date-of-receipt election for future interest in property not in trust.

(e) Reduction of tax for foreign gift or estate tax paid.

(1) In general.

(2) Protective claim for refund.

(f) Examples.

(g) Applicability date.

§ 28.2801-5 Foreign trusts.

(a) In general.

(b) Distribution defined.

(c) Amount of distribution attributable to covered gift or covered bequest.

(1) Section 2801 ratio.

(i) In general.

(ii) Computation.

(2) Effect of reported transfer and tax payment.

(3) Inadequate information to calculate section 2801 ratio.

(d) Foreign trust treated as domestic trust.

(1) Election required.

(2) Effect of election.

(3) Time and manner of making the election.

(i) When to make the election.

(ii) Requirements for a valid election.

(iii) Section 2801 tax payable with the election.

(iv) Designation of U.S. agent.

(A) In general.

(B) Role of designated agent.

(C) Effect of appointment of agent.

(4) Filing requirement.

(5) Duration of status as electing foreign trust.

(i) In general.

(ii) Termination.

(A) Manner of termination.

(B) Effective date of termination.

(C) Notice requirements upon termination.

(iii) Subsequent elections.

(6) Dispute as to amount of section 2801 tax owed by electing foreign trust.

(i) Procedure.

(ii) Effect of compliance.

(iii) Effect of failing to comply (imperfect election).

(A) In general.

(B) Notice to permissible distributees.

(C) Reasonable cause.

(D) Interim period.

(7) No overpayment caused solely by virtue of defect in election.

(e) Examples.

(f) Applicability date.

§ 28.2801-6 Special rules and cross-references.

(a) Determination of basis.

(b) Generation-skipping transfer tax.

(c) Information returns.

(1) Gifts and bequests.

(2) Foreign trust distributions.

(3) Penalties and use of information.

(d) Application of penalties.

(1) Accuracy-related penalties on underpayments.

(2) Penalty for substantial and gross valuation misstatements attributable to incorrect appraisals.

(3) Penalty for failure to file a return and to pay tax.

(e) Applicability date.

§ 28.2801-7 Determining responsibility under section 2801.

(a) Responsibility of U.S. citizens or residents receiving gifts or bequests from expatriates.

(b) Disclosure of return and return information.

(1) In general.

(2) Rebuttable presumption.

(c) Protective return.

(d) Applicability date.

§ 28.2801-1

Tax on certain gifts and bequests from covered expatriates.

(a)

In general.

Section 2801 of the Internal Revenue Code (Code) imposes a tax (section 2801 tax) on covered gifts and covered bequests, including distributions attributable to covered gifts and covered bequests from non-electing foreign trusts, received by a U.S. citizen or resident from a covered expatriate during a calendar year. Domestic trusts, as well as electing foreign trusts, are subject to tax under section 2801 in the same manner as if the trusts were U.S. citizens.

See

section 2801(e)(4)(A)(i) and (B)(iii). Accordingly, the section 2801 tax is paid by the U.S. citizen or resident, domestic trust, or electing foreign trust that receives the covered gift or covered bequest, including distributions attributable to covered gifts and covered bequests from non-electing foreign trusts. For purposes of the regulations in this part 28 (26 CFR part 28), references to U.S. citizens are considered to include domestic trusts and electing foreign trusts.

(b)

Applicability date.

This section applies to covered gifts or covered bequests received on or after January 1, 2025.

§ 28.2801-2

Definitions.

(a)

Overview.

This section provides definitions of terms applicable solely for purposes of section 2801 of the Code and the regulations in this part 28.

(b)

U.S. citizen or resident.

A

U.S. citizen or resident

is an individual who is a citizen or resident of the United States for purposes of chapter 11 or 12 of subtitle B, as the case may be, at the time of receipt of the covered gift or covered bequest. Furthermore, references to a U.S. citizen also include a domestic trust, as well as an electing foreign trust. See § 28.2801-1(a).

(c)

Domestic trust.

The term

domestic trust

means a trust defined in section 7701(a)(30)(E) of the Code. References to a domestic trust include an electing foreign trust.

(d)

Foreign trust—

(1)

In general.

The term

foreign trust

means a trust defined in section 7701(a)(31)(B).

(2)

Electing foreign trust.

The term

electing foreign trust

means a foreign trust that has in effect a valid election to be treated as a domestic trust for purposes of section 2801.

See

§ 28.2801-5(d).

(3)

Non-electing foreign trust.

The term

non-electing foreign trust

means any foreign trust other than an electing foreign trust described in paragraph (d)(2) of this section.

(e)

U.S. recipient.

The term

U.S. recipient

means a U.S. citizen or resident, a domestic trust, or an electing foreign trust that receives a covered gift or covered bequest, whether directly or indirectly, during the calendar year. The term U.S. recipient includes a U.S. citizen or resident receiving a distribution from a non-electing foreign trust if the distribution is attributable (in whole or in part) to one or more covered gifts or covered bequests received by the non-electing foreign trust.

See

§ 28.2801-5(c) to determine the amount of a distribution attributable to covered gifts and covered bequests. This term also includes the U.S. citizen or resident shareholders, partners, or other interest-holders, as the case may be (if any), of a business entity that receives a covered gift or covered bequest.

(f)

Covered bequest.

The term

covered bequest

means any property acquired by a recipient on or after June 17, 2008, directly or indirectly by reason of the death of a covered expatriate, regardless of the situs of the property and of whether such property was acquired by the covered expatriate before or after expatriation from the United States, but only to the extent the property would have been included in the covered expatriate's gross estate for Federal estate tax purposes if the covered expatriate had been a U.S. citizen immediately before death. See paragraph (i) of this section for guidance in determining when property is acquired indirectly for purposes of this paragraph (f). The term

covered bequest

also includes any other property that would have been included in the covered expatriate's gross estate for Federal estate tax purposes (for example, under section 2035 of the Code) if the covered expatriate had been a U.S. citizen immediately before death, as well as distributions made by reason of the death of a covered expatriate from a non-electing foreign trust to the extent the distributions are attributable to covered gifts and covered bequests made to the non-electing foreign trust on or after June 17, 2008.

See

§ 28.2801-3 for additional rules and exceptions applicable to the term

covered bequest.

(g)

Covered gift.

The term

covered gift

means any property acquired by a recipient on or after June 17, 2008, by gift directly or indirectly from an individual who is a covered expatriate at the time the property is received by the recipient, regardless of the situs of such property and of whether such property was acquired by the covered expatriate before or after expatriation from the United States. See paragraph (i) of this section for guidance in determining when property is acquired indirectly for purposes of this paragraph (g). The term

covered gift

also includes distributions made, other than by reason of the death of a covered expatriate, from a non-electing foreign trust to the extent the distributions are attributable to covered gifts and covered bequests made to the non-electing foreign trust on or after June 17, 2008.

See

§ 28.2801-3 for additional rules and exceptions applicable to the term covered gift.

(h)

Expatriate and covered expatriate.

The term

expatriate

has the same meaning for purposes of section 2801 as that term has in section 877A(g)(2) of the Code. The term

covered expatriate

has the same meaning for purposes of section 2801 as that term has in section 877A(g)(1). The determination of whether an individual is a covered expatriate is made as of the expatriation date as defined in section 877A(g)(3), and if an expatriate meets the definition of a covered expatriate, the expatriate is a covered expatriate for purposes of section 2801 at all times after the

expatriation date. However, an expatriate is not treated as a covered expatriate for purposes of section 2801 during any period beginning after the expatriation date during which such individual is subject to United States estate or gift tax (chapter 11 or chapter 12 of subtitle B) as a U.S. citizen or resident.

See

section 877A(g)(1)(C). An individual's status as a covered expatriate will be determined as of the date of the most recent expatriation, if there has been more than one.

(i)

Indirect acquisition of property.

For purposes of paragraphs (f) and (g) of this section, an indirect acquisition of property means the receipt of an interest in property, gratuitously passed from or conferred by the covered expatriate, by or on behalf of the recipient through another person, or by a trust or entity in which the recipient has an interest, regardless of the means or device employed. Such an indirect acquisition includes but is not limited to—

(1) Property acquired by a recipient through a transfer to a corporation or other entity other than a trust or estate, to the extent of the ownership interest of the recipient in that corporation or other entity;

(2) Money paid or property distributed by a covered expatriate, or distributed from a non-electing foreign trust that received a covered gift or covered bequest, in satisfaction of a debt or liability of the recipient, regardless of the payee of that payment or distribution;

(3) Property acquired by or on behalf of a recipient pursuant to the exercise, release, or lapse (without regard to the exception in section 2041(b)(2) or 2514(e) of the Code) of a non-covered expatriate's power of appointment granted by a covered expatriate over property not in trust, unless the property previously was subjected to section 2801 tax upon the grant of the power or the covered e

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