This GMS Flash Alert provides an overview of the finalized covered expatriate gift regulations issued on January 10, 2025, and published in the Federal Register on January 14, 2025.1 (For prior coverage, see GMS Flash Alert 2015-121 and GMS Flash Alert 2025-010.)
WHY THIS MATTERS
Global mobility programs with assignees inbound to or outbound from the United States may be familiar with the U.S. expatriation tax regime, under which certain individuals who relinquish U.S. citizenship or cease to be lawful permanent residents (i.e., green card holders) of the United States are considered “covered expatriates,” and subject to a mark-to-market tax on the deemed sale of their property.
In addition to this mark-to-market tax, gifts and bequests of a covered expatriate are subject to a special tax. Unlike the normal transfer tax rules, which impose tax on the donor or decedent, this special tax (the “section 2801 tax”)2 is imposed on the gift or bequest recipient. These final regulations provide needed guidance on the application of this tax, as well as guidance on the method of reporting and paying the tax.
Background
The final regulations provide detailed guidance on the application, reporting, and payment of the section 2801 tax on U.S. citizens, residents, and certain trusts that receive gifts or bequests from covered expatriates. The final regulations generally adopt proposed regulations issued in September 2015. Some portions of the final regulations are effective as of January 1, 2025, while other portions are effective as of January 14, 2025. The final regulations apply to covered gifts and bequests received on or after January 1, 2025.
The section 2801 tax applies to any property transferred to a U.S. citizen or resident that qualifies as a covered gift or bequest. A covered gift or bequest includes a direct or indirect gift or transfer from a covered expatriate, who is any individual who meets the definition of “covered expatriate” under the section 877A expatriate tax regime.
KPMG INSIGHTS
The definition of “U.S. resident” recipient under section 2801 is based on the domicile status of the individual for transfer tax purposes, as opposed to the income tax definition determined by either the substantial presence test or lawful permanent residence test. The U.S. Treasury and Internal Revenue Service (IRS) declined to adopt the suggestions of some commenters who advocated for adopting the income tax definition, noting the transfer tax definition used in section 2801 “avoids creating an opportunity to circumvent the section 2801 tax” and “is consistent with the concept of neutrality because it eliminates the avoidance of estate and gift tax that otherwise would result from expatriation.”3
Careful planning could provide an opportunity where a non-U.S. citizen is able to relinquish his or her U.S. domicile status (by establishing a new domicile in another country) before receiving an otherwise covered gift or bequest.
Exceptions
The final regulations generally adopt the exceptions provided in the proposed regulations to the definitions of covered gifts and bequests. In particular, exceptions are available for gifts or bequests transferred to an individual’s spouse that qualify for the marital deduction and taxable gifts reported on a timely-filed U.S. gift tax return, as well as property included in the covered expatriate’s timely-filed U.S. estate tax return. However, unlike the proposed regulations, the final regulations do not condition these latter exceptions on the timely payment of the tax.
Application of Section 2801 Tax
The U.S. recipient (either a U.S. citizen or domiciliary) who receives a covered gift or bequest is liable for paying the section 2801 tax. Special rules apply to domestic and foreign trusts that receive covered gifts or bequests. The section 2801 tax is calculated by reducing the total amount of covered gifts and bequests received during the calendar year by the annual gift exclusion limit per-donee (currently $19,000), and then multiplying the net amount by the highest estate or gift tax rate in effect during the same calendar year, currently 40 percent. A credit may be allowed for any estate or gift tax paid to a foreign country on the same transfer of property.
Form 708, United States Return of Tax for Gifts and Bequests from Covered Expatriates
A new form, Form 708, United States Return of Tax for Gifts and Bequests from Covered Expatriates, will be released by the IRS. The form will be used to report and compute any tax under section 2801 relating to covered gifts or bequests received from a covered expatriate.
KPMG INSIGHTS
The proposed regulations provided that Form 708 would be used to report and compute any tax under section 2801 relating to covered gifts or bequests received from a covered expatriate on or after June 17, 2008 (the effective date the enacting legislation).4 However, the final regulations are silent as to whether Form 708 needs to be filed with respect to covered gifts and bequests received between June 17, 2008 and January 1, 2025. This may be clarified in the forthcoming Form 708 Instructions.5
Other Provisions of Note
The final regulations exclude the value of a covered gift that was previously subject to section 2801 tax from the value of the covered bequest of that same property, in order to limit the duplication of liability under section 2801.
Footnotes:
1 Department of the Treasury, Internal Revenue Service, Final Regulations, "Guidance under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests from Covered Expatriates.”
2 Unless otherwise indicated, all references to “section” or “sections” herein are to the Internal Revenue Code of 1986, as amended, or to regulations promulgated thereunder.
3 See Preamble to Department of the Treasury, Internal Revenue Service, Final Regulations, "Guidance under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests from Covered Expatriates."
4 Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act).
5 In IRS Notice 2009-85, the IRS stated:
“Gifts or bequests from a covered expatriate on or after June 17, 2008, are subject to a transfer tax under new section 2801. Separate guidance will be issued for U.S. persons who receive gifts or bequests on or after June 17, 2008, from expatriates who are subject to the rules of this notice. Satisfaction of the reporting and tax obligations for covered gifts or bequests received will be deferred, pending the issuance of guidance. That guidance will provide a reasonable period of time between the issuance of that guidance and the date prescribed for such reporting and tax payments.”
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The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
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