[Federal Register Volume 80, Number 175 (Thursday, September 10, 2015)]
[Proposed Rules]
[Pages 54447-54468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-22574]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 28

[REG-112997-10]
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: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to a tax 
on United States citizens and residents who receive gifts or bequests 
from certain individuals who relinquished United States citizenship or 
ceased to be lawful permanent residents of the United States on or 
after June 17, 2008. These proposed regulations affect taxpayers who 
receive covered gifts or covered bequests on or after the date these 
regulations are published as final regulations in the Federal Register. 
This document also provides notice of a public hearing on these 
proposed regulations.

DATES: Written or electronic comments must be received by December 9, 
2015. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for January 6, 2016, at 10 a.m., must be 
received by December 9, 2015.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-112997-10), Room 5205, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
112997-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC; or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS-REG-112997-10). 
The public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Karlene Lesho or Leslie Finlow at (202) 317-6859; concerning the 
submission of comments, the public hearing, or to be placed on the 
building access list to attend the hearing, Oluwafunmilayo Taylor at 
(202) 317-6901 (not toll-free numbers) or email at 
[email protected].

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, and to Clearance Officer, 
SE:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by November 9, 2015. Comments are 
specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of IRS functions, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection

[[Page 54448]]

techniques or other forms of information technology; and
    Estimates of capital or start-up costs of operation, maintenance, 
and purchase of services to provide information.
    The collections of information in these proposed regulations are in 
Sec. Sec.  28.2801-4(e), 28.2801-5(d), 28.6001-1, and 28.6011-1. The 
collection of information requirement in proposed regulation Sec.  
28.2801-4(e) is required in order for the IRS to verify that the U.S. 
person who received a covered gift or covered bequest is entitled to a 
reduction in the section 2801 tax for certain foreign taxes paid on the 
transfer and, if so, the amount of such reduction. The collection of 
information is mandatory to obtain a benefit. The likely respondents 
are individuals, domestic trusts, and foreign trusts electing to be 
treated as domestic trusts.
    The collection of information in Sec.  28.2801-5(d) is required to 
notify the IRS and the U.S. persons who are beneficiaries of a foreign 
trust that the trust is electing to be treated as a domestic trust for 
purposes of section 2801. It is also required for the IRS to verify the 
proper amount of section 2801 tax due and to notify the beneficiaries 
who are U.S. citizens or residents in the event the election 
terminates. This alerts the IRS and the U.S. citizens and residents who 
are beneficiaries that the trust will be liable for payment of the 
section 2801 tax while the election is in effect, but that the U.S. 
beneficiaries will be liable for the tax if and when the election 
terminates. 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 to obtain a benefit. The 
likely respondents are the trustees of foreign trusts.
    The collection of information in Sec.  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 is also required to verify the 
receipt of covered gifts and covered bequests by U.S. persons and the 
value of such gifts and bequests. This collection of information is 
mandatory. The likely respondents are individuals and trustees of 
trusts.
    The collection of information in Sec.  28.6011-1 is required for 
the IRS to verify the receipt of a covered gift or covered bequest 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 trustees of trusts.
    Estimated total annual reporting burden: 7,000 hours.
    Estimated average annual burden hours per respondent: 1 hour to 
prepare and attach documentation to Form 708, ``U.S. Return of Gifts or 
Bequests from Covered Expatriates,'' for the reduction of tax for 
foreign taxes paid; 2 hours for a trustee of an electing foreign trust 
to make the election and notify the beneficiaries; 1 hour for the 
trustee of the foreign trust to prepare annual certifications; 1 hour 
to notify the U.S. persons who are beneficiaries of the trust 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 assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may 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.

Background

    Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 
2008, Public Law 110-245 (122 Stat. 1624) (the HEART Act), added new 
section 877A to subtitle A of the Internal Revenue Code (Code), and new 
chapter 15 and new section 2801 to subtitle B, effective June 17, 2008. 
Prior to the addition of chapter 15, subtitle B contained chapters 11 
through 14 relating to the estate tax, the gift tax, the generation-
skipping transfer tax, and special valuation rules for purposes of 
subtitle B. New chapter 15 consists solely of section 2801.
    Prior to the enactment of the HEART Act, citizens and long-term 
residents of the United States who expatriated to avoid U.S. taxes were 
subject to an alternative regime of U.S. income, estate, and gift taxes 
under sections 877, 2107, and 2501, respectively, for a period of 10 
years following expatriation. Recognizing that citizens and residents 
of the United States generally are subject to estate tax on their 
world-wide assets at the time of death, Congress determined that it was 
appropriate, in the interests of tax equity, to impose a tax on U.S. 
citizens or residents who receive, from an expatriate, a transfer that 
would otherwise have escaped U.S. estate and/or gift taxes as a 
consequence of expatriation.
    In an explanation of an earlier bill also proposing enactment of 
new chapter 15 and section 2801, the Report of the House Ways and Means 
Committee states that citizens and long-term residents of the United 
States have a right to physically leave the United States and 
relinquish their citizenship or terminate their residency. See H.R. 
Rep. No. 110-431 (2007). The Report states that the Committee believed 
that the Code should not be used to discourage individuals from 
relinquishing citizenship or terminating residency. At the same time, 
however, the Report states that the Code should not reward individuals 
who leave the United States. The Report concludes that an individual's 
decision to relinquish citizenship or terminate long-term residency 
should not affect the total amount of taxes imposed (that is, it should 
be ``tax neutral''). The Report further states that, where 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 
donor's avoided transfer taxes.
    With the enactment of sections 877A and 2801, sections 877 and 2107 
apply only to individuals who relinquished United States citizenship or 
ceased to be lawful permanent residents prior to June 17, 2008. Section 
2501 generally continues to apply to any individual, resident or 
nonresident, including individuals who expatriate, whether or not on or 
after June 17, 2008. Section 2501(a)(3) and (a)(5), however, provides 
special rules for expatriates subject to section 877(b), which are not 
applicable to individuals who expatriate on or after June 17, 2008.
    Section 2801 imposes a tax (section 2801 tax) on covered gifts and 
covered bequests received by a citizen or resident of the United States 
(U.S. citizen or resident) from a covered expatriate. The section 2801 
tax applies with regard to any property transferred to a U.S. citizen 
or resident which qualifies as a covered gift or covered bequest under 
section 2801, regardless of whether the property transferred was 
acquired by the donor or decedent covered expatriate before or after 
expatriation.

[[Page 54449]]

    The value of a covered gift or covered bequest is its fair market 
value at the time the gift or bequest is received by the U.S. citizen 
or resident. A U.S. citizen or resident receiving a covered gift or 
covered bequest (U.S. recipient) is liable for payment of the section 
2801 tax imposed under this chapter. A domestic trust that receives a 
covered gift or covered bequest is treated as a U.S. citizen and 
therefore is liable for payment of the section 2801 tax. A foreign 
trust may elect to be treated as a domestic trust (an electing foreign 
trust) for this purpose; absent this election, the trust's U.S. citizen 
or resident beneficiaries will be taxed as distributions are made from 
the trust (a non-electing foreign trust).
    On July 20, 2009, the Treasury Department and the IRS issued 
Announcement 2009-57, 2009-29 I.R.B. 158. Announcement 2009-57 put 
taxpayers on notice that any covered gift or covered bequest received 
on or after June 17, 2008, is subject to the imposition of the section 
2801 tax. Announcement 2009-57 states that the IRS intends to issue 
guidance under section 2801 and that the due date for reporting, 
filing, and payment of the tax imposed under section 2801 will be 
included in the guidance. The announcement further provides that the 
guidance the IRS intends to issue will provide a reasonable period of 
time between the date of issuance of the guidance and the date 
prescribed for the filing of the return and the payment of the tax.
    On October 15, 2009, the Treasury Department and the IRS released 
Notice 2009-85, 2009-45 I.R.B. 598. Notice 2009-85 generally provides 
guidance for individuals who are subject to section 877A (added to the 
Code together with section 2801). With respect to gifts and bequests, 
section 9 of Notice 2009-85 provides that gifts or bequests from a 
covered expatriate on or after June 17, 2008, are subject to a transfer 
tax under new section 2801. Section 9 of Notice 2009-85 further 
provides that satisfaction of the reporting and tax obligations under 
section 2801 for covered gifts or covered bequests received on or after 
June 17, 2008, is deferred pending the issuance of separate guidance by 
the IRS.

Explanation of Provisions

    The proposed regulations amend title 26 of the Code of Federal 
Regulations by adding part 28 (Imposition of Tax on Gifts and Bequests 
from Covered Expatriates) under new section 2801 of the Code. The 
proposed regulations are divided into seven sections.
    Section 28.2801-1 of the proposed regulations sets forth the 
general rules of liability for the tax imposed by section 2801(a). 
Section 2801 imposes a tax on United States citizens or residents who 
receive, directly or indirectly, covered gifts or covered bequests 
(including distributions from foreign trusts attributable to covered 
gifts and covered bequests) from a covered expatriate. For purposes of 
section 2801, domestic trusts and foreign trusts electing to be treated 
as domestic trusts are treated in the same manner as U.S. citizens.
Definitions
    Section 28.2801-2 of the proposed regulations defines terms for 
purposes of new chapter 15. The proposed regulations define the term 
``citizen or resident of the United States'' as an individual who is a 
citizen or resident of the United States under the estate and gift tax 
rules of chapter 11 and chapter 12, respectively, in subtitle B of the 
Code. Accordingly, whether an individual is a ``resident'' is based on 
domicile in the United States, notwithstanding that section 877A adopts 
the income tax definition of that term. The Treasury Department and the 
IRS believe that, because section 2801 imposes a tax subject to 
subtitle B, the tax definition of resident under subtitle B generally 
should apply for purposes of section 2801. See Sec. Sec.  20.0-1(b)(1) 
and 25.2501-1(b).
    The proposed regulations generally define the term ``covered gift'' 
by reference to the definition of gift for purposes of chapter 12 of 
subtitle B. The proposed regulations define the term ``covered 
bequest'' as any property acquired directly or indirectly because of 
the death of a covered expatriate. Such property generally is 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 or resident at the time of death.
    Section 2801 defines ``covered expatriate'' by reference to the 
section 877A(g)(1) definition of that term. Section 877A(g)(1) 
generally provides that an individual who expatriates on or after June 
17, 2008, is a covered expatriate if, on the expatriation date, (1) the 
individual's average annual net income tax liability is greater than 
$124,000 (indexed for inflation) for the previous five taxable years, 
(2) the individual's net worth is at least $2,000,000 (not indexed), or 
(3) the individual fails to certify under penalty of perjury that he or 
she has complied with all U.S. tax obligations for the five preceding 
taxable years. See section 877A(g)(1); Notice 2009-85, 2009-45 I.R.B. 
598. The proposed regulations provide 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 as a U.S. citizen or resident.
    Additionally, the proposed regulations define for purposes of 
section 2801 the terms ``domestic trust,'' ``foreign trust,'' 
``electing foreign trust,'' ``U.S. recipient,'' ``power of 
appointment,'' and ``indirect acquisition of property.''

Rules and Exceptions Applicable to Covered Gifts and Covered Bequests

    Section 28.2801-3 addresses the rules in section 2801(e) and 
includes rules and several exceptions applicable to the definitions of 
covered gift and covered bequest. Exceptions include taxable gifts 
reported on a covered expatriate's timely filed gift tax return, and 
property included in the covered expatriate's gross estate and reported 
on such expatriate's timely filed estate tax return, provided that the 
gift or estate tax due is timely paid. Qualified disclaimers of 
property made by a covered expatriate are excepted from the definitions 
of a covered gift and covered bequest. In addition, charitable 
donations that would qualify for the estate or gift tax charitable 
deduction are excepted from the terms ``covered gift'' and ``covered 
bequest.''
    Section 28.2801-3(c)(4) provides that a gift or bequest to a 
covered expatriate's U.S. citizen spouse is excepted from the terms 
``covered gift'' and ``covered bequest'' if the gift or bequest, if 
given by a U.S. citizen or resident, would qualify for the gift or 
estate tax marital deduction. In the case of a gift or bequest in 
trust, this means that, to the extent the gift or bequest to the trust 
(or to a separate share of the trust) would qualify for the estate or 
gift tax marital deduction, the gift or bequest is not a covered gift 
or covered bequest. A gift or bequest of a partial or terminable 
interest in property that a covered expatriate makes to his or her 
spouse is excepted from the definitions of a covered gift and covered 
bequest only to the extent that such gift or bequest is qualified 
terminable interest property (QTIP), as defined in section 2523(f) or 
section 2056(b)(7), and a valid QTIP election is made. To the extent a 
covered gift or covered bequest is made to a non-electing foreign trust 
(or to a separate share of such a trust), a distribution from the trust 
(or from the

[[Page 54450]]

separate share of the trust) to the U.S. citizen spouse of the covered 
expatriate who funded the trust (whether in whole or in part) will not 
qualify for the exception. Note that gifts and bequests made by a 
covered expatriate to his or her noncitizen spouse are subject to an 
annual limit under section 2523(i). Furthermore, a bequest from a 
covered expatriate to his or her noncitizen surviving spouse who is a 
U.S. resident is not a covered bequest to the extent the bequest is 
made to a qualified domestic trust (QDOT) that satisfies the 
requirements of section 2056A and the corresponding regulations, and 
for which a valid QDOT election is made.
    Section 28.2801-3(d) provides rules to implement section 2801(e)(4) 
regarding covered gifts and covered bequests made in trust, including 
transfers of property in trust that are subject to a general power of 
appointment granted by the covered expatriate. In identifying the 
recipient of such covered gifts and covered bequests made in trust, the 
proposed regulations do not adopt the gift tax rule of treating the 
trust beneficiary or holder of an immediate right to withdraw the 
property as the recipient of that property. Instead, for purposes of 
section 2801, the proposed regulations treat transfers in trust that 
constitute covered gifts and covered bequests as transfers to the 
trust, to be taxed under the rules in section 2801(e)(4). Specifically, 
the proposed regulations provide that, if a covered expatriate makes a 
transfer in trust and such transfer is a covered gift or covered 
bequest, the transfer is treated as a covered gift or covered bequest 
to the trust, without regard to the beneficial interests in the trust 
or whether any person has a general power of appointment or a power of 
withdrawal over trust property. Under section 2801(e)(4), the transfer 
to the trust will be taxed either to the trust receiving the covered 
gift or covered bequest, in the case of a domestic trust or electing 
foreign trust, or to the U.S. beneficiaries or distributees of a non-
electing foreign trust as trust distributions are made.
    Section 28.2801-3(e) provides two rules addressing covered gifts 
and covered bequests arising from powers of appointment. First, 
consistent with the rules in chapters 11 and 12, the proposed 
regulations confirm that the exercise, release, or lapse of a covered 
expatriate's general power of appointment for the benefit of a U.S. 
citizen or resident is a covered gift or covered bequest. Second, the 
proposed regulations provide that a covered expatriate's grant of a 
general power of appointment over property not held in trust is a 
covered gift or covered bequest to the powerholder as soon as both the 
power is exercisable and the transfer of the property subject to the 
power is irrevocable. See also Sec.  28.2801-4(d)(5)(ii). The preceding 
sentence applies only for purposes of section 2801, and should not be 
interpreted as having any impact on the determination of whether the 
grant of a general power of appointment over property not in trust is a 
completed gift for Federal gift tax purposes, which is a question to be 
resolved under chapter 12 without regard to this provision.

Liability for Section 2801 Tax

    Section 28.2801-4 provides specific rules regarding who is liable 
for the payment of the section 2801 tax. Generally, the U.S. citizen or 
resident who receives the covered gift or covered bequest is liable. 
Similarly, the proposed regulations provide rules explaining that a 
domestic trust that receives a covered gift or covered bequest is 
treated as a U.S. citizen and thus is liable for payment of the section 
2801 tax imposed under this section. An electing foreign trust also is 
treated as a U.S. citizen. See Sec. Sec.  28.2801-2(b) and 28.2801-
5(d). However, a non-electing foreign trust is not liable for the 
section 2801 tax. Instead, a U.S. citizen or resident who receives a 
distribution from a non-electing foreign trust is liable for the 
section 2801 tax on the receipt of that distribution to the extent the 
distribution is attributable to covered gifts or covered bequests to 
that trust. Under section 2801(e)(4)(B)(ii), that U.S. citizen or 
resident may be entitled to a limited deduction under section 164 
against income tax for the section 2801 tax paid on the distribution. 
The deduction is limited to the extent that the section 2801 tax is 
imposed on that portion of the distribution that is reported in the 
gross income of the U.S. citizen or resident. Section 28.2801-
4(a)(3)(ii) of the proposed regulations describes how to compute that 
deduction.
    Section 28.2801-4(a)(2)(ii) of the proposed regulations provides 
that, in the case of a domestic trust or an electing foreign trust, the 
trust's payment of the section 2801 tax for which the trust is liable 
does not result in a taxable distribution under section 2621 of the 
Code to any beneficiary of the trust for generation-skipping transfer 
(GST) tax purposes. This provision is consistent with the GST tax 
consequences of a trust's payment of tax, which differ depending upon 
whether the trust or the trust beneficiary is liable for the tax being 
paid.
    Section 28.2801-4(a)(2)(iv) provides a special rule for certain 
non-electing foreign trusts that become domestic trusts (migrated 
foreign trusts). A migrated foreign trust will be treated solely for 
purposes of section 2801 as a domestic trust for the entire year during 
which the change from foreign trust to domestic trust occurred. The 
trust must file a timely Form 708 for the year in which the trust 
becomes a domestic trust and must report and pay the section 2801 tax 
on all covered gifts and covered bequests received by the trust during 
the year it becomes a domestic trust as well as on the portion of the 
trust's value attributable to any covered gifts and covered bequests 
received by the trust prior to the year in which it becomes a domestic 
trust determined as of December 31 of the year prior to the year it 
becomes a domestic trust.

Charitable Remainder Trusts

    Section 28.2801-4(a)(2)(iii) of the proposed regulations provides 
rules for charitable remainder trusts (CRTs), as defined in section 
664, contributions to which are made by covered expatriates for the 
benefit of one or more charitable organizations described in section 
170(c) and a U.S. citizen or resident other than such a charitable 
organization (non-charitable U.S. citizen or resident). Section 
2801(e)(3) indicates that the value of the charitable organization's 
remainder interest in a CRT is excluded from the definition of a 
covered gift or covered bequest. The value of the interest of the non-
charitable U.S. citizen or resident in such contributions to the CRT is 
a covered gift or covered bequest, unless otherwise excluded.
    Under section 664, a CRT must be a domestic trust. Accordingly, 
when a covered expatriate contributes a covered gift or covered bequest 
to a CRT, the CRT is liable for the payment of the section 2801 tax 
attributable to the value of the non-charitable U.S. person's interest 
in the trust. Section 664(d)(1)(B) and (d)(2)(B) and Sec.  1.664-
3(a)(4) of the Income Tax Regulations provide that no amount other than 
the annuity or unitrust amount may be paid ``to or for the use of any 
person other than an organization described under section 170(c).'' 
This rule has been applied in Revenue Ruling 82-128 (1982-2 CB 71) to 
disqualify a trust as a CRT if the trust could be required to pay 
estate taxes by reason of the applicable state apportionment statute. 
Thus, if the CRT's liability for payment of section 2801 tax 
attributable to the non-charitable recipient's interest in the CRT were 
to be deemed comparable to the CRT's liability for payment of estate 
tax,

[[Page 54451]]

the CRT would not qualify as a CRT under section 664.
    A CRT's liability for payment of the section 2801 tax is 
distinguishable from a CRT's liability for payment of estate tax 
because the section 2801 tax is imposed expressly on the CRT under a 
federal tax statute, section 2801(e)(4)(A). In addition, the section 
2801 tax is imposed on the CRT as a primary obligation of the CRT, 
rather than an obligation imposed on the CRT for the payment of a 
liability belonging to or attributable to another taxpayer. 
Accordingly, a CRT's payment of the section 2801 tax on the portion of 
each transfer to the CRT that is a covered gift or covered bequest is 
not a distribution to or for the use of any person within the meaning 
of section 664(d)(1)(B) and (d)(2)(B), and the CRT's liability for such 
a payment will not cause the trust to be disqualified as a CRT defined 
in section 664. The proposed regulations confirm that the charitable 
remainder interest's share of each transfer to the CRT is not a covered 
gift or covered bequest and provide the method for computing the net 
covered gifts and covered bequests that are taxable to the CRT under 
section 2801.

Computation of Section 2801 Tax

    Section 28.2801-4 of the proposed regulations also provides 
guidance on how to compute the section 2801 tax. Generally, the section 
2801 tax is determined by reducing the total amount of covered gifts 
and covered bequests received during the calendar year by the section 
2801(c) amount, which is the dollar amount of the per-donee exclusion 
in effect under section 2503(b) for that calendar year ($14,000 in 
2015), and then multiplying the net amount by the highest estate or 
gift tax rate in effect during that calendar year. The reference to 
section 2503(b) in section 2801 is included solely to provide a dollar 
amount by which to decrease the U.S. recipient's aggregate covered 
gifts and covered bequests received during that calendar year to 
determine the amount subject to the section 2801 tax; section 2801 does 
not incorporate the substantive rule of section 2503(b) that applies to 
donors of gifts under chapter 12. The resulting tax then is reduced by 
any estate or gift tax paid to a foreign country with regard to those 
transfers. See Sec.  28.2801-4(e).

Value of a Covered Gift or Covered Bequest

    The value of a covered gift or covered bequest is the fair market 
value of the property on the date of its receipt by the U.S. citizen or 
resident. Section 28.2801-4(c) provides that the value of a covered 
gift is determined by applying the federal gift tax valuation 
principles under section 2512 and chapter 14 and the corresponding 
regulations. Similarly, the value of a covered bequest is determined by 
applying the federal estate tax valuation principles under section 2031 
and chapter 14 and the corresponding regulations, but without regard to 
sections 2032 and 2032A.

Date of Receipt

    The proposed regulations identify the date of the receipt of a 
covered gift or covered bequest by a U.S. citizen or resident. See 
Sec.  28.2801-4(d). In general, a covered gift is received on the same 
date it is given for purposes of chapter 12. In general, a covered 
bequest is received on the date the property is distributed from the 
estate or the covered expatriate's revocable trust. However, in the 
case of property that passes by operation of law or beneficiary 
designation upon the covered expatriate's death, the date of receipt is 
the date of death. The proposed regulations provide more detail with 
regard to the determination of the date of receipt of covered gifts and 
covered bequests received from a non-electing foreign trust, those 
received pursuant to powers of appointment, and those received 
indirectly.

Foreign Trusts

    Section 28.2801-5 of the proposed regulations provides guidance on 
the treatment of foreign trusts under section 2801. If a covered gift 
or covered bequest is made to a foreign trust, the section 2801 tax 
applies to any distribution from that trust, whether of income or 
corpus, to a recipient that is a U.S. citizen or resident, unless the 
foreign trust elects to be treated as a domestic trust for purposes of 
section 2801. The proposed regulations define the term ``distribution'' 
broadly to include any direct, indirect, or constructive transfer from 
a foreign trust, including each disbursement from such a trust pursuant 
to the exercise, release, or lapse of a power of appointment.

Distributions From Foreign Trusts

    The section 2801 tax applies only to the portion of a distribution 
from a non-electing foreign trust that is attributable to covered gifts 
and covered bequests contributed to the foreign trust. Section 28.2801-
5(c) of the proposed regulations provides that the amount of the 
distribution attributable to covered gifts and covered bequests is 
determined by multiplying the total distribution by a ratio, as in 
effect at the time of the distribution, that is redetermined after each 
contribution to the trust. The proposed regulations explain how to 
compute that ratio and provide that each distribution from the foreign 
trust is considered to be made proportionally from the covered and non-
covered portions of the trust, without any tracing with regard to 
particular assets. One effect of this rule is that the portion of a 
distribution from a foreign trust that is attributable to covered gifts 
and covered bequests contributed to the foreign trust includes the 
ratable portion of any appreciation and income that has accrued on the 
foreign trust's assets since the contribution of the covered gifts and 
covered bequests to the foreign trust.

Election by Foreign Trust To Be Treated as Domestic Trust

    Section 2801(e)(4)(B)(iii) provides that, solely for purposes of 
section 2801, a foreign trust may elect to be treated as a domestic 
trust. Consequently, the section 2801 tax is imposed on the electing 
foreign trust when it receives covered gifts and covered bequests, 
rather than on the U.S. trust beneficiaries when distributions are made 
from the trust. The election may be made for a calendar year whether or 
not the foreign trust received a covered gift or covered bequest during 
that calendar year. Section 28.2801-5(d)(3) of the proposed regulations 
provides guidance on the time and manner of making the election. In 
order for an election to be valid, the trustee of the foreign trust 
must satisfy several requirements. The trustee must make the election 
on a timely filed Form 708 and, if tax is due, timely pay the section 
2801 tax (as computed under Sec.  28.2801-5(d)(3)(iii)) by the due date 
of the Form 708 for that year and include a computation of how the 
applicable ratio and tax liability were calculated. Further, the 
trustee must designate and authorize a U.S. agent for purposes of 
section 2801, and must agree to file annually a Form 708 either to 
certify that no covered gifts or covered bequests were received by the 
foreign trust during the calendar year, or to report and, if tax is 
due, pay the section 2801 tax on covered gifts and covered bequests 
received by the foreign trust during the calendar year. The trustee 
also must report the portion of the trust attributable to covered gifts 
and covered bequests and all distributions attributable to covered 
gifts and covered bequests made to U.S. recipients in years prior to 
the year of the election. Finally, the trustee must notify the 
permissible U.S. distributees of the trust that the trustee is making 
the election to

[[Page 54452]]

be treated as a domestic trust for purposes of section 2801.
    Under Sec.  28.2801-5(d)(3)(iii), an electing foreign trust that 
received covered gifts or covered bequests in prior calendar years when 
the election to be treated as a domestic trust was not in effect also 
must pay the section 2801 tax liability for all prior calendar years at 
the time the election is made on Form 708. Such liability is based on 
the fair market value of the trust attributable to covered gifts and 
covered bequests as of the last day of the calendar year immediately 
preceding the year for which the election is made, using the ratio 
calculated and then in effect under Sec.  28.2801-5(c). If the trustee 
is unable to determine the portion of the trust attributable to covered 
gifts and covered bequests, then the fair market value of the entire 
trust as of the last day of the calendar year immediately preceding the 
year for which the election is made is subject to the section 2801 tax.
    A valid election to be treated as a domestic trust is effective as 
of the beginning of the calendar year for which the Form 708 is filed. 
The effect of a valid election is that, as of such effective date of 
the election and until the election is terminated, U.S. citizens and 
residents receiving a distribution from that foreign trust will not be 
subject to section 2801 tax on that distribution. Instead, the electing 
foreign trust, like a domestic trust, must report and pay the section 
2801 tax on each covered gift and covered bequest as it is received. 
The election, however, will not change the section 2801 tax liability 
of the U.S. recipients with regard to distributions made from the trust 
prior to the effective date of the election. The election has no impact 
outside of section 2801 on the taxation or reporting of trust 
distributions to U.S. persons.

Dispute as to Amount of Section 2801 Tax Owed by Electing Foreign Trust

    If the IRS asserts that additional section 2801 tax is due from the 
electing foreign trust because, for example, the trust undervalued the 
covered gift or covered bequest or failed to report all covered gifts 
and covered bequests, then the IRS will notify the trustee of the 
foreign trust and the U.S. agent of the additional tax due on the 
asserted additional value or additional covered gifts or covered 
bequests, including any penalties and interest, and request payment by 
the due date identified in the IRS letter. 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, then the election is deemed to be an ``imperfect 
election.'' This means that the election terminates as of the first day 
of the calendar year for which the IRS asserts that the additional 
section 2801 tax is due. In this event, the covered gifts and covered 
bequests for which the return was timely filed, but only to the extent 
of the value on which the section 2801 tax was timely paid, are no 
longer considered to be covered gifts or covered bequests for purposes 
of determining the ratio under Sec.  28.2801-5(c)(1), and distributions 
relating to such amounts will not be taxable to a U.S. citizen or 
resident who receives a trust distribution. However, with regard to the 
asserted additional value or additional covered gifts or covered 
bequests on which the trust did not timely pay the section 2801 tax 
asserted by the IRS, the foreign trust is not an electing foreign trust 
and thus is not the taxpayer responsible for the payment of that 
additional section 2801 tax. Instead, as of the effective date of the 
termination of the trust's election, the usual rule of section 
2801(e)(4)(B) applies with regard to the taxation of distributions from 
foreign trusts. Specifically, the U.S. citizens or residents who 
receive any trust distributions on or after the effective date of the 
terminated election should take into consideration the additional value 
or additional covered gifts or covered bequests asserted by the IRS in 
determining the ratio under Sec.  28.2801-5(c)(1) to be applied to such 
distributions. If the U.S. recipient does not take the additional value 
or additional covered gifts or covered bequests asserted by the IRS 
into consideration in computing that ratio, and the IRS challenges the 
computation of that ratio during its review of the U.S. recipient's 
Form 708 reporting the distribution, the IRS's assertion of the 
additional value or additional covered gifts or covered bequests then 
will become an issue to be resolved as part of the usual examination 
process for the U.S. recipient's Form 708. See Sec.  28.2801-5(e), 
Example 4.

Termination of Status as Electing Foreign Trust

    An electing foreign trust's failure to file the Form 708 on an 
annual basis or to timely pay its section 2801 tax terminates that 
foreign trust's election to be treated as a domestic trust as of the 
first day of the calendar year for which the certification is not 
timely made or for which its section 2801 tax is not timely paid. But 
see Sec.  28.2801-5(d)(6) in the case of a dispute as to the amount of 
section 2801 tax owed by an electing foreign trust. In the event of the 
termination of the election, the trustee should notify the permissible 
U.S. distributees of the effective date of the termination and that 
each U.S. recipient of a distribution made from the foreign trust on or 
after that date is subject to the section 2801 tax to the extent the 
distribution is attributable to covered gifts or covered bequests. 
After an election is terminated, a foreign trust is not prohibited from 
making a new election to be treated as a domestic trust by complying 
with all applicable requirements.

Other Provisions

    Section 28.2801-6(a) addresses how the basis rules under sections 
1014, 1015(a), and 1022 impact the determination of the U.S. 
recipient's basis in the covered gift or covered bequest. Unlike 
section 1015(d), which generally allows gift tax paid on the gift to be 
added to the donee's basis, section 2801 does not provide a similar 
basis adjustment for the payment of the section 2801 tax.
    Section 28.2801-6(b) clarifies the applicability of the GST tax to 
certain section 2801 transfers and cross-references the GST rules.
    Section 28.2801-6(c) discusses the interaction of section 2801 and 
the information reporting provisions of sections 6039F and 6048(c). 
Generally, pursuant to section 6039F and Notice 97-34, 1997-1 CB 422, a 
U.S. person (other than an organization described in section 501(c) and 
exempt from tax under section 501(a)) who receives a gift or bequest 
(including a covered gift or covered bequest) from a foreign person 
(other than through a foreign trust) must report such gift or bequest 
on Part IV of Form 3520, ``Annual Return to Report Transactions with 
Foreign Trusts and Receipt of Certain Foreign Gifts,'' if the total 
value of such gifts and bequests exceeds a certain threshold. A U.S. 
citizen or resident, as defined under Sec.  28.2801-2(b) and thus 
including a domestic trust as defined in Sec.  28.2801-2(c), but not 
including a foreign trust that elects to be treated as a domestic 
trust, is included within the definition of a U.S. person for purposes 
of section 6039F.
    Under section 6039F(c)(1)(A), if a U.S. person fails to furnish all 
of the information regarding the gift or bequest in accordance with the 
requirements of Form 3520, and any related guidance, within the time 
prescribed (in the case of a U.S. citizen or resident, the time for 
filing the Form 1040, including extensions), then, absent reasonable 
cause, a monthly penalty of 5 percent of the amount of the gift or 
bequest (not to exceed 25 percent) may be imposed until such 
information is furnished. In

[[Page 54453]]

addition, the tax consequences of the receipt of such gift or bequest 
may be determined by the Secretary. Taxpayers should be aware that the 
information reported on Part IV of Form 3520, whether or not timely 
filed, may be considered in determining whether a U.S. citizen or 
resident received a covered gift or covered bequest.
    Pursuant to section 6048(c) and Notice 97-34, a U.S. person must 
report any distributions received from a foreign trust on Part III of 
Form 3520. Under section 6677(a), a penalty of the greater of $10,000 
or 35 percent of the gross value of the distribution may be imposed on 
a U.S. person who fails to timely report the distribution. A U.S. 
citizen or resident, as defined in Sec.  28.2801-2(b), but not 
including a foreign trust that elects to be treated as a domestic 
trust, generally would be required to report such a distribution under 
section 6048(c).
    Further, if adequate records are not provided to determine the 
treatment of such a distribution, to the extent provided in Notice 97-
34, as modified by the instructions to Form 3520 and any subsequent 
guidance, such distribution may be treated as an accumulation 
distribution includible in the gross income of the distributee. 
Taxpayers similarly should be aware that information reported on Part 
III of Form 3520 may be used to determine if a U.S. citizen or resident 
received a trust distribution attributable to a covered gift or covered 
bequest.
    Finally, Sec.  28.2801-6(d) addresses the section 6662 accuracy-
related penalties on underpayments of tax, the section 6651 failure to 
file and pay penalties, and the section 6695A penalty on substantial 
and gross valuation misstatements attributable to incorrect appraisals. 
The Treasury Department and the IRS recognize that taxpayers have had 
to defer their tax reporting and payment obligations with respect to 
covered gifts and covered bequests received after the effective date of 
section 2801 (as described in Notice 2009-85). Thus, there may be 
circumstances under which a taxpayer who received a covered gift or 
covered bequest in a year prior to the issuance of final regulations 
may have difficulty in complying with the deferred filing and payment 
requirements with respect to those receipts. A taxpayer who establishes 
that such failure in this regard is due to reasonable cause and not to 
willful neglect will not be subject to the section 6651 penalties for 
failure to file or pay. The determination of whether an exception to 
the other penalties applies will be made on a case-by-case basis.
    Section 28.2801-7 provides guidance on the responsibility of a U.S. 
recipient, as defined in Sec.  28.2801-2(e), to determine if tax under 
section 2801 is due. The Treasury Department and the IRS realize that, 
because the tax imposed by this section is imposed on the U.S. citizen 
or resident receiving a covered gift or covered bequest, rather than on 
the donor or decedent covered expatriate making the gift or bequest, 
U.S. taxpayers may have difficulty determining whether they are liable 
for any tax under section 2801. Nevertheless, the same standard of due 
diligence that applies to any other taxpayer to determine whether the 
taxpayer has a tax liability or a filing requirement also applies to 
U.S. citizens and residents under this section. Accordingly, it is the 
responsibility of each U.S. citizen or resident receiving a gift or 
bequest, whether directly or indirectly, from an expatriate (as defined 
in section 877A(g)(2)) to determine its tax obligations under section 
2801. Thus, the burden is on that U.S. citizen or resident to determine 
whether the expatriate was a covered expatriate (as defined in section 
877A(g)(1)) and, if so, whether the gift or bequest was a covered gift 
or covered bequest.
    The Treasury Department and the IRS understand that a U.S. citizen 
or resident receiving a gift or bequest from an expatriate may be 
unable to obtain directly from the expatriate, the expatriate's 
attorney, the expatriate's executor, or other reliable sources the 
information necessary to make the above determinations. If the IRS 
receives a request from a U.S. citizen or resident who received a gift 
from an expatriate who has consented to the disclosure of certain 
return information to that donee, a gift from an expatriate who is 
deceased at the time of the request, or a bequest from an expatriate, 
the IRS may in certain circumstances disclose to such U.S. citizen or 
resident the return or return information of the donor or decedent 
expatriate that may assist the U.S. citizen or resident in determining 
whether the donor or decedent was a covered expatriate and whether the 
transfer was a covered gift or covered bequest. See section 6103. The 
types of information and requirements and procedures for requesting 
such information will be set forth in guidance published in the 
Internal Revenue Bulletin.
    Although the IRS, if authorized, may disclose returns and return 
information upon request, the IRS will not make the determinations as 
to whether an expatriate from whom a gift or bequest was received was a 
covered expatriate or whether the gift or bequest was a covered gift or 
covered bequest. Furthermore, the U.S. citizen or resident receiving a 
gift or bequest from an expatriate may not rely on any information 
provided by the IRS that the U.S. citizen or resident knows or has 
reason to know is incorrect. These determinations are the 
responsibility of the U.S. citizen or resident.
    The proposed regulations provide that, if a living expatriate donor 
does not authorize the IRS to release to a U.S. citizen or resident the 
donor's relevant return or return information, there is a rebuttable 
presumption that the expatriate donor is a covered expatriate and that 
each gift from that expatriate to a U.S. citizen or resident is a 
covered gift. A taxpayer who reasonably concludes that a gift or 
bequest is not subject to section 2801 and intends to rebut the 
presumption may choose to file a protective return to start the period 
for assessment of any section 2801 tax. See Sec. Sec.  28.2801-7(b)(2), 
28.6011-1(b).

Administrative Regulations

    The proposed regulations also include administrative regulations 
that address filing and payment due dates, returns, extension requests, 
and recordkeeping requirements with respect to the section 2801 tax. 
See Sec. Sec.  28.6001-1, 28.6011-1, 28.6060-1, 28.6071-1, 28.6081-1, 
28.6091-1, 28.6101-1, 28.6107-1, 28.6109-1, 28.6151-1, 28.6694-1, 
28.6694-2, 28.6694-3, 28.6694-4, 28.6695-1, 28.6696-1, 28.7701-1. 
Section 28.6011-1(a) provides the return requirements to report the 
receipt of covered gifts and covered bequests from covered expatriates 
using Form 708.
    The Treasury Department and IRS will permit the filing of a 
protective Form 708, unaccompanied by any payment of tax under section 
2801, in limited circumstances when a U.S. citizen or resident receives 
a gift or bequest from an expatriate and reasonably concludes, after 
exercising due diligence, that the gift or bequest is not a covered 
gift or covered bequest from a covered expatriate. The mere absence of 
information confirming that the expatriate is a covered expatriate or 
that the gift or bequest is a covered gift or covered bequest is not a 
sufficient basis for a protective return. Section 28.6011-1(b)(i) 
provides that filing a protective Form 708, together with the required 
attachments, will start the period for the assessment of any section 
2801 tax.
    The IRS intends to issue Form 708 once these regulations are 
published as final regulations in the Federal Register.

[[Page 54454]]

The IRS will provide the due date for filing Form 708 and for payment 
of the section 2801 tax liability in the final regulations. Consistent 
with Announcement 2009-57, U.S. recipients will be given a reasonable 
period of time after the date the final regulations are published in 
the Federal Register to file the Form 708 and to pay the section 2801 
tax on covered gifts and covered bequests received on or after June 17, 
2008, and before the date of publication of the final regulations in 
the Federal Register. Interest will not accrue on the section 2801 tax 
liability for any taxable years until the due date for payment, as 
specified in the final regulations, has passed.

Effect on Other Documents

    The following publication will be obsolete when regulations 
finalizing these proposed regulations are published in the Federal 
Register:
    Announcement 2009-57, 2009-29 I.R.B. 158.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations. Pursuant to the Regulatory Flexibility Act (5 U.S.C. 
chapter 6), it is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that this regulation does not 
affect small entities because it applies to individuals and certain 
trusts. Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Code, these proposed regulations 
have been submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small 
businesses.

Statement of Availability for Documents Published in the Internal 
Revenue Bulletin

    For copies of recently issued revenue procedures, revenue rulings, 
notices, and other guidance published in the Internal Revenue Bulletin 
or Cumulative Bulletin, please visit the IRS Web site at http://www.irs.gov.

Drafting Information

    The principal authors of these regulations are Karlene Lesho and 
Leslie Finlow, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations. In particular, comments are requested with 
respect to the following issues:
    1. How to calculate the amount of a distribution from a foreign 
trust that is attributable to a covered gift or covered bequest if the 
U.S. recipient does not have adequate books and records or information 
available to make such a determination.
    2. How to minimize the burden associated with a foreign trust 
making an election to be treated as a domestic trust while adequately 
securing the government's interest in collecting the tax from the 
foreign trust.
    3. How contributions to or distributions from a non-electing 
foreign trust to a U.S. citizen spouse could qualify for the marital 
exception in section 2801(e)(3), taking into account the rules 
applicable to domestic trusts and foreign trusts in section 2801(e)(4).
    All comments will be available at www.regulations.gov or upon 
request.
    A public hearing has been scheduled for January 6, 2016, at 10 a.m. 
in the IRS Auditorium Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For more information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic (a signed original and eight (8) 
copies) by December 9, 2015. A period of 10 minutes will be allotted to 
each person for making comments. Copies of the agenda will be available 
free of charge at the meeting.

List of Subjects in 26 CFR Part 28

    Expatriation taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR chapter 1 is proposed to be amended by adding 
part 28 to subchapter B to read as follows:

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

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 Automatic 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.

    Authority:  26 U.S.C. 7805.

    Section 28.6001-1 also issued under 26 U.S.C. 6001(a).
    Section 28.6011(a)-1 also issued under 26 U.S.C. 6011(a).
    Section 28.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 28.6071(a)-1 also issued under 26 U.S.C. 6071(a).

[[Page 54455]]

    Section 28.6081-1 also issued under 26 U.S.C. 6081(a).
    Section 28.6091-1 also issued under 26 U.S.C. 6091.
    Section 28.6101-1 also issued under 26 U.S.C. 6101.
    Section 28.6107-1 also issued under 26 U.S.C. 6107(c).
    Section 28.6109-1 also issued under 26 U.S.C. 6109(a).
    Section 28.6151-1 also issued under 26 U.S.C. 6151.
    Section 28.6695-1 also issued under 26 U.S.C. 6695(b).
    Section 28.6696-1 also issued under 26 U.S.C. 6696(c).


Sec.  28.2801-0  Table of contents.

    This section lists the captions in Sec. Sec.  28.2801-1 through 
28.2801-7.

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

    (a) In general.
    (b) Effective/applicability date.

Sec.  28.2801-2 Definitions.

    (a) Overview.
    (b) Citizen or resident of the United States.
    (c) Domestic trust.
    (d) Foreign trust.
    (1) In general.
    (2) 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) Effective/applicability date.

Sec.  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) Transfers to charity.
    (4) Transfers to spouse.
    (5) 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) Effective/applicability date.

Sec.  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) Charitable remainder trust.
    (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) Foreign trusts.
    (5) Powers of appointment.
    (i) Covered expatriate as holder of power.
    (ii) Covered expatriate as grantor of power.
    (6) Indirect receipts.
    (e) Reduction of tax for foreign estate or gift tax paid.
    (f) Examples.
    (g) Effective/applicability date.

Sec.  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) Annual certification or filing requirement.
    (5) Duration of status as electing foreign trust.
    (i) In general.
    (ii) Termination.
    (iii) Subsequent elections.
    (6) Dispute as to amount of section 2801 tax owed by electing 
foreign trust.
    (i) Procedure.
    (ii) Effect of timely paying the additional section 2801 tax 
amount.
    (iii) Effect of failing to timely pay the additional section 
2801 tax amount (imperfect election).
    (A) In general.
    (B) Notice to permissible beneficiaries.
    (C) Reasonable cause.
    (D) Interim period.
    (7) No overpayment caused solely by virtue of defect in 
election.
    (e) Examples.
    (f) Effective/applicability date.

Sec.  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) Effective/applicability date.

Sec.  28.2801-7 Determining responsibility under section 2801.

    (a) Responsibility of recipients of gifts and bequests from 
expatriates.
    (b) Disclosure of return and return information.
    (1) In general.
    (2) Rebuttable presumption.
    (c) Effective/applicability date.


Sec.  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 from foreign trusts attributable to covered 
gifts or covered bequests, received by a United States citizen or 
resident (U.S. citizen or resident) from a covered expatriate during a 
calendar year. Domestic trusts, as well as foreign trusts electing to 
be treated as domestic trusts for purposes of section 2801, 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 (e)(4)(B)(iii). Accordingly, 
the section 2801 tax is paid by the U.S. citizen or resident, domestic 
trust, or foreign trust electing to be treated as a domestic trust for 
purposes of section 2801 that receives the covered gift or covered 
bequest. For purposes of this part 28, references to a U.S. citizen or 
U.S. citizens are considered to include a domestic trust and a foreign 
trust electing to be treated as a domestic trust for purposes of 
section 2801.
    (b) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  28.2801-2  Definitions.

    (a) Overview. This section provides definitions of terms applicable 
solely for purposes of section 2801 and the corresponding regulations.
    (b) Citizen or resident of the United States. A citizen or resident 
of the United States (U.S. citizen or resident) is an individual who is 
a citizen or resident of the United States under the

[[Page 54456]]

rules applicable for purposes of chapter 11 or 12 of the Code, as the 
case may be, at the time of receipt of the covered gift or covered 
bequest. Furthermore, for purposes of this part 28, references to U.S. 
citizens also include domestic trusts, as well as foreign trusts 
electing to be treated as a domestic trust under Sec.  28.2801-5(d). 
See Sec.  28.2801-1(a)(1).
    (c) Domestic trust. The term domestic trust means a trust defined 
in section 7701(a)(30)(E). For purposes of this part 28, references to 
a domestic trust include a foreign trust that elects under Sec.  
28.2801-5(d) to be treated as a domestic trust solely for purposes of 
section 2801.
    (d) Foreign trust--(1) In general. The term foreign trust means a 
trust defined in section 7701(a)(31).
    (2) Electing foreign trust. The term electing foreign trust is a 
foreign trust that has in effect a valid election to be treated as a 
domestic trust solely for purposes of section 2801. See Sec.  28.2801-
5(d).
    (e) U.S. recipient. The term U.S. recipient means a citizen or 
resident of the United States, a domestic trust, and 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 U.S. citizens or residents receiving a distribution 
from a foreign trust not electing to be treated as a domestic trust for 
purposes of section 2801 if the distributions are attributable (in 
whole or in part) to one or more covered gifts or covered bequests 
received by the foreign trust. This term also includes the U.S. citizen 
or resident shareholders, partners, members, or other interest-holders, 
as the case may be (if any), of a domestic entity that receives a 
covered gift or covered bequest.
    (f) Covered bequest. The term covered bequest means any property 
acquired directly or indirectly by reason of the death of a covered 
expatriate, regardless of its situs and of whether such property was 
acquired by the covered expatriate before or after expatriation from 
the United States. The term also includes distributions made by reason 
of the death of a covered expatriate from a foreign trust that has not 
elected under Sec.  28.2801-5(d) to be treated as a domestic trust for 
purposes of section 2801 to the extent the distributions are 
attributable to covered gifts or covered bequests made to the foreign 
trust. See Sec.  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 gift directly or indirectly from an individual who is a covered 
expatriate at the time the property is received by a U.S. citizen or 
resident, regardless of its situs and of whether such property was 
acquired by the covered expatriate before or after expatriation from 
the United States. The term also includes distributions made, other 
than by reason of the death of a covered expatriate, from a foreign 
trust that has not elected under Sec.  28.2801-5(d) to be treated as a 
domestic trust for purposes of section 2801 to the extent the 
distributions are attributable to covered gifts or covered bequests 
made to the foreign trust. See Sec.  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). 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 considered a covered expatriate for purposes of section 2801 at all 
times after the expatriation date. However, an expatriate (as defined 
in section 877A(g)(2)) 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. An indirect acquisition of 
property, as referred to in the definitions of a covered gift and 
covered bequest, includes--
    (1) Property acquired as a result of a transfer that is a covered 
gift or covered bequest to a corporation or other entity other than a 
trust or estate, to the extent of the respective ownership interest of 
the recipient U.S. citizen or resident in the corporation or other 
entity;
    (2) Property acquired by or on behalf of a U.S. citizen or 
resident, either from a covered expatriate or from a foreign trust that 
received a covered gift or covered bequest, through one or more other 
foreign trusts, other entities, or a person not subject to the section 
2801 tax;
    (3) Property paid by a covered expatriate, or distributed from a 
foreign trust that received a covered gift or covered bequest, in 
satisfaction of a debt or liability of a U.S. citizen or resident, 
regardless of the payee of that payment or distribution;
    (4) Property acquired by or on behalf of a U.S. citizen or resident 
pursuant to 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 expatriate had no more than a non-general power of 
appointment over that property; and
    (5) Property acquired by or on behalf of a U.S. citizen or resident 
in other transfers not made directly by the covered expatriate to the 
U.S. citizen or resident.
    (j) Power of appointment. The term power of appointment refers to 
both a general and non-general power of appointment. A general power of 
appointment is as defined in sections 2041(b) and 2514(c) of the Code 
and a non-general power of appointment is any power of appointment that 
is not a general power of appointment.
    (k) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


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

    (a) Covered gift. Subject to the provisions of paragraphs (c), (d), 
and (e) of this section, the term gift as used in the definition of 
covered gift in Sec.  28.2801-2(g) has the same meaning as in chapter 
12 of subtitle B, but without regard to the exceptions in section 
2501(a)(2), (a)(4), and (a)(5), the per-donee exclusion under section 
2503(b) for certain transfers of a present interest, the exclusion 
under section 2503(e) for certain educational or medical expenses, and 
the waiver of certain pension rights under section 2503(f).
    (b) Covered bequest. Subject to the provisions of paragraphs (c), 
(d), and (e) of this section, property acquired ``by reason of the 
death of a covered expatriate'' as described in the definition of 
covered bequest in Sec.  28.2801-2(f) includes any property that would 
have been includible in the gross estate of the covered expatriate

[[Page 54457]]

under chapter 11 of subtitle B if the covered expatriate had been a 
U.S. citizen at the time of death. Therefore, in addition to the items 
described in Sec.  28.2801-2(f), the term covered bequest includes, 
without limitation, property or an interest in property acquired by 
reason of a covered expatriate's death--
    (1) By bequest, devise, trust provision, beneficiary designation or 
other contractual arrangement, or by operation of law;
    (2) That was transferred by the covered expatriate during life, 
either before or after expatriation, and which would have been 
includible in the covered expatriate's gross estate under section 2036, 
section 2037, or section 2038 had the covered expatriate been a U.S. 
citizen at the time of death;
    (3) That was received for the benefit of a covered expatriate from 
such covered expatriate's spouse, or predeceased spouse, for which a 
valid qualified terminable interest property (QTIP) election was made 
on such spouse's, or predeceased spouse's, Form 709, ``U.S. Gift (and 
Generation-Skipping Transfer) Tax Return,'' Form 706, ``United States 
Estate (and Generation-Skipping Transfer) Tax Return,'' or Form 706-NA, 
``United States Estate (and Generation-Skipping Transfer) Tax Return, 
Estate of Nonresident Not a Citizen of the United States,'' which would 
have been included in the covered expatriate's gross estate under 
section 2044 if the covered expatriate was a U.S. citizen at the time 
of death; or
    (4) That otherwise passed from the covered expatriate by reason of 
death, such as--
    (i) Property held by the covered expatriate and another person as 
joint tenants with right of survivorship or as tenants by the entirety, 
but only to the extent such property would have been included in the 
covered expatriate's gross estate under section 2040 if the covered 
expatriate had been a U.S. citizen at the time of death;
    (ii) Any annuity or other payment that would have been includible 
in the covered expatriate's gross estate if the covered expatriate had 
been a U.S. citizen at the time of death;
    (iii) Property subject to a general power of appointment held by 
the covered expatriate at death; or
    (iv) Life insurance proceeds payable upon the covered expatriate's 
death that would have been includible in the covered expatriate's gross 
estate under section 2042 if the covered expatriate had been a U.S. 
citizen at the time of death.
    (c) Exceptions to covered gift and covered bequest. The following 
transfers from a covered expatriate are exceptions to the definition of 
covered gift and covered bequest.
    (1) Reported taxable gifts. A transfer of property that is a 
taxable gift under section 2503(a) and is reported on the donor's 
timely filed Form 709 is not a covered gift, provided that the donor 
also timely pays the gift tax, if any, shown as due on that return. A 
transfer excluded from the definition of a taxable gift, such as a 
transfer of a present interest not in excess of the annual exclusion 
amount under section 2503(b), is not excluded from the definition of a 
covered gift under this paragraph (c)(1) even if reported on the 
donor's Form 709.
    (2) Property reported as subject to estate tax. Property that is 
included in the gross estate of the covered expatriate and is reported 
on a timely filed Form 706 or Form 706-NA is not a covered bequest, 
provided that the estate also timely pays the estate tax, if any, shown 
as due on that return. For this purpose, estate tax imposed on 
distributions from or on the remainder of a qualified domestic trust 
(QDOT) are deemed to be reported on a timely filed Form 706, if the tax 
due thereon was timely paid. Thus, if the covered expatriate's gross 
estate is not of sufficient value to require the filing of a Form 706-
NA, for example, and no Form 706-NA is timely filed, the property 
passing from that covered expatriate is not excluded from the 
definition of a covered bequest under the rule of this paragraph 
(c)(2). Further, this exclusion does not apply to the property not on 
such a form, whether or not subject to United States estate tax (that 
is, non U.S.-situs property that passes to U.S. citizens or residents).
    (3) Transfers to charity. A gift to a donee described in section 
2522(b) or a bequest to a beneficiary described in section 2055(a) is 
not a covered gift or covered bequest to the extent a charitable 
deduction under section 2522 or section 2055 would have been allowed if 
the covered expatriate had been a U.S. citizen or resident at the time 
of the transfer.
    (4) Transfers to spouse. A transfer from a covered expatriate to 
the covered expatriate's spouse is not a covered gift or covered 
bequest to the extent a marital deduction under section 2523 or section 
2056 would have been allowed if the covered expatriate had been a U.S. 
citizen or resident at the time of the transfer. To the extent that a 
gift or bequest to a trust (or to a separate share of the trust) would 
qualify for the marital deduction, the gift or bequest is not a covered 
gift or covered bequest. For purposes of this paragraph (c)(4), a 
marital deduction is deemed not to be allowed for qualified terminable 
interest property (QTIP) or for property in a qualified domestic trust 
(QDOT) unless a valid QTIP and/or QDOT election is made. The term 
covered bequest also does not include assets in a QDOT funded for the 
benefit of a covered expatriate by the covered expatriate's predeceased 
spouse, but only if a valid election was made on the predeceased 
spouse's Form 706 or Form 706-NA to treat the trust as a QDOT.
    (5) Qualified disclaimers. A transfer pursuant to a covered 
expatriate's qualified disclaimer, as defined in section 2518(b), is 
not a covered gift or covered bequest from that covered expatriate.
    (d) Covered gifts and covered bequests made in trust. For purposes 
of section 2801, when a covered expatriate transfers property to a 
trust in a transfer that is a covered gift or covered bequest as 
determined under this section, the transfer of property is treated as a 
covered gift or covered bequest to the trust, without regard to the 
beneficial interests in the trust or whether any person has a general 
power of appointment or a power of withdrawal over trust property. 
Accordingly, the rules in section 2801(e)(4) and Sec.  28.2801-4(a) 
apply to determine liability for payment of the section 2801 tax. The 
U.S. recipient of a covered gift or a covered bequest to a domestic 
trust or an electing foreign trust is the domestic or electing foreign 
trust, and the U.S. recipient of a covered gift or a covered bequest to 
a non-electing foreign trust is any U.S. citizen or resident receiving 
a distribution from the non-electing foreign trust. See Sec.  28.2801-
2(e) for the definition of a U.S. recipient.
    (e) Powers of appointment--(1) Covered expatriate as holder of 
power. The exercise or release of a general power of appointment held 
by a covered expatriate over property, whether or not in trust (even if 
that covered expatriate was a U.S. citizen or resident when the general 
power of appointment was granted), for the benefit of a U.S. citizen or 
resident is a covered gift or covered bequest. The lapse of a general 
power of appointment is treated as a release to the extent provided in 
sections 2041(b)(2) and 2514(e). Furthermore, the exercise of a power 
of appointment by a covered expatriate that creates another power of 
appointment as described in section 2041(a)(3) or section 2514(d) for 
the benefit of a U.S. citizen or resident is a covered gift or a 
covered bequest.
    (2) Covered expatriate as grantor of power. The grant by a covered 
expatriate to an individual who is a U.S. citizen or

[[Page 54458]]

resident of a general power of appointment over property not 
transferred in trust by the covered expatriate is a covered gift or 
covered bequest to the powerholder. For the rule applying to the grant 
by a covered expatriate of a general power of appointment over property 
in trust, see paragraph (d) of this section.
    (f) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Transfer to spouse. In Year 1, CE, a covered 
expatriate domiciled in Country F, a foreign country with which the 
United States does not have a gift tax treaty, gives $300,000 cash 
to his wife, W, a U.S. resident and citizen of Country F. Under 
paragraph (c)(4) of this section, the $100,000 exemption for a 
noncitizen spouse, as indexed for inflation in Year 1, is excluded 
from the definition of a covered gift under section 2801 because 
only that amount of the transfer would have qualified for the gift 
tax marital deduction if CE had been a U.S. citizen at the time of 
the gift. See sections 2801(e)(3) and 2523(i). The remaining amount 
($300,000 less the $100,000 exemption for a noncitizen spouse as 
indexed for inflation), however, is a covered gift from CE to W. W 
must timely file Form 708, ``U.S. Return of Gifts or Bequests from 
Covered Expatriates,'' and timely pay the tax. See Sec. Sec.  
28.6011-1(a), 28.6071-1(a), and 28.6151-1(a). W also must report the 
transfer on Form 3520, ``Annual Return to Report Transactions with 
Foreign Trusts and Receipt of Certain Foreign Gifts,'' and any other 
required form. See Sec.  28.2801-6(c)(1).
    Example 2.  Reporting property as subject to estate tax. (i) CE, 
a covered expatriate domiciled in Country F, a foreign country with 
which the United States does not have an estate tax treaty, owns a 
condominium in the United States with son, S, a U.S. citizen. CE and 
S each contributed their actuarial share of the purchase price when 
purchasing the condominium and own it as joint tenants with rights 
of survivorship. On December 14, Year 1, CE dies. At the time of 
CE's death, the fair market value of CE's share of the condominium, 
$250,000, is included in CE's gross estate under sections 2040 and 
2103.
    (ii) On September 14 of the following calendar year, Year 2, the 
executor of CE's estate timely files a Form 4768, ``Application for 
Extension of Time to File a Return and/or Pay U.S. Estate (and 
Generation-Skipping Transfer) Taxes,'' requesting a 6-month 
extension of time to file Form 706-NA, and a 1-year extension of 
time to pay the estate tax. The IRS grants both extensions but CE's 
executor fails to file the Form 706-NA until after March 14 of the 
calendar year immediately following Year 2.
    (iii) S learns that the executor of CE's estate did not timely 
file Form 706-NA. Because CE is a covered expatriate, S received a 
covered bequest as defined under Sec.  28.2801-2(f) and paragraph 
(b) of this section. S must timely file Form 708 and pay the section 
2801 tax. See Sec. Sec.  28.6011-1(a), 28.6071-1(a), and 28.6151-
1(a). S also must file Form 3520 to report a large gift or bequest 
from a foreign person, and any other required form. See Sec.  
28.2801-6(c)(1).
    Example 3. Covered gift in trust with grant of general power of 
appointment over trust property. (i) On October 20, Year 1, CE, a 
covered expatriate domiciled in Country F, a foreign country with 
which the United States does not have a gift tax treaty, transfers 
$500,000 in cash from an account in Country F to an irrevocable 
foreign trust created on that same date. Under section 2511(a), no 
gift tax is imposed on the transfer and thus, CE is not required to 
file a U.S. gift tax return. Under the terms of the foreign trust, 
A, CE's child and a U.S. resident, and Q, A's child and a U.S. 
citizen, may receive discretionary distributions of income and 
principal during life. At A's death, the assets remaining in the 
foreign trust will be distributed to B, CE's other U.S. resident 
child, or if B is not living at the time of A's death, then to CE's 
then-living issue, per stirpes. The terms of the foreign trust also 
allow A to appoint trust principal and/or income to A, A's estate, 
A's creditors, the creditors of A's estate, or A's issue at any 
time. On March 5, Year 2, A exercises this power to appoint and 
causes the trustee to distribute $100,000 to Q.
    (ii) On October 20, Year 1, the irrevocable foreign trust 
receives a covered gift for purposes of section 2801, but no section 
2801 tax is imposed at that time. On March 5, Year 2, when Q 
receives $100,000 from the irrevocable foreign trust pursuant to the 
exercise of A's power of appointment, Q has received a distribution 
attributable to a covered gift and section 2801 tax is imposed on Q 
as of the date of the distribution. See Sec.  28.2801-4(d). Q must 
timely file Form 708 to report the covered gift from a foreign 
person (specifically, from CE). See section 6039F(a) and Sec. Sec.  
28.6011-1(a), 28.6071-1(a), and 28.6151-1(a). Under section 2501, A 
makes a taxable gift to Q of $100,000 when A exercises the general 
power of appointment for Q's benefit. See section 2514(b). 
Accordingly, A must report A's $100,000 gift to Q on a timely filed 
Form 709. See section 6019. Because A is considered the transferor 
of the $100,000 for gift and GST tax purposes, the distribution to Q 
is not a generation-skipping transfer under chapter 13. See Sec.  
26.2652-1(a)(1). Furthermore, because the $100,000 is being 
distributed from a foreign trust, Q must report the gift on a Form 
3520 as a distribution from a foreign trust. See Sec.  28.2801-
6(c)(2).
    Example 4. Lapse of power of appointment held by covered 
expatriate. (i) A, a U.S. citizen, creates an irrevocable domestic 
trust for the benefit of A's issue, CE, and CE's children. CE is a 
covered expatriate, but CE's children are U.S. citizens. CE has the 
right to withdraw $5,000 in each year in which A makes a 
contribution to the trust, but the withdrawal right lapses 30 days 
after the date of the contribution. In Year 1, A funds the trust, 
but CE fails to exercise CE's right to withdraw $5,000 within 30 
days of the contribution. The $5,000 lapse is not considered to be a 
release of the power, so it is neither a gift for U.S. gift tax 
purposes, nor a covered gift for purposes of section 2801 under 
paragraph (e)(1) of this section.

    (g) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  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. A U.S. citizen 
or resident who receives a covered gift or covered bequest is liable 
for payment of the section 2801 tax.
    (2) Domestic trust--(i) In general. A domestic trust that receives 
a covered gift or covered bequest is treated as a U.S. citizen and is 
liable for payment of the section 2801 tax. See section 
2801(e)(4)(A)(i) and Sec.  28.2801-2(b).
    (ii) Generation-skipping transfer tax. A trust's payment of the 
section 2801 tax does not result in a taxable distribution under 
section 2621 to any trust beneficiary for purposes of the generation-
skipping transfer tax to the extent that the trust, rather than the 
beneficiary, is liable for the section 2801 tax.
    (iii) Charitable remainder trust. A domestic trust qualifying as a 
charitable remainder trust (as that term is defined in Sec.  1.664-
1(a)(1)(iii)(a)) is subject to section 2801 when it receives a covered 
gift or covered bequest. Section 2801(e)(3) excepts from the definition 
of covered gift and covered bequest property with respect to which a 
deduction under section 2522 or section 2055, respectively, would have 
been allowed if the covered expatriate had been a U.S. citizen or 
resident at the time of the transfer. See Sec.  28.2801-3(c)(3). As a 
result, the charitable remainder interest's share of each transfer to 
the charitable remainder trust is not a covered gift or covered 
bequest. 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

[[Page 54459]]

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. The charitable remainder trust 
then computes its section 2801 tax in accordance with paragraph (b) of 
this section.
    (iv) Migrated foreign trust. A foreign trust (other than one 
electing to be treated as a domestic trust under Sec.  28.2801-5(d)) 
that has previously received a covered gift or covered bequest and that 
subsequently becomes a domestic trust as defined under section 
7701(a)(30)(E) (migrated foreign trust), must file a timely Form 708, 
``U.S. Return of Gifts or Bequests from Covered Expatriates,'' for the 
taxable year in which the trust becomes a domestic trust. The section 
2801 tax, if any, must be paid by the due date of that Form 708. On 
that Form 708, the section 2801 tax is calculated in the same manner as 
if such trust was making an election under Sec.  28.2801-5(d) to be 
treated as a domestic trust solely for purposes of the section 2801 
tax. Accordingly, the trustee must report and pay the section 2801 tax 
on all covered gifts and covered bequests received by the trust during 
the year in which the trust becomes a domestic trust, as well as on the 
portion of the trust's value at the end of the year preceding the year 
in which the trust becomes a domestic trust that is attributable to all 
prior covered gifts and covered bequests. Because the migrated foreign 
trust will be treated solely for purposes of section 2801 as a domestic 
trust for the entire year during which it became a domestic trust, 
distributions made to U.S. citizens or residents during that year but 
before the date on which the trust became a domestic trust will not be 
subject to section 2801.
    (3) Foreign trust--(i) In general. A foreign trust that receives a 
covered gift or covered bequest is not liable for payment of the 
section 2801 tax unless the trust makes an election to be treated as a 
domestic trust solely for purposes of section 2801 as provided in Sec.  
28.2801-5(d). Absent such an election, each U.S. recipient is liable 
for payment of the section 2801 tax on that person's receipt, either 
directly or indirectly, of a distribution from the foreign trust to the 
extent that the distribution is attributable to a covered gift or 
covered bequest made to the foreign trust. See Sec.  28.2801-5(b) and 
(c) regarding distributions from foreign trusts.
    (ii) Income tax deduction. The U.S. recipient of a distribution 
from a foreign trust is allowed a deduction against income tax under 
section 164 in the calendar year in which the section 2801 tax is paid 
or accrued. The amount of the deduction is equal to the portion of the 
section 2801 tax attributable to such distribution, but only to the 
extent that portion of the distribution is included in the U.S. 
recipient's gross income. The amount of the deduction allowed under 
section 164 is calculated as follows:
    (A) First, the U.S. recipient must determine the total amount of 
distribution(s) from the foreign trust treated as covered gifts and 
covered bequests received by that U.S. recipient during the calendar 
year to which the section 2801 tax payment relates.
    (B) Second, of the amount determined in paragraph (a)(3)(ii)(A) of 
this section, the U.S. recipient must determine the amount that also is 
includable in the U.S. recipient's gross income for that calendar year. 
For purposes of this paragraph (a)(3)(ii)(B), distributions from 
foreign trusts includable in the U.S. recipient's gross income are 
deemed first to consist of the portion of those distributions, if any, 
that are attributable to covered gifts and covered bequests.
    (C) Finally, the U.S. recipient must determine the portion of the 
section 2801 tax paid for that calendar year that is attributable to 
the amount determined in paragraph (a)(3)(ii)(B) of this section, the 
covered gifts and covered bequests received from the foreign trust that 
are also included in the U.S. recipient's gross income. This amount is 
the allowable deduction. Thus, for a calendar year taxpayer, the 
deduction is determined by multiplying the section 2801 tax paid during 
the calendar year by the ratio of the amount determined in paragraph 
(a)(3)(ii)(B) of this section to the total covered gifts and covered 
bequests received by the U.S. recipient during the calendar year to 
which that tax payment relates (that is, 2801 tax liability x [foreign 
trust distributions attributable to covered gifts and covered bequests 
that are also included in gross income/total covered gifts or covered 
bequests received]).
    (b) Computation of tax--(1) In general. The section 2801 tax is 
computed by multiplying the net covered gifts and covered bequests (as 
defined in paragraph (b)(2) of this section) received by a U.S. 
recipient during the calendar year by the greater of--
    (i) The highest rate of estate tax under section 2001(c) in effect 
for that calendar year; or
    (ii) The highest rate of gift tax under section 2502(a) in effect 
for that calendar year. See paragraph (f) of this section, Example 1.
    (2) Net covered gifts and covered bequests. The net covered gifts 
and covered bequests received by a U.S. recipient during the calendar 
year is the total value of all covered gifts and covered bequests 
received by that U.S. recipient during the calendar year, less the 
section 2801(c) amount, which is the dollar amount of the per-donee 
exclusion in effect under section 2503(b) for that calendar year.
    (c) Value of covered gift or covered bequest. The value of a 
covered gift or covered bequest is the fair market value of the 
property as of the date of its receipt by the U.S. recipient. See 
paragraph (d) of this section regarding the determination of the date 
of receipt. As in the case of chapters 11 and 12, the fair market value 
of a covered gift or covered bequest is the price at which such 
property would change hands between a willing buyer and a willing 
seller, neither being under any compulsion to buy or to sell and both 
having reasonable knowledge of relevant facts. The fair market value of 
a covered gift is determined in accordance with the federal gift tax 
valuation principles of section 2512 and chapter 14 and the 
corresponding regulations. The fair market value of a covered bequest 
is determined by applying the federal estate tax valuation principles 
of section 2031 and chapter 14 and the corresponding regulations, but 
without regard to sections 2032 and 2032A.
    (d) Date of receipt--(1) In general. The section 2801 tax is 
imposed upon the receipt of a covered gift or covered bequest by a U.S. 
recipient.
    (2) Covered gift. The date of receipt of a covered gift is the same 
as the date of the gift for purposes of chapter 12 as if the covered 
expatriate had been a U.S. citizen at the time of the transfer. Thus, 
for a gift of stock, if the covered expatriate delivers a properly 
endorsed stock certificate to the U.S. recipient, the date of delivery 
is the date of receipt for purposes of this section. Alternatively, if 
the covered expatriate delivers the stock certificate to the issuing 
corporation or its transfer agent in order to transfer title to the 
U.S. recipient, the date of receipt is the date the stock is 
transferred on the books of the corporation. For a transfer of assets 
by a covered expatriate to a domestic revocable trust, the trust 
receives the transfer on the date the covered expatriate relinquishes 
the right to revoke the trust. If, before the donor's relinquishment of 
the right to revoke the trust, the revocable trust distributes property 
to a U.S. citizen or resident not in discharge of a support or other 
obligation of the donor, then the U.S. recipient receives a covered 
gift on the date of that distribution. For an asset

[[Page 54460]]

subject to a claim of right of another involving a bona fide dispute, 
the date of receipt is the date on which such claim is extinguished.
    (3) Covered bequest. The date of receipt of a covered bequest is 
the date of distribution from the estate or the decedent's revocable 
trust rather than the date of death of the covered expatriate. However, 
the date of receipt is the date of death for property passing on the 
death of the covered expatriate by operation of law, or by beneficiary 
designation or other contractual agreement. Notwithstanding the 
previous sentences, for an asset subject to a claim of right of another 
involving a bona fide dispute, the date of receipt is the date on which 
such claim is extinguished.
    (4) Foreign trusts. The date of receipt by a U.S. citizen or 
resident of property from a foreign trust that has not elected to be 
treated as a domestic trust under Sec.  28.2801-5(d) is the date of its 
distribution from the foreign trust.
    (5) Powers of appointment--(i) Covered expatriate as holder of 
power. In the case of the exercise, release, or lapse of a power of 
appointment held by a covered expatriate that is a covered gift 
pursuant to Sec.  28.2801-3(e)(1), the date of receipt is the date of 
the exercise, release, or lapse of the power. In the case of the 
exercise, release, or lapse of a power of appointment held by a covered 
expatriate that is a covered bequest pursuant to Sec.  28.2801-3(e)(1), 
the date of receipt is (A) the date the property subject to the power 
is distributed from the decedent's estate or revocable trust when the 
power of appointment is over property in such estate or trust, or (B) 
the date of the covered expatriate's death when the power of 
appointment is over property passing on the covered expatriate's death 
by operation of law, by beneficiary designation, or by other 
contractual agreement.
    (ii) Covered expatriate as grantor of power. The date of receipt of 
property subject to a general power of appointment granted by a covered 
expatriate to a U.S. citizen or resident over property not transferred 
in trust that constitutes a covered gift or covered bequest pursuant to 
Sec.  28.2801-3(e)(2) is the first date on which both the power is 
exercisable by the U.S. citizen or resident and the property subject to 
the general power has been irrevocably transferred by the covered 
expatriate. The date of receipt of property subject to a general power 
of appointment over property in a domestic trust or an electing foreign 
trust is determined in accordance with paragraphs (d)(2) and (d)(3) of 
this section, and over property in a non-electing foreign trust is 
determined in accordance with paragraph (d)(4) of this section. See 
Sec.  28.2801-3(d) for the rule applying to covered gifts and covered 
bequests made in trust.
    (6) Indirect receipts. The date of receipt by a U.S. citizen or 
resident of a covered gift or covered bequest received indirectly from 
a covered expatriate is the date of its receipt, as determined under 
paragraph (d)(2) or (d)(3) of this section, by the U.S. citizen or 
resident who is the first recipient of that property from the covered 
expatriate to be subject to section 2801 with regard to that property. 
For example, the date of receipt of property (i) subject to a non-
general power of appointment over property not held in trust given by a 
covered expatriate to a foreign person (other than another covered 
expatriate) is the date that property is received by the U.S. citizen 
or resident in whose favor the power was exercised, and (ii) received 
through one or more entities not subject to section 2801 is the date of 
its receipt by the U.S. citizen or resident from a conduit entity.
    (e) Reduction of tax for foreign estate or gift tax paid. The 
section 2801 tax is reduced by the amount of any gift or estate tax 
paid to a foreign country with respect to the covered gift or covered 
bequest. For this purpose, the term foreign country includes 
possessions and political subdivisions of foreign states. However, no 
reduction is allowable for interest and penalties paid in connection 
with those foreign taxes. To claim the reduction of section 2801 tax, 
the U.S. recipient must attach to the Form 708 a copy of the foreign 
estate or gift tax return and a copy of the receipt or cancelled check 
for payment of the foreign estate or gift tax. The U.S. recipient also 
must report, on an attachment to the Form 708:
    (1) The amount of foreign estate or gift tax paid with respect to 
each covered gift or covered bequest and the amount and date of each 
payment thereof;
    (2) A description and the value of the property with respect to 
which such taxes were imposed;
    (3) Whether any refund of part or all of the foreign estate or gift 
tax has been or will be claimed or allowed, and the amount; and
    (4) All other information necessary for the verification and 
computation of the amount of the reduction of section 2801 tax.
    (f) Examples. The provisions of this section are illustrated by the 
following examples.

    Example 1.  Computation of tax. In Year 1, A, a U.S. citizen, 
receives a $50,000 covered gift from B and an $80,000 covered 
bequest from C. Both B and C are covered expatriates. In Year 1, the 
highest estate and gift tax rate is 40 percent and the section 
2801(c) amount is $14,000. A's section 2801 tax for Year 1 is 
computed by multiplying A's net covered gifts and covered bequests 
by 40 percent. A's net covered gifts and covered bequests for Year 1 
are $116,000, which is determined by reducing A's total covered 
gifts and covered bequests received during Year 1, $130,000 ($50,000 
+ $80,000), by the section 2801(c) amount of $14,000. A's section 
2801 tax liability is then reduced by any foreign estate or gift tax 
paid under paragraph (e) of this section. Assuming A, B, and C paid 
no foreign estate or gift tax on the transfers, A's section 2801 tax 
liability for Year 1 is $46,400 ($116,000 x 0.4).
    Example 2.  Deduction of section 2801 tax for income tax 
purposes. In Year 1, B receives a covered bequest of $25,000. Also 
in Year 1, B receives an aggregate $500,000 of distributions from a 
non-electing foreign trust of which $100,000 was attributable to a 
covered gift. In Year 1, the highest estate and gift tax rate is 40 
percent and the section 2801(c) amount is $14,000. Based on 
information provided by the trustee of the foreign trust, B includes 
$50,000 of the aggregate distributions from the foreign trust in B's 
gross income for Year 1. Under paragraph (a)(3)(ii) of this section, 
B (a cash basis taxpayer) is entitled to an income tax deduction 
under section 164 for the calendar year in which the section 2801 
tax is paid. In Year 2, B timely reports the distributions from the 
foreign trust and pays $44,400 in section 2801 tax (($125,000-
$14,000) x 0.4). In Year 2, B is entitled to an income tax deduction 
because B paid the section 2801 tax in Year 2 on the Year 1 covered 
gift and covered bequest. B's Year 2 income tax deduction is 
computed as follows:
    (i) $100,000 of B's total covered gifts and covered bequests of 
$125,000 received in Year 1 consisted of the portion of the 
distributions from the foreign trust attributable to covered gifts 
and covered bequests received by the trust. See paragraph 
(a)(3)(ii)(A) of this section.
    (ii) $50,000 of the $500,000 of trust distributions were 
includable in B's gross income for Year 1. This amount is deemed to 
consist first of distributions subject to the section 2801 tax 
($100,000). Thus, the entire amount included in B's gross income 
($50,000) also is subject to the section 2801 tax, and is used in 
the numerator to determine the income tax deduction available to B. 
See paragraph (a)(3)(ii)(B) of this section.
    (iii) The portion of B's section 2801 tax liability attributable 
to distributions from a foreign trust is $17,760 ($44,400 x 
($50,000/$125,000)). Therefore, B's deduction under section 164 is 
$17,760. See paragraph (a)(3)(ii)(C) of this section.
    Example 3. Date of receipt; bona fide claim. On October 10, Year 
1, CE, a covered expatriate, died testate as a resident of Country 
F, a foreign country with which the United States does not have an 
estate tax treaty. CE designated his son, S, as the beneficiary of 
CE's retirement account. S is a U.S. citizen. CE's wife, W, who is a 
citizen

[[Page 54461]]

and resident of Country F, elects to take her elective share of CE's 
estate under local law. S contests whether the retirement account is 
property subject to the elective share. S and W agree to settle 
their respective claims by dividing CE's assets equally between 
them. On December 15 of Year 2, Country F's court enters an order 
accepting the terms of the settlement agreement and dismissing the 
case. Under paragraph (d)(3) of this section, S received a covered 
bequest of one-half of CE's retirement account on December 15, Year 
2, when W's claim of right was extinguished.

    (g) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  28.2801-5  Foreign trusts.

    (a) In general. The section 2801 tax is imposed on a U.S. recipient 
who receives distributions, whether of income or principal, from a 
foreign trust to the extent the distributions are attributable to one 
or more covered gifts or covered bequests made to that foreign trust. 
See paragraph (d) of this section regarding a foreign trust's election 
to be treated as a domestic trust for purposes of section 2801.
    (b) Distribution defined. For purposes of determining whether a 
U.S. recipient has received a distribution from a foreign trust, the 
term distribution means any direct, indirect, or constructive transfer 
from a foreign trust. This determination is made without regard to 
whether any portion of the trust is treated as owned by the U.S. 
recipient or any other person under subpart E of part I, subchapter J, 
chapter 1 of the Code (pertaining to grantors and others treated as 
substantial owners) and without regard to whether the U.S. recipient of 
the transfer is designated as a beneficiary by the terms of the trust. 
For purposes of section 2801, the term distribution also includes each 
disbursement from a foreign trust pursuant to the exercise, release, or 
lapse of a power of appointment, whether or not a general power. In 
addition to the reporting requirements under this section, see section 
6048(c) regarding the information reporting requirement for U.S. 
persons receiving a distribution or deemed distribution from a foreign 
trust during the year.
    (c) Amount of distribution attributable to covered gift or covered 
bequest--(1) Section 2801 ratio--(i) In general. A foreign trust may 
have received covered gifts and covered bequests as well as 
contributions that were not covered gifts or covered bequests. Under 
such circumstances, the fair market value of the foreign trust at any 
time consists in part of a portion of the trust attributable to the 
covered gifts and covered bequests it has received (covered portion) 
and in part of a portion of the trust attributable to other 
contributions (non-covered portion). The covered portion of the trust 
includes the ratable portion of appreciation and income that has 
accrued on the foreign trust's assets from the date of the contribution 
of the covered gifts and covered bequests to the foreign trust. For 
purposes of section 2801, the amount of each distribution from the 
foreign trust, whether made from the income or principal of the trust, 
that is considered attributable to the foreign trust's covered gifts 
and covered bequests is determined on a proportional basis, by 
reference to the section 2801 ratio (as described in paragraph 
(c)(1)(ii) of this section), and not by the identification or tracing 
of particular trust assets. Specifically, this portion of each 
distribution is determined by multiplying the distributed amount by the 
percentage of the trust that consists of its covered portion 
immediately prior to that distribution (section 2801 ratio). Thus, for 
example, the section 2801 ratio of a foreign trust whose assets are 
comprised exclusively of covered gifts or covered bequests and the 
income and appreciation thereon, would be 1 and the full amount of each 
distribution from that foreign trust to a U.S. citizen or resident 
would be subject to section 2801.
    (ii) Computation. The section 2801 ratio, which must be 
redetermined after each contribution to the foreign trust, is computed 
by using the following fraction:
[GRAPHIC] [TIFF OMITTED] TP10SE15.000


Where,

X = The value of the trust attributable to covered gifts and covered 
bequests, if any, immediately before the contribution (pre-
contribution value); this value is determined by multiplying the 
fair market value of the trust assets immediately prior to the 
contribution by the section 2801 ratio in effect immediately prior 
to the current contribution. This amount will be zero for all years 
prior to the year in which the foreign trust receives its first 
covered gift or covered bequest;
Y = The portion, if any, of the fair market value of the current 
contribution that constitutes a covered gift or covered bequest; and
Z = The fair market value of the trust immediately after the current 
contribution. See paragraph (e) of this section, Example 1, for an 
illustration of this computation.

    (2) Effect of reported transfer and tax payment. 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 the computation described in paragraph (c)(1)(ii) of 
this section. For purposes of the prior sentence, 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, ``U.S. Return of Gifts or 
Bequests from Covered Expatriates.''
    (3) Inadequate information to calculate section 2801 ratio. 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.
    (d) Foreign trust treated as domestic trust--(1) Election required. 
To be considered an electing foreign trust, so that the foreign trust 
is treated as a domestic trust solely for purposes of the section 2801 
tax, a valid election is required.
    (2) Effect of election. (i) A valid election subjects the electing 
foreign trust to the section 2801 tax on (A) all covered gifts and 
covered bequests received by the foreign trust during that calendar 
year, (B) the portion of the trust attributable to covered gifts and 
covered bequests received by the trust in prior years, as determined in 
paragraph (d)(3)(iii) of this section, and (C) all covered gifts and 
covered bequests received by the foreign trust during calendar years 
subsequent to the first year in which the election is effective, unless 
and until the election is terminated. To the extent that covered gifts 
and covered bequests are subject to the section 2801 tax under the 
prior sentence, those trust receipts are no longer treated as a covered 
gift or covered bequest for purposes of determining the portion of the 
trust attributable to covered gifts and covered bequests. Therefore, 
upon making a valid election, the foreign trust's section 2801 ratio 
described in paragraph

[[Page 54462]]

(c)(1)(ii) of this section will be zero until the effective date of any 
termination of the election and the subsequent receipt of any covered 
gift or covered bequest, and a distribution made from the foreign trust 
while this election is in effect is not taxable under section 2801 to 
the recipient trust beneficiary.
    (ii) This election has no effect on any distribution from the 
foreign trust that was made to a U.S. recipient in a calendar year 
prior to the calendar year for which the election is made. Thus, even 
after a valid election is made, a distribution to a U.S. recipient in a 
calendar year prior to the calendar year for which the election is made 
that was attributable to one or more covered gifts or covered bequests 
continues to be a distribution attributable to one or more covered 
gifts or covered bequests and the section 2801 ratio in place at the 
time of the distribution continues to apply to that distribution. 
Furthermore, an election under this section does not relieve the U.S. 
recipient from the information reporting requirements of section 
6048(c).
    (3) Time and manner of making the election--(i) When to make the 
election. The election is made on a timely filed Form 708 for the 
calendar year for which the foreign trust seeks to subject itself to 
the section 2801 tax as described in paragraph (d)(2)(i) of this 
section. The election may be made for a calendar year whether or not 
the foreign trust received a covered gift or covered bequest during 
that calendar year. See Sec.  28.6071-1.
    (ii) Requirements for a valid election. To make a valid election to 
be treated as a domestic trust for purposes of section 2801, the 
electing foreign trust must timely file a Form 708 and must, on such 
form--
    (A) Make the election, timely pay the section 2801 tax, if any, as 
determined under paragraph (d)(3)(iii) of this section, and include a 
computation illustrating how the trustee of the electing foreign trust 
calculated both the section 2801 ratio described in paragraph 
(c)(1)(ii) of this section and the section 2801 tax;
    (B) Designate and authorize a U.S. agent as provided in paragraph 
(d)(3)(iv) of this section;
    (C) Agree to file Form 708 annually;
    (D) List the amount and year of all prior distributions 
attributable to covered gifts and covered bequests made to a U.S. 
recipient and provide the name, address, and taxpayer identification 
number of each U.S. recipient; and
    (E) Notify each permissible distributee that the trustee is making 
the election under this paragraph (d) and provide to the IRS a list of 
the name, address, and taxpayer identification number of each 
permissible distributee. For this purpose, a permissible distributee is 
any U.S. citizen or resident who:
    (1) Currently may or must receive distributions from the trust, 
whether of income or principal;
    (2) May withdraw income or principal from the trust, regardless of 
whether the right arises or lapses upon the occurrence of a future 
event; or
    (3) Would have been described in paragraph (d)(3)(ii)(E)(1) of this 
section if either the interests of all persons described in 
(d)(3)(ii)(E)(1) or (E)(2) had just terminated or the trust had just 
terminated.
    (iii) Section 2801 tax payable with the election. To make a valid 
election to be treated as a domestic trust for purposes of section 
2801, the electing foreign trust must timely pay the section 2801 tax 
on all covered gifts and covered bequests received by the electing 
foreign trust in the calendar year for which the Form 708 is being 
filed. In some cases, an electing foreign trust may have received 
covered gifts or covered bequests in prior calendar years during which 
no such election was in effect. In those cases, the trustee must also, 
at the same time, report and pay the tax on the fair market value, 
determined as of the last day of the calendar year immediately 
preceding the year for which the Form 708 is being filed, of the 
portion of the trust attributable to covered gifts and covered bequests 
received by such trust in prior calendar years (except as provided in 
paragraph (d)(6)(iii) of this section with regard to an imperfect 
election). That portion is determined by multiplying the fair market 
value of the trust, as of the December 31 immediately preceding the 
year for which the election is made, by the section 2801 ratio in 
effect on that date, as calculated under paragraph (c)(1)(ii) of this 
section. If the trustee does not have sufficient books and records to 
determine what amount of the corpus and undistributed income is 
attributable to undistributed prior covered gifts and covered bequests, 
then that amount is deemed to be the entire fair market value of the 
trust as of that December 31. See paragraph (c)(3) of this section.
    (iv) Designation of U.S. agent--(A) In general. The trustee of an 
electing foreign trust must designate and authorize a U.S. person, as 
defined in section 7701(a)(30), to act as an agent for the trust solely 
for purposes of section 2801. By designating a U.S. agent, the trustee 
of the foreign trust agrees to provide the agent with all information 
necessary to comply with any information request or summons issued by 
the Secretary. Such information may include, without limitation, copies 
of the books and records of the trust, financial statements, and 
appraisals of trust property.
    (B) Role of designated agent. Acting as an agent for the trust for 
purposes of section 2801 includes serving as the electing foreign 
trust's agent for purposes of section 7602 (``Examination of books and 
witnesses''), section 7603 (``Service of summons''), and section 7604 
(``Enforcement of summons'') with respect to--
    (1) Any request by the Secretary to examine records or produce 
testimony related to the proper identification or treatment of covered 
gifts or covered bequests contributed to the electing foreign trust and 
distributions attributable to such contributions; and
    (2) Any summons by the Secretary for records or testimony related 
to the proper identification or treatment of covered gifts or covered 
bequests contributed to the electing foreign trust and distributions 
attributable to such contributions.
    (C) Effect of appointment of U.S. agent. An electing foreign trust 
that appoints such an agent is not considered to have an office or a 
permanent establishment in the United States, or to be engaged in a 
trade or business in the United States, solely because of the agent's 
activities as an agent pursuant to this section.
    (4) Annual certification or filing requirement. 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.
    (5) Duration of status as electing foreign trust--(i) In general. A 
valid election (one that meets all of the requirements of paragraph 
(d)(3) of this section) is effective as of January 1 of the calendar 
year for which the Form 708 on which the election is made is filed. The 
election, once made, applies for all calendar years until the election 
is terminated as described in paragraph (d)(5)(ii) of this section.
    (ii) Termination. An election to be treated as a domestic trust for 
purposes of section 2801 is terminated either by the failure of the 
foreign trust to make the annual filing, together with any payment of 
the section 2801 tax, as required by paragraph (d)(4) of this section, 
or by the failure of the foreign trust to timely pay any additional 
amount of section 2801 tax (in

[[Page 54463]]

accordance with the requirements of paragraph (d)(6)(ii) of this 
section) with respect to recalculations described in paragraph (d)(6) 
of this section (a failure that results in an imperfect election). A 
termination, if any, is effective as of the beginning of the calendar 
year for which the trustee fails to make the annual filing required by 
paragraph (d)(4) of this section or for which the trustee fails to pay 
any of the amounts described in this paragraph (d)(5)(ii). In the case 
of a terminated election, the trustee should notify promptly each 
permissible distributee, as defined in paragraph (d)(3)(ii)(E) of this 
section, that the foreign trust's election was terminated as of January 
1 of the applicable year (with the actual year of the termination being 
set forth in the notice), and that each U.S. recipient of a 
distribution made from the foreign trust on and after that date is 
subject to the section 2801 tax on the portion of each such 
distribution that is attributable to covered gifts and covered 
bequests. See paragraph (d)(6)(iii)(B) of this section for an 
additional notification requirement in the case of an imperfect 
election.
    (iii) Subsequent elections. If a foreign trust's election is 
terminated under paragraph (d)(5)(ii) of this section, the foreign 
trust is not prohibited from making another election in a future year, 
subject to the requirements of paragraph (d)(3) of this section.
    (6) Dispute as to amount of section 2801 tax owed by electing 
foreign trust--(i) Procedure. If the Commissioner disputes the value of 
a covered gift or covered bequest, or otherwise challenges the 
computation of the section 2801 tax, that is reported on the electing 
foreign trust's timely filed Form 708 for any calendar year, the 
Commissioner will issue a letter (but not a notice of deficiency as 
defined in section 6212) to the trustee of the electing foreign trust 
and the appointed U.S. agent that details the disputed information and 
the proper amount of section 2801 tax as recalculated. The foreign 
trust must pay the additional amount of section 2801 tax including 
interest and penalties, if any, in accordance with the requirements of 
paragraph (d)(6)(ii) of this section, on or before the due date 
specified in the letter to maintain its election.
    (ii) Effect of timely paying the additional section 2801 tax 
amount. If the trustee of the foreign trust timely pays the additional 
amount(s) specified in the Commissioner's letter, or such other amount 
as agreed to by the Commissioner, and enters into a closing agreement 
with the IRS as described in section 7121, then the foreign trust's 
election to be treated as a domestic trust under paragraph (d) of this 
section remains in effect. In addition, in the absence of fraud, 
malfeasance, or misrepresentation of a material fact, that payment, in 
conjunction with the closing agreement, will be deemed to render any 
determination of value to which the closing agreement applies as final 
and binding on both the IRS and the foreign trust. Thus, subsequently, 
the IRS will not be able to challenge the section 2801 tax due from 
either the foreign trust or any of its beneficiaries who are U.S. 
citizens or residents for the year for which that Form 708 was filed by 
the foreign trust, except with respect to any covered gifts or covered 
bequests not reported on that return, and neither the foreign trust nor 
any of its beneficiaries will be able to file a claim for refund with 
respect to section 2801 tax paid by the foreign trust on the covered 
gifts and covered bequests reported on that Form 708.
    (iii) Effect of failing to timely pay the additional section 2801 
tax amount (imperfect election)--(A) In general. If the foreign trust 
fails to timely pay the additional amount of section 2801 tax with 
interest and penalties, if any, claimed to be due by the IRS in 
accordance with the requirements of paragraph (d)(6)(ii) of this 
section, then the foreign trust's valid election is terminated and 
becomes an imperfect election. The foreign trust's election is 
terminated, and is converted into an imperfect election, retroactively 
as of the first day of the calendar year for which was filed the Form 
708 with respect to which the additional amount of section 2801 tax is 
claimed to be due by the IRS. Thus, the value the foreign trust has 
reported on the Form 708 and on which the trust has paid the section 
2801 tax is no longer considered to be attributable to covered gifts or 
covered bequests when computing the section 2801 ratio described in 
paragraph (c)(1)(ii) of this section applicable to distributions made 
by the foreign trust to U.S. recipients during the calendar year for 
which the Form 708 was filed and thereafter. The U.S. recipients of 
distributions from the foreign trust, however, should take into 
consideration the additional value determined by the IRS, on which the 
foreign trust did not timely pay the section 2801 tax, when computing 
the section 2801 ratio to be applied to a distribution from the trust. 
See paragraph (c) of this section. Any disagreement with regard to that 
additional value will be an issue to be resolved as part of the review 
of that U.S. recipient's own Form 708 reporting a distribution.
    (B) Notice to permissible beneficiaries. If the trustee of the 
foreign trust fails to remit the additional payment of the section 2801 
tax including all interest and penalties, if any, in accordance with 
the requirements of paragraph (d)(6)(ii) of this section, by the due 
date stated in the IRS letter, the trustee should notify promptly each 
permissible distributee, as defined in paragraph (d)(3)(ii)(E) of this 
section, of the amount of additional value on which the foreign trust 
did not timely pay the section 2801 tax as determined by the IRS and 
that:
    (1) The foreign trust's election was terminated as of January 1 of 
the applicable year (with the actual year of the termination being set 
forth in the notice); and
    (2) Each U.S. recipient of a distribution made from the foreign 
trust on and after that termination date is subject to the section 2801 
tax on the portion of each such distribution attributable to covered 
gifts and covered bequests.
    (C) Reasonable cause. If a U.S. recipient received a distribution 
from such trust on or after January 1 of the year for which the 
election was terminated and the election became an imperfect election, 
provided the U.S. recipient files a Form 708 and pays the section 2801 
tax within a reasonable period of time after being notified by the 
trustee of the foreign trust or otherwise becoming aware that a valid 
election was not in effect when the distribution was made, the U.S. 
recipient's failure to timely file and pay are due to reasonable cause 
and not willful neglect for purposes of section 6651. For this purpose, 
a reasonable period of time is not more than six months after the U.S. 
recipient is notified by the trustee or the U.S. recipient otherwise 
becomes aware that a valid election is not in effect.
    (D) Interim period. If a foreign trust's valid election is 
terminated and becomes an imperfect election, there is a period of time 
(interim period) after the effective date of the termination of the 
election during which both the foreign trust and its U.S. beneficiaries 
are likely to continue to comply with section 2801 as it applies to an 
electing foreign trust with a valid election in place. The interim 
period begins on the effective date of the termination of the foreign 
trust's election that resulted in an imperfect election as described in 
paragraph (d)(6)(iii)(A) of this section, and ends on December 31 of 
the calendar year immediately preceding the calendar year in which the 
additional section 2801 tax claimed by the IRS is due. As under the 
rule in paragraph (d)(6)(iii)(A) of this section regarding imperfect 
elections, the covered gifts and covered bequests

[[Page 54464]]

received by the foreign trust during this interim period, which the 
foreign trust has reported on its timely filed Form 708 and on which 
the foreign trust has timely paid the section 2801 tax, are no longer 
considered to be covered gifts and covered bequests for purposes of 
computing the section 2801 ratio described in paragraph (c)(1)(ii) of 
this section as it applies to distributions made by non-electing 
foreign trusts to their U.S. beneficiaries. In addition, each 
distribution made by the foreign trust to a U.S. citizen or resident 
during this interim period must be reported on that U.S. recipient's 
Form 708 by applying the section 2801 ratio to that distribution. Once 
the interim period has ended, the foreign trust has no election in 
place and the rules of section 2801(e)(4)(B)(i) will apply until the 
foreign trust subsequently (if ever) makes another valid election to be 
treated as a domestic trust for purposes of section 2801.
    (7) No overpayment caused solely by virtue of defect in election. 
Any remittance of section 2801 tax made by a foreign trust electing to 
be treated as a domestic trust does not become an overpayment solely by 
virtue of a defect in the election. Instead, if at some subsequent time 
the IRS determines that the election was not in fact a valid election, 
then the election shall be considered valid only with respect to the 
covered gifts or covered bequests on which the section 2801 tax was 
timely paid by the foreign trust and each covered gift and covered 
bequest on which the section 2801 tax has been timely paid is no longer 
treated as a covered gift or covered bequest for purposes of 
determining the portion of the foreign trust attributable to covered 
gifts and covered bequests. See paragraphs (d)(2)(i) and (d)(6)(iii) of 
this section.
    (e) Examples. The provisions of this section are illustrated by the 
following examples.

    Example 1.  Computation of section 2801 ratio. A and B each 
contribute $100,000 to a foreign trust. A (but not B) is a covered 
expatriate and A's contribution is a covered gift. The section 2801 
ratio immediately after these two contributions is 0.50, computed as 
follows: The pre-contribution value of the trust ($0) times the pre-
contribution section 2801 ratio (-0-), plus the current covered gift 
($100,000), divided by the post-contribution fair market value of 
the trust ($200,000). See Sec.  28.2801-5(c). Therefore, 50 percent 
of each distribution from the trust is subject to the section 2801 
tax until the next contribution is made to the trust. If the trustee 
distributes $40,000 to C, a U.S. citizen, before the trust receives 
any other contributions, then $20,000 ($40,000 x 0.5) is a covered 
gift to C.
    Example 2.  Computation of section 2801 ratio when multiple 
contributions are made to foreign trust. (i) In 2005, A, a U.S. 
citizen, established and funded an irrevocable foreign trust with 
$200,000 and reported the transfer as a completed gift. On January 1 
of each of the following three years (2006 through 2008), A 
contributed an additional $100,000 to the foreign trust. A reported 
A's contributions to the foreign trust as completed gifts on timely 
filed Forms 709, for calendar years 2005 through 2008. On August 8, 
2008, a date after the effective date of section 2801 (June 17, 
2008), A expatriated and became a covered expatriate. On January 1 
of a year after 2008 (Year X), A makes an additional $100,000 
contribution to the trust. The aggregate $600,000 contributed to the 
trust by A, both before and after expatriation, are the only 
contributions to the trust. Each year, the trustee of the foreign 
trust provides beneficiary B, a U.S. citizen, with an accounting of 
the trust showing each receipt and disbursement of the trust during 
that year, including the date and amount of each contribution by A.
    (ii) The fair market value of the trust was $610,000 immediately 
prior to A's contribution to the trust on January 1, Year X. 
Therefore, upon the Year X contribution of A's first and only 
covered gift, the portion of the trust attributable to covered gifts 
and covered bequests (covered portion) changed from zero to 0.14 
([(section 2801 ratio of 0 x $610,000 fair market value pre-
contribution) plus the $100,000 covered gift]/$710,000 fair market 
value post-contribution). See paragraph (c) of this section.
    (iii) In February of Year X, B received a distribution of 
$225,000 from the foreign trust. Although A contributed a total of 
$600,000 to the foreign trust, A contributed only $100,000 while A 
was a covered expatriate. Under paragraph (c) of this section, the 
portion of the $225,000 distribution from the foreign trust 
attributable to a covered gift is $31,500 ($225,000 x 0.14 (section 
2801 ratio)) because the distribution is made proportionally from 
the covered and non-covered portions of the trust. See paragraph 
(c)(1) of this section. Accordingly, B received a covered gift of 
$31,500.
    (iv) Pursuant to the terms of the foreign trust, the trust made 
a terminating distribution on August 5, Year X, when B turned 35, 
and B received the balance of the appreciated trust, $505,000. The 
portion of this distribution attributable to covered gifts and 
covered bequests is $70,700 ($505,000 x 0.14). Therefore, B has 
received covered gifts from the foreign trust during Year X in the 
total amount of $102,200 ($31,500 + $70,700).
    Example 3. Termination of foreign trust election. The trustee of 
a foreign trust that received a covered gift makes a valid election 
to be treated as a domestic trust under Sec.  28.2801-5(d) for Year 
1. However, the trustee fails to file timely the Form 708 for the 
next year, Year 2. The foreign trust election is terminated as of 
January 1, Year 2, under paragraph (d)(5)(ii) of this section. Thus, 
any distributions made to U.S. recipients during Year 1 have a 
section 2801 ratio of zero and are not subject to the section 2801 
tax. However, any such distributions made during Year 2 are subject 
to the section 2801 tax to the extent the distributions are 
attributable to a covered gift or covered bequest received by the 
trust during Year 2. Unless the trustee makes a new election as 
described in paragraph (d)(5)(iii) of this section, beginning in 
Year 2, the foreign trust's section 2801 ratio must be recomputed 
each time the foreign trust receives a contribution.
    Example 4.  Imperfect election by foreign trust. (i) In Year 1, 
CE, a covered expatriate, gives a 20 percent limited partnership 
interest in a closely held business to a foreign trust created for 
the benefit of CE's child, A, who is a U.S. citizen. The limited 
partnership interest is a covered gift. The trustee of the foreign 
trust makes a valid election to have the trust treated as a domestic 
trust for purposes of section 2801, trustee timely files a Form 708, 
and timely pays the section 2801 tax on the reported fair market 
value of the covered gift ($500,000). Later in Year 1, the trust 
makes a $100,000 distribution to A.
    (ii) In Year 2, CE contributes $200,000 in cash to the foreign 
trust. The cash is a covered gift. The trustee of the foreign trust 
timely files a Form 708 reporting the transfer and pays the section 
2801 tax. The trust does not make a distribution to any beneficiary 
during Year 2. Late in Year 3, the IRS disputes the reported value 
of the partnership interest transferred in Year 1 and determines 
that the proper valuation on the date of the gift was $800,000. In 
Year 3, the IRS issues a letter to the trustee of the foreign trust 
detailing its finding of the increased valuation and of the 
resulting additional section 2801 tax including accrued interest, if 
any, due on or before a later date in Year 3 specified in the 
letter. The foreign trust fails to pay the additional section 2801 
tax liability on or before that due date.
    (iii) Under paragraph (d)(6)(iii) of this section, the foreign 
trust's election for Year 1 is an imperfect election; although it 
timely filed its return reporting the transfer and paid the tax, it 
failed to timely pay the additional section 2801 tax when the IRS 
notified the trust of an additional amount of section 2801 tax 
claimed to be due. Accordingly, the foreign trust's election is 
deemed to have terminated as of January 1 of Year 1. In computing 
the foreign trust's section 2801 ratio upon the receipt of the 
covered gift in Year 1, the $500,000 of value on which the section 
2801 tax was timely paid is no longer deemed to be a covered gift. 
See paragraph (d)(6)(iii) of this section. When the trustee advises 
A of the letter from the IRS, A must file a late Form 708 reporting 
the portion of the Year 1 distribution attributable to covered gifts 
and covered bequests. Although A may owe section 2801 tax and 
interest, A will not owe any penalties under section 6651 as long as 
A files the Form 708 and pays the tax within a reasonable period of 
time after A receives notice of the termination of the election from 
the trustee of the foreign trust or otherwise becomes aware of the 
termination of the election. See paragraph (d)(6)(iii)(C) of this 
section.
    (iv) When A files the Form 708, the IRS will verify whether A 
treated the $300,000 undervaluation claimed by the IRS as a

[[Page 54465]]

covered gift in computing the section 2801 ratio. As with any other 
item reported on that return, A has the burden to prove the value of 
the covered gift to the foreign trust, and the IRS may challenge 
that value. If A treats the $300,000 as a covered gift to the trust, 
under paragraph (c)(1)(ii) of this section, the section 2801 ratio 
after the Year 1 contribution is 0.375 ($0 + ($300,000)/$800,000)). 
Thus, 37.5 percent of all distributions made to A from the foreign 
trust during Year 1 are subject to the section 2801 tax.
    (v) The foreign trust's timely filing of the Form 708 for Year 2 
and the timely payment of the section 2801 tax shown on that return 
is not a valid election under paragraph (d)(5)(iii) of this section 
because the trust did not timely pay the section 2801 tax on all 
covered gifts and covered bequests in prior years as required in 
paragraph (d)(3) of this section; that is, the tax on the additional 
$300,000 of value of the Year 1 transfer. However, under paragraph 
(d)(6)(iii)(D) of this section, because the foreign trust timely 
filed and paid the section 2801 tax on the Year 2 covered gift of 
$200,000, and the additional unpaid tax was not due until Year 3, 
the $200,000 amount is no longer considered a covered gift for 
purposes of computing the section 2801 ratio.
    Example 5.  Subsequent election after termination of foreign 
trust election. The facts are the same as in Example 4. In Year 3, 
the foreign trust does not receive a covered gift or covered 
bequest. However, the trustee decides that making another election 
to be treated as a domestic trust would be in the best interests of 
the trust's beneficiaries. Accordingly, by the due date for the Form 
708 for Year 3, the trustee timely files the return and pays the 
section 2801 tax on the portion of the trust attributable to covered 
gifts and covered bequests. See paragraph (d)(5)(iii) of this 
section. The trustee calculates the portion of the trust 
attributable to covered gifts and covered bequests received by the 
trust in prior calendar years by multiplying the fair market value 
of the trust on December 31, Year 2, by the section 2801 ratio in 
effect on that date. See paragraph (d)(3)(iii) of this section. The 
foreign trust is an electing foreign trust in Year 3.
    (f) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  28.2801-6  Special rules and cross-references.

    (a) Determination of basis. For purposes of determining the U.S. 
recipient's basis in property received as a covered gift or covered 
bequest, see sections 1015 and 1014, respectively. However, section 
1015(d) does not apply to increase the basis in a covered gift to 
reflect the tax paid under this section. For purposes of determining a 
U.S. recipient's basis in property received as a covered bequest from a 
decedent who died during 2010 and whose executor elected under section 
301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and 
Job Creation Act of 2010 not to have the estate tax provisions apply, 
see section 1022.
    (b) Generation-skipping transfer tax. Transfers made by a 
nonresident not a citizen of the United States (NRA transferor) are 
subject to generation-skipping transfer (GST) tax only to the extent 
those transfers are subject to federal estate or gift tax as defined in 
Sec.  26.2652-1(a)(2). In applying this rule, taxable distributions 
from a trust and taxable terminations are subject to the GST tax only 
to the extent the NRA transferor's contributions to the trust were 
subject to federal estate or gift tax as defined in Sec.  26.2652-
1(a)(2). See Sec.  26.2663-2. A transfer is subject to federal estate 
or gift tax, regardless of whether a federal estate or gift tax return 
reporting the transfer is timely filed and regardless of whether 
chapter 15 applies because of a covered expatriate's failure to timely 
file and pay the section 2801 tax, if applicable.
    (c) Information returns--(1) Gifts and bequests. Pursuant to 
section 6039F and the corresponding regulations, and to the extent 
provided in Notice 97-34, 1997-1 CB 422, and Form 3520, Part IV, each 
U.S. person (other than an organization described in section 501(c) and 
exempt from tax under section 501(a)) who treats an amount received 
from a foreign person (other than through a foreign trust) as a gift or 
bequest (including a covered gift or covered bequest) must report such 
gift or bequest on Part IV of Form 3520 if the value of the total of 
such gifts and bequests exceeds a certain threshold. A U.S. citizen or 
resident, as defined in Sec.  28.2801-2(b) but not including a foreign 
trust that elects to be treated as a domestic trust, is included within 
the definition of a U.S. person for purposes of section 6039F.
    (2) Foreign trust distributions. Pursuant to section 6048(c) and 
the corresponding regulations, and to the extent provided in Notice 97-
34 and Part III of Form 3520, U.S. persons must report each 
distribution received during the taxable year from a foreign trust on 
Part III of Form 3520. Under section 6677(a), a penalty of the greater 
of $10,000 or 35 percent of the gross value of the distribution may be 
imposed on a U.S. person who fails to timely report the distribution. A 
U.S. citizen or resident as defined in Sec.  28.2801-2(b), but not 
including a foreign trust that elects to be treated as a domestic 
trust, generally is required to report such a distribution under 
section 6048(c).
    (3) Penalties and use of information. The filing of Form 706, Form 
706-NA, Form 708, or Form 709 does not relieve a U.S. citizen or 
resident who is required to file Form 3520 from any penalties imposed 
under section 6677(a) for failure to comply with section 6048(c), or 
from any penalties imposed under section 6039F(c) for failure to comply 
with section 6039F(a). Pursuant to section 6039F(c)(1)(A), the 
Secretary may determine the tax consequences of the receipt of a 
purported foreign gift or bequest.
    (d) Application of penalties--(1) Accuracy-related penalties on 
underpayments. The section 6662 accuracy-related penalty may be imposed 
upon any underpayment of tax attributable to--
    (i) A substantial valuation understatement under section 6662(g) of 
a covered gift or covered bequest; or
    (ii) A gross valuation misstatement under section 6662(h) of a 
covered gift or covered bequest.
    (2) Penalty for substantial and gross valuation misstatements 
attributable to incorrect appraisals. The section 6695A penalty for 
substantial and gross valuation misstatements attributable to incorrect 
appraisals may be imposed upon any person who prepares an appraisal of 
the value of a covered gift or covered bequest.
    (3) Penalty for failure to file a return and to pay tax. See 
section 6651 for the application of a penalty for the failure to file 
Form 708, or the failure to pay the section 2801 tax.
    (e) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  28.2801-7  Determining responsibility under section 2801.

    (a) Responsibility of recipients of gifts and bequests from 
expatriates. It is the responsibility of the taxpayer (in this case, 
the U.S. citizen or resident receiving a gift or bequest from an 
expatriate or a distribution from a

[[Page 54466]]

foreign trust funded at least in part by an expatriate) to ascertain 
the taxpayer's obligations under section 2801, which includes making 
the determination of whether the transferor is a covered expatriate and 
whether the transfer is a covered gift or covered bequest.
    (b) Disclosure of return and return information--(1) In general. In 
certain circumstances, the Internal Revenue Service (IRS) may be 
permitted, upon request of a U.S. citizen or resident in receipt of a 
gift or bequest from an expatriate, to disclose to the U.S. citizen or 
resident return or return information of the donor or decedent 
expatriate that may assist the U.S. citizen or resident in determining 
whether the donor or decedent was a covered expatriate and whether the 
transfer was a covered gift or covered bequest. The U.S. citizen or 
resident may not rely upon this information, however, if the U.S. 
citizen or resident knows, or has reason to know, that the information 
received from the IRS is incorrect. The circumstances under which such 
information may be disclosed to a U.S. citizen or resident, and the 
procedures for requesting such information from the IRS, will be as 
provided by publication in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b)).
    (2) Rebuttable presumption. Unless a living donor expatriate 
authorizes the disclosure of his or her relevant return or return 
information to the U.S. citizen or resident receiving the gift, there 
is a rebuttable presumption that the donor is a covered expatriate and 
that the gift is a covered gift. A taxpayer who reasonably concludes 
that a gift or bequest is not subject to section 2801 may file a 
protective Form 708 in accordance with Sec.  28.6011-1(b) to start the 
period for the assessment of any section 2801 tax.
    (c) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. Once these regulations have 
been published as final regulations in the Federal Register, taxpayers 
may rely upon the final rules of this part for the period beginning 
June 17, 2008, and ending on the date preceding the date these 
regulations are published as final regulations in the Federal Register.


Sec.  28.6001-1  Records required to be kept.

    (a) In general. Every U.S. recipient as defined in Sec.  28.2801-
2(e) subject to taxation under chapter 15 of the Internal Revenue Code 
must keep, for the purpose of determining the total amount of covered 
gifts and covered bequests, such permanent books of account or records 
as are necessary to establish the amount of that person's aggregate 
covered gifts and covered bequests, and the other information required 
to be shown on Form 708, ``United States Return of Tax for Gifts and 
Bequests from Covered Expatriates.'' 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.
    (b) Supplemental information. In order that the Internal Revenue 
Service (IRS) may determine the correct tax, the U.S. recipient as 
defined in Sec.  28.2801-2(e) must furnish such supplemental 
information as may be deemed necessary by the IRS. Therefore, the U.S. 
recipient must furnish, upon request, copies of all documents relating 
to the covered gift or covered bequest, appraisals of any items 
included in the aggregate amount of covered gifts and covered bequests, 
copies of balance sheets and other financial statements obtainable by 
that person relating to the value of stock or other property 
constituting the covered gift or covered bequest, and any other 
information obtainable by that person that may be necessary in the 
determination of the tax. See section 2801 and the corresponding 
regulations. For every policy of life insurance listed on the return, 
the U.S. recipient must procure a statement from the insurance company 
on Form 712 and file it with the IRS office where the return is filed. 
If specifically requested by the Commissioner, the insurance company 
must file this statement directly with the Commissioner.


Sec.  28.6011-1  Returns.

    (a) Return required. The return of any tax to which this part 28 
applies must be made on Form 708, ``United States Return of Tax for 
Gifts and Bequests from Covered Expatriates,'' according to the 
instructions applicable to the form. With respect to each covered gift 
and covered bequest received during the calendar year, the U.S. 
recipient as defined in Sec.  28.2801-2(e) must include on Form 708 the 
information set forth in Sec.  25.6019-4. The U.S. recipient must file 
Form 708 for each calendar year in which a covered gift or covered 
bequest is received. The U.S. recipient who receives the covered gift 
or covered bequest during the calendar year is the person required to 
file the return. A U.S. recipient is not required to file such form, 
however, for a calendar year in which the total fair market value of 
all covered gifts and covered bequests received by that person during 
that calendar year is less than or equal to the section 2801(c) amount, 
which is the dollar amount of the per-donee exclusion in effect under 
section 2503(b) for that calendar year.
    (b) Protective return. (i) A U.S. citizen or resident (as defined 
in Sec.  28.2801-2(b)) that receives a gift or bequest from an 
expatriate and reasonably concludes that the gift or bequest is not a 
covered gift or a covered bequest from a covered expatriate may file a 
protective Form 708 in order to start the period for assessment of tax. 
To be a protective Form 708, it must provide all of the information 
otherwise required on Form 708, along with an affidavit, signed under 
penalties of perjury, setting forth the information on which that U.S. 
citizen or resident has relied in concluding that the donor or 
decedent, as the case may be, was not a covered expatriate, or that the 
transfer was not a covered gift or a covered bequest, as well as that 
person's efforts to obtain other information that might be relevant to 
these determinations. If that U.S. citizen or resident has obtained 
information from the Internal Revenue Service (IRS) (as described in 
Sec.  28.2801-7(b)(1)), it must attach a copy of such information. The 
U.S. citizen or resident also must attach a copy of a completed Form 
3520, Part III, for all trust distributions, or Part IV for all gifts 
and bequests, if applicable. If the return meets the requirements of 
this paragraph (b)(i), and if the IRS does not assess a section 2801 
tax liability for that tax year within the limitations period for 
assessment stated in section 6501, the IRS may not later assess a 
section 2801 tax with regard to any transfer reported on that Form 708.
    (ii) A U.S. citizen or resident who receives a gift or bequest from 
an expatriate and who files a protective Form 708 meeting the 
requirements of paragraph (b)(i) of this section showing no tax due, 
absent fraud or other special factors, will not be subject to any 
additions to tax for late filing under section 6651(a)(1) or for late 
payment under section 6651(a)(2), even if the gift or bequest is 
determined to be a covered gift or covered bequest from a covered 
expatriate within the limitations period for assessment stated in 
section 6501. Notwithstanding the foregoing, however, if a U.S. citizen 
or resident knows, or has reason to know, that the information provided 
by the IRS or any other source is incorrect or incomplete, that U.S. 
citizen or resident may not rely on that information, and except as 
provided in the preceding paragraph (b)(i) of this section, may be 
subject to all of the generally applicable provisions governing 
assessment of tax,

[[Page 54467]]

collection of tax, and penalties. See sections 6501, 6502, 6651 and 
6662.
    (c) Effective/applicability dates. This section applies on and 
after the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register.


Sec.  28.6060-1  Reporting requirements for tax return preparers.

    (a) In general. A person that employs one or more signing tax 
return preparers to prepare a return or claim for refund of any tax to 
which this part 28 applies, other than for the person, at any time 
during a return period, must satisfy the recordkeeping and inspection 
requirements in the manner stated in Sec.  1.6060-1 of this chapter.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  28.6071-1  Time for filing returns.

    (a) In general--(1) A U.S. recipient as defined in Sec.  28.2801-
2(e) must file Form 708, ``U.S. Return of Gifts or Bequests from 
Covered Expatriates,'' on or before the fifteenth day of the eighteenth 
calendar month following the close of the calendar year in which the 
covered gift or covered bequest was received. Notwithstanding the 
preceding sentence, the due date for a Form 708 reporting a covered 
bequest that is not received on the decedent's date of death under 
Sec.  28.2801-4(d)(3) is the later of--
    (i) The fifteenth day of the eighteenth calendar month following 
the close of the calendar year in which the covered expatriate died; or
    (ii) The fifteenth day of the sixth month of the calendar year 
following the close of the calendar year in which the covered bequest 
was received.
    (2) If a U.S. recipient receives multiple covered gifts and covered 
bequests during the same calendar year, the rule in paragraph (a)(1) of 
this section may result in different due dates and the filing of 
multiple returns reporting the different transfers received during the 
same calendar year.
    (b) Migrated foreign trust. The due date for a Form 708 for the 
year in which a foreign trust becomes a domestic trust is the fifteenth 
day of the sixth month of the calendar year following the close of the 
calendar year in which the foreign trust becomes a domestic trust.
    (c) Certain returns by foreign trusts--(1) Election under Sec.  
28.2801-5(d) for calendar year in which no covered gift or covered 
bequest received. A foreign trust making an election to be treated as a 
domestic trust for purposes of section 2801 under Sec.  28.2801-5(d) 
for a calendar year in which the foreign trust received no covered 
gifts or covered bequests must file a Form 708 on or before the 
fifteenth day of the sixth month of the calendar year following the 
close of the calendar year for which the election is made.
    (2) Certification to maintain election under Sec.  28.2801-5(d) for 
calendar year in which no covered gift or covered bequest received. An 
electing foreign trust filing a Form 708 to certify that the electing 
foreign trust did not receive any covered gifts or covered bequests 
during the calendar year must file the Form 708 on or before the 
fifteenth day of the sixth month of the calendar year following the 
close of that calendar year. See Sec.  28.2801-5(d)(4).
    (d) Transition period. The Form 708 reporting covered gifts or 
covered bequests received on or after June 17, 2008, and before the 
date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register, will be due within a 
reasonable period of time after the date of that publication as 
specified in the final regulations, but in no event before the due date 
of the first return required under the final regulations for covered 
gifts or covered bequests received after the final regulations are 
published.
    (e) Effective/applicability dates. This section applies to each 
Form 708 filed on or after the date on which a Treasury decision is 
published adopting these rules as final regulations in the Federal 
Register.


Sec.  28.6081-1  Automatic extension of time for filing returns 
reporting gifts and bequests from covered expatriates.

    (a) In general. A U.S. recipient as defined in Sec.  28.2801-2(e) 
may request an extension of time to file a Form 708, ``U.S. Return of 
Gifts or Bequests from Covered Expatriates,'' by filing Form 7004, 
``Application for Automatic Extension of Time To File Certain Business 
Income Tax, Information, and Other Returns.'' A U.S. recipient must 
include on Form 7004 an estimate of the amount of section 2801 tax 
liability and must file Form 7004 with the Internal Revenue Service 
office designated in the Form's instructions (except as provided in 
Sec.  301.6091-1(b) of this chapter for hand-carried documents).
    (b) Automatic extension. A U.S. recipient as defined in Sec.  
28.2801-2(e) will be allowed an automatic six-month extension of time 
beyond the date prescribed in Sec.  28.6071-1 to file Form 708 if Form 
7004 is filed on or before the due date for filing Form 708 in 
accordance with the procedures under paragraph (a) of this section.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (b) of 
this section will not extend the time for payment of any tax due with 
such return.
    (d) Penalties. See section 6651 regarding penalties for failure to 
file the required tax return or failure to pay the amount shown as tax 
on the return.
    (e) Effective/applicability dates. This section applies to 
applications for an extension of time to file Form 708 filed on or 
after the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register.


Sec.  28.6091-1  Place for filing returns.

    A U.S. recipient as defined in Sec.  28.2801-2(e) must file Form 
708, ``U.S. Return of Gifts and Bequests from Covered Expatriates,'' 
with the Internal Revenue Service office designated in the instructions 
applicable to the Form.


Sec.  28.6101-1  Period covered by returns.

    See Sec.  28.6011-1 for the rules relating to the period covered by 
the return.


Sec.  28.6107-1  Tax return preparer must furnish copy of return or 
claim for refund to taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of any tax to which this part 28 applies 
must furnish a completed copy of the return or claim for refund to the 
taxpayer and retain a completed copy or record in the manner stated in 
Sec.  1.6107-1 of this chapter.
    (b) Effective/applicability dates. This section applies to returns 
and claims for refund filed on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  28.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund of the tax 
under chapter 15 of subtitle B of the Internal Revenue Code prepared by 
one or more signing tax return preparers must include the identifying 
number of the preparer required by Sec.  1.6695-1(b) of this chapter to 
sign the return or claim for refund in the manner stated in Sec.  
1.6109-2 of this chapter.
    (b) Effective/applicability date. This section applies on and after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register.

[[Page 54468]]

Sec.  28.6151-1  Time and place for paying tax shown on returns.

    The tax due under this part 28 must be paid at the time prescribed 
in Sec.  28.6071-1 for filing the return, and at the place prescribed 
in Sec.  28.6091-1 for filing the return.


Sec.  28.6694-1  Section 6694 penalties applicable to return preparer.

    (a) In general. For general rules regarding section 6694 penalties 
applicable to preparers of returns or claims for refund of the tax 
under chapter 15 of subtitle B of the Internal Revenue Code (Code), see 
Sec.  1.6694-1 of this chapter.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed, and advice provided, on or after the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.


Sec.  28.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any tax under chapter 15 of subtitle B of the 
Code is subject to penalties under section 6694(a) in the manner stated 
in Sec.  1.6694-2 of this chapter.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed, and advice provided, on or after the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.


Sec.  28.6694-3  Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any tax under chapter 15 of subtitle B of the 
Code is subject to penalties under section 6694(b) in the manner stated 
in Sec.  1.6694-3 of this chapter.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed, and advice provided, on or after the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.


Sec.  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.

    (a) In general. For rules relating to the extension of the period 
of collection when a tax return preparer who prepared a return or claim 
for refund of tax under chapter 15 of subtitle B of the Code pays 15 
percent of a penalty for understatement of taxpayer's liability, and 
for procedural matters relating to the investigation, assessment, and 
collection of the penalties under section 6694(a) and (b), the rules 
under Sec.  1.6694-4 of this chapter apply.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed, and advice provided, on or after the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.


Sec.  28.6695-1  Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any tax under chapter 15 of subtitle B of the 
Internal Revenue Code (Code) is subject to penalties for failure to 
furnish a copy to the taxpayer under section 6695(a) of the Code, 
failure to sign the return under section 6695(b) of the Code, failure 
to furnish an identification number under section 6695(c) of the Code, 
failure to retain a copy or list under section 6695(d) of the Code, 
failure to file a correct information return under section 6695(e) of 
the Code, and negotiation of a check under section 6695(f) of the Code, 
in the manner stated in Sec.  1.6695-1 of this chapter.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  28.6696-1  Claims for credit or refund by tax return preparers 
and appraisers.

    (a) In general. For rules regarding claims for credit or refund by 
a tax return preparer who prepared a return or claim for refund for any 
tax under chapter 15 of subtitle B of the Internal Revenue Code (Code), 
or by an appraiser that prepared an appraisal in connection with such a 
return or claim for refund under section 6695A of the Code, the rules 
under Sec.  1.6696-1 of this chapter will apply.
    (b) Effective/applicability date. This section applies to returns 
and claims for refund filed, appraisals, and advice provided, on or 
after the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register.


Sec.  28.7701-1  Tax return preparer.

    For the definition of the term tax return preparer, see Sec.  
301.7701-15 of this chapter.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-22574 Filed 9-9-15; 8:45 am]
 BILLING CODE 4830-01-P