Federal Register, Volume 90 Issue 8 (Tuesday, January 14, 2025)

[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Rules and Regulations]
[Pages 3376-3410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00284]

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Vol. 90

Tuesday,

No. 8

January 14, 2025

Part III

Department of the Treasury

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Internal Revenue Service

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26 CFR Part 28

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

Federal Register / Vol. 90 , No. 8 / Tuesday, January 14, 2025 /
Rules and Regulations

[[Page 3376]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 28

[TD 10027]
RIN 1545-BJ43

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance
on the application of a tax on United States citizens and residents, as
well as certain trusts, that receive, directly or indirectly, gifts or
bequests from certain individuals who relinquished United States
citizenship or ceased to be lawful permanent residents of the United
States. The final regulations also provide guidance on the method of
reporting and paying this tax. The final regulations primarily affect
United States citizens and residents, as well as certain trusts, that
receive one or more such gifts or bequests.

DATES:
Effective Date: These regulations are effective January 14, 2025.
Applicability Dates: For dates of applicability, see Sec. Sec.
28.2801-1(b), 28.2801-2(n), 28.2801-3(g), 28.2801-4(g), 28.2801-5(f),
28.2801-6(e), 28.2801-7(d), 28.6001-1(c), 28.6011-1(c), 28.6060-1(b),
28.6071-1(d), 28.6081-1(e), 28.6091-1(b), 28.6107-1(b), 28.6109-1(b),
28.6151-1(b), 28.6694-1(b), 28.6694-2(b), 28.6694-3(b), 28.6694-4(b),
28.6695-1(b), 28.6696-1(b), and 28.7701-1(b).

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

SUPPLEMENTARY INFORMATION:

Authority

This document contains additions and amendments to 26 CFR part 28
(Imposition of Tax on Gifts and Bequests from Covered Expatriates)
addressing the application of section 2801 of the Internal Revenue Code
(Code) and related provisions (the ``final regulations''). The
additions and amendments are issued under sections 2801, 6001, 6011,
6060, 6071, 6081, 6091, 6101, 6107, and 6109 pursuant to the express
delegations of authority provided under those sections. The express
delegations relied upon are referenced in the Background section of
this preamble and in the Summary of Comments and Explanation of
Revisions describing the individual sections of the final regulations.
The final regulations are also issued under the express delegation of
authority under section 7805 of the Code.

Background

This document amends subchapter B of 26 CFR chapter 1 (Estate and
Gift Taxes) by adding part 28 under section 2801 and by expanding
several existing regulations to also apply to the filing and furnishing
of returns and payment of the tax imposed by section 2801 (section 2801
tax). Section 301 of the Heroes Earnings Assistance and Relief Tax Act
of 2008 (HEART Act), Public Law 110-245, 122 Stat. 1624 (2008), added
chapter 15 (Gifts and Bequests from Expatriates) to subtitle B of the
Code (subtitle B), effective June 17, 2008. Before the addition of
chapter 15, subtitle B contained chapters 11 through 14 relating to the
estate tax, the gift tax, and the generation-skipping transfer (GST)
tax, as well as special valuation rules applicable for purposes of
subtitle B. Chapter 15 consists solely of section 2801 and imposes the
section 2801 tax on certain transfers of property by gift (covered
gifts) and on certain transfers of property by bequest (covered
bequests) from certain individuals who expatriate on or after June 17,
2008 (covered expatriates).
The section 2801 tax is imposed on each United States (U.S.)
citizen or resident receiving a covered gift or covered bequest (U.S.
recipient). For this purpose, domestic trusts and foreign trusts that
elect to be treated as domestic trusts solely for purposes of section
2801 (electing foreign trusts) are included in the definition of a U.S.
citizen. Foreign trusts that do not elect to be treated as domestic
trusts for purposes of section 2801 (non-electing foreign trusts) are
not U.S. citizens or residents and, therefore, do not become subject to
the section 2801 tax upon receipt of covered gifts and covered
bequests. Instead, the beneficiaries of non-electing foreign trusts who
are U.S. citizens or residents (U.S. citizen or resident beneficiaries)
become subject to the section 2801 tax upon their receipt of a
distribution from a non-electing foreign trust that is attributable to
covered gifts and covered bequests made to that non-electing foreign
trust.
The section 2801 tax will be computed on Form 708, United States
Return of Tax for Gifts and Bequests Received from Covered Expatriates,
on which a U.S. recipient will report covered gifts and covered
bequests received during the calendar year. If the aggregate value of
the covered gifts and covered bequests received by the U.S. recipient
during the calendar year exceeds the amount of the inflation-adjusted
annual exclusion under section 2503(b) of the Code ($18,000 for 2024),
the section 2801 tax is computed by multiplying the excess by the
highest estate tax rate specified in section 2001(c) of the Code in
effect on the date of receipt, and then reducing the product by any
gift or estate taxes paid to a foreign country with respect to the
covered gifts and covered bequests. The value of each covered gift and
covered bequest is its fair market value as of the date of its receipt.
On September 10, 2015, a notice of proposed rulemaking and a notice
of public hearing (REG-112997-10) were published in the Federal
Register (80 FR 54447) proposing rules related to the section 2801 tax
(proposed regulations). A total of sixteen comments on the proposed
regulations were received and are available at https://www.regulations.gov or upon request. A public hearing on the proposed
regulations was held on January 6, 2016. After consideration of all the
comments, this Treasury decision adopts the proposed regulations, with
revisions, as final regulations. The revisions are discussed in the
following Summary of Comments and Explanation of Revisions section.
Unless otherwise indicated in the Summary of Comments and Explanation
of Revisions, provisions of the proposed regulations for which no
comments were received are adopted without substantive change. The
final regulations include non-substantive modifications, including
modifications that promote consistency across definitions, rules, and
examples and improve the overall clarity of the guidance. Such
modifications are not addressed in the Summary of Comments and
Explanation of Revisions.

Summary of Comments and Explanation of Revisions

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

The Department of the Treasury (Treasury Department) and the IRS
received several general comments on section 2801. One comment objects
to the enactment of section 2801, opining that the section 2801 tax is
unnecessary, infringes on privacy rights, and unfairly applies to
former long-term permanent residents. Other comments object by pointing
out several ways in which the statutory provisions of section 2801 are
not tax neutral, treat expatriates more harshly than if they had
remained

[[Page 3377]]

subject to U.S. gift and estate taxes, and thus violate what the
commenters described as the intent of Congress in enacting section 2801
to make expatriation a tax-neutral event with regard to U.S. transfer
taxes. Some comments request changes and additions to the proposed
regulations to create a more tax-neutral outcome than under the
statute.
The Background section of the preamble of the proposed regulations
describes the history of the addition of chapter 15 and section 2801 to
the Code and references the idea, as explained in a report of the House
Ways and Means Committee regarding an earlier, pre-HEART Act, bill to
enact chapter 15 and section 2801, that the decision to relinquish
citizenship ought to be ``tax neutral.'' See H.R. Rep. No. 110-431, at
113 (2007). More specifically, the report states that an individual's
decision to relinquish citizenship or terminate long-term residency
should not affect the total amount of taxes imposed; that is, the
decision should be ``tax neutral.'' The report further states that, if
U.S. estate or gift taxes are avoided with respect to a transfer of
property to a U.S. person by reason of the expatriation of the donor,
it is appropriate for the recipient to be subject to a tax similar to
the transfer tax that the donor or donor's estate would have been
subject to, had the donor not expatriated. Id. at 114.
Despite the language in the report, section 2801 imposes a tax on
the receipt by a U.S. citizen or resident of certain gifts or bequests
which does not equal, and in some cases is not similar to, the tax that
would have been imposed on the transfer of such gifts or bequests by a
U.S. transferor (that is, one who had not expatriated), as illustrated
by a comparison of the relevant statutory provisions of chapter 11
(estate tax), chapter 12 (gift tax), and chapter 13 (GST tax), with
chapter 15 (section 2801 tax). Obvious dissimilarities between section
2801 and the provisions of chapters 11 through 13 include the absence
in chapter 15 of an applicable credit amount that can be applied to
offset or reduce the estate or gift tax liability (see sections 2010
and 2505 of the Code, for which transfers of up to $13.99 million (the
2025 inflation-adjusted amount) over a lifetime may be offset for
purposes of gift and estate taxes) and the absence of a GST tax for
covered gifts and covered bequests to a U.S. recipient who is a skip
person (see section 2601 of the Code, imposing an additional transfer
tax on GSTs). There are many other dissimilarities between section 2801
and the other transfer tax provisions.
The role of the Treasury Department and the IRS is to implement
section 2801, as enacted by the HEART Act. Thus, to the extent the
comments suggest changes to the statutory text of chapter 15 and
section 2801, the Treasury Department and the IRS do not further
address those comments in this preamble. To the extent the comments
suggest changes or additions to the proposed regulations to create a
more tax-neutral outcome, the Treasury Department and the IRS have
responded to specific comments as the relevant issues are discussed in
this preamble, and in doing so considered both the statutory language
of section 2801 and the scope of regulatory authority granted by
Congress.

2. Definitions

A. Expatriate and Covered Expatriate
Section 2801(f) and proposed Sec. 28.2801-2(h) define the term
covered expatriate by reference to section 877A(g)(1) of the Code.
Proposed Sec. 28.2801-2(h) defines the term expatriate by reference to
section 877A(g)(2). Proposed Sec. 28.2801-2(h) further provides that,
if an expatriate meets the definition of a covered expatriate, the
expatriate is considered a covered expatriate for purposes of section
2801 at all times after the expatriation date, except during any period
beginning after the expatriation date during which such individual is
subject to United States estate or gift tax (estate or gift tax) as a
U.S. citizen or resident. For this exception, the proposed regulations
cite to section 877A(g)(1)(C) of the Code, which indicates that an
individual will not be treated as a covered expatriate for certain
purposes during the time that they are subject to tax as a U.S. citizen
or resident.
Section 877A relies on the income tax definition of the term
resident as described in section 7701(b)(1)(A). Section 28.2801-2(b) of
the proposed regulations, however, applies the estate and gift tax
rules under chapters 11 and 12 of subtitle B to define U.S. resident
for purposes of section 2801, which also is in subtitle B, thereby
providing consistency across the provisions.
One comment suggests that the exception in proposed Sec. 28.2801-
2(h), which excludes an expatriate from being treated as a covered
expatriate during any period in which the expatriate is subject to
estate or gift tax, creates a coherent structure for purposes of
section 2801, but leaves open the possibility that an individual could
be a covered expatriate for purposes of section 877A but not for
purposes of section 2801 and vice versa. The comment states that this
result seems to conflict with sections 2801(f) and 877A(g)(1)(C) and
suggests that the final regulations provide that an expatriate who is
deemed to be an income tax resident of the U.S. will be deemed not to
be a covered expatriate. Another comment expresses support for the rule
in proposed Sec. 28.2801-2(h) as arguably necessary because applying
sections 2801(f) and 877A(g)(1)(C) using the income tax definition of
U.S. resident would create a convenient and simple way to avoid
imposition of the section 2801 tax. For instance, a covered expatriate
could become an income tax resident in one year during which such
person does not also satisfy the transfer tax definition of resident.
During that year, the covered expatriate could make gifts that would
not be subject to gift tax. The following year, the covered expatriate
could terminate the covered expatriate's income tax residency, thereby
allowing the gifts to completely escape transfer taxation. The Treasury
Department and the IRS agree with the latter comment that using the
transfer tax definition of resident for the exception in proposed Sec.
28.2801-2(h) avoids creating an opportunity to circumvent the section
2801 tax. Further, section 2801 is a transfer tax and is part of
subtitle B; section 7701(b) of the Code specifically provides that the
definitions in section 7701(b)(1) do not apply for purposes of subtitle
B. Accordingly, applying the definition of resident under subtitle B
for purposes of this transfer tax under section 2801 and the
corresponding regulations is consistent with the purpose of the
statute. Moreover, as one comment acknowledges, the use of the transfer
tax definition is consistent with the concept of neutrality because it
eliminates the avoidance of estate and gift tax that otherwise would
result from expatriation. For these reasons, the final regulations
adopt the transfer tax definition of U.S. resident without change.
One comment points out that the date on which a person loses U.S.
citizenship was changed by the HEART Act. The comment explains that
this change could create ambiguity as to the exact date of a taxpayer's
expatriation under certain circumstances. The comment requests
clarification of how that date is determined for persons who had
determined that they had expatriated before the effective date of the
HEART Act, and for those with dual citizenship under section
7701(a)(50)(B). The

[[Page 3378]]

Treasury Department and the IRS agree that such clarification would be
both appropriate and helpful. Such clarification, however, would impact
significantly more issues than those related to the section 2801 tax,
and would be better addressed in guidance under sections 877A and 7701,
rather than in regulations under section 2801. This issue is,
therefore, beyond the scope of these final regulations. Accordingly,
the final regulations adopt the language in proposed Sec. 28.2801-2(h)
without change.
B. Foreign Trust and Domestic Trust
Section 2801(a) provides that the section 2801 tax is imposed on a
covered gift or covered bequest received by a U.S. citizen or resident.
Section 2801(e)(4)(A) and (B)(iii) explains that a domestic trust or an
electing foreign trust that receives a covered gift or covered bequest
is treated as a U.S. citizen for the purposes of section 2801. If a
covered gift or covered bequest is received by a non-electing foreign
trust, however, section 2801(e)(4)(B)(i) provides that the section 2801
tax is imposed on any distribution attributable to the covered gift or
covered bequest from the trust to a U.S. citizen or resident.
Therefore, it is important to properly classify a trust receiving a
covered gift or covered bequest as either a domestic or foreign trust
in order to determine the identity of the U.S. citizen or resident
liable for, and the timing of, payment of the section 2801 tax. Section
28.2801-2(c) and (d)(1) of the proposed regulations defines the terms
domestic trust and foreign trust by reference to section 7701(a)(30)(E)
and (31)(B), respectively. No comments were received regarding the
definitions of domestic trust or foreign trust. These final regulations
maintain the same definitions as in the proposed regulations.
C. Covered Bequest
Section 2801(e)(1)(B) defines a covered bequest as any property
acquired directly or indirectly by reason of the death of an individual
who, immediately before such death, was a covered expatriate. The
proposed regulations define covered bequest in section 28.2801-2(f) and
confirm that this definition includes any property acquired directly or
indirectly by reason of the death of a covered expatriate, regardless
of the situs of such property and whether such property was acquired by
the covered expatriate before or after the covered expatriate's
expatriation from the United States. Proposed Sec. 28.2801-3(b), which
contains additional rules and exceptions applicable to covered
bequests, provides that property acquired by reason of the death of a
covered expatriate for purposes of the definition of covered bequest in
Sec. 28.2801-2(f) includes any property that would have been
includible in the gross estate of the covered expatriate under chapter
11 of subtitle B had the covered expatriate been a U.S. citizen at the
time of death.
One comment acknowledges that including property that would have
been includible in the gross estate of the covered expatriate had the
covered expatriate been a U.S. citizen at the time of death appears to
be consistent with legislative intent. However, the comment expresses
concern that the definition of covered bequest in Sec. 28.2801-2(f),
which includes all property passing by reason of the decedent's death,
was too broad. The comment points out that not all property passing by
reason of a decedent's death would be includible in the decedent's
gross estate. The comment provides, as an example, property passing to
a child from a trust created by a grandparent after a term measured by
a now deceased parent's life. The comment suggests revising the
definition of covered bequest in Sec. 28.2801-2(f) to include property
acquired by reason of the death of a covered expatriate, but only to
the extent the property would have been included in the gross estate of
the covered expatriate had the covered expatriate been a United States
citizen immediately before death.
The comment correctly observes that including any property acquired
directly or indirectly by reason of the death of a covered expatriate
may inappropriately subject property to section 2801 tax, such as in
the example provided by the comment (assuming the facts do not support
an indirect gift). However, the suggestion to limit the definition of
covered bequest to property acquired by reason of the death of a
covered expatriate that would have been included in the gross estate of
the covered expatriate is too narrow. Such a definition, for example,
would wrongly exclude property that would otherwise be included in the
gross estate of a covered expatriate even though the property was not
acquired on the death of the covered expatriate (for example, under
section 2035, which increases the gross estate by the value of certain
property transferred within the 3-year period ending on the date of the
covered expatriate's death). The comment's suggested definition also
would exclude all distributions made by reason of the death of a
covered expatriate from non-electing foreign trusts to the extent the
distributions are attributable to covered gifts and covered bequests
made to the foreign trust on or after June 17, 2008. Under section
2801(e)(4)(B)(i), a distribution from a non-electing foreign trust that
is attributable to a covered gift or covered bequest made to the trust
is subject to section 2801 tax in the same manner as if the
distribution were a covered gift or covered bequest. When such a
distribution is made by reason of a death of a covered expatriate, the
distribution is more similar to a covered bequest described in section
2801(e)(1)(B) than a covered gift described in section 2801(e)(1)(A)
and, therefore, is appropriately classified as a covered bequest.
To address the concern expressed in the comment as to property that
would not have been included in the gross estate of the decedent, the
definition of covered bequest in the final regulations instead
describes three categories of property that are included in the
definition of covered bequest. The first category includes in the
definition of covered bequest property acquired by a recipient on or
after June 17, 2008, directly or indirectly by reason of the death of a
covered expatriate but only to the extent the property would have been
included in the covered expatriate's gross estate if the covered
expatriate had been a U.S. citizen immediately before death. The second
category includes in the definition property received from a covered
expatriate that would have been included in the covered expatriate's
estate, even if not acquired directly or indirectly by reason of the
death of a covered expatriate, for example property includible under
section 2035. The third category includes in the definition
distributions made by reason of the death of a covered expatriate from
a non-electing foreign trust to the extent the distributions are
attributable to covered gifts and covered bequests made to the foreign
trust on or after June 17, 2008.
D. Indirect Acquisition of Property
A covered gift or covered bequest is defined in section 2801(e) as
any property acquired directly or indirectly by gift from or by reason
of the death of a covered expatriate. Using transfer tax principles,
Sec. 28.2801-2(i) of the proposed regulations identifies the transfers
that constitute indirect acquisitions of property, to include property
(1) acquired through ownership of an interest in a corporation or other
entity, (2) acquired through one or more foreign trusts, entities, or
persons not subject to the section 2801 tax, (3) paid in satisfaction
of a debt or liability, (4) acquired

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through a power of appointment over property not in trust granted by a
covered expatriate to a non-covered expatriate, and (5) acquired as a
result of any other indirect transfer by a covered expatriate. Comments
were received with respect to each example.
One comment states that the examples of an indirect acquisition of
property in Sec. 28.2801-2(i)(2) and (3) of the proposed regulations
go too far in that they are not limited by the extent to which the
interest indirectly received is attributable to a covered gift or
covered bequest. Although these examples illustrate the definition of
``indirect acquisition of property'' for purposes of the 2801 tax, this
definition is relevant only to the extent that the indirect acquisition
is of an interest in a covered gift or covered bequest. When the
definition of indirect acquisition is applied in relation to a covered
gift or covered bequest, the appropriate limitation is applied. As a
result, no change is needed in the final regulations to achieve the
limitation sought by the commenter.
Several comments observe that the rule in Sec. 28.2801-2(i)(1) of
the proposed regulations is consistent with the rule in Sec. 25.2511-
1(h)(1) of the Gift Tax Regulations, which describes the gift tax
consequences of a transfer made to a corporation. One comment requests
that proposed Sec. 28.2801-2(i)(1) be revised to clarify the metrics
used for determining a U.S. citizen or resident owner's share of a
covered gift or covered bequest made to the entity. For instance, the
commenter noted that an owner of an interest in an entity could have a
mix of interests and/or rights in capital, profits, voting,
distribution, liquidation, etc., and suggested that the final
regulations permit taxpayers to use any reasonable method to account
for these interests and rights. The Treasury Department and the IRS
note that this issue is not unique to section 2801; the same issue
arises in the gift tax context under chapter 12. See, e.g., Sec.
25.2511-1(h)(1) (extent of a shareholder's interest relevant to
determine the gift tax consequences of a transfer made by a corporation
to another shareholder). Given the broader, more factual nature of
determining the extent of an owner's interest and rights in an entity,
this issue is better addressed under the Gift Tax Regulations, and
therefore is beyond the scope of these final regulations. As a result,
this suggestion is not adopted.
Several comments state that the illustrations in proposed Sec.
28.2801-2(i)(2), (3), and (5) are overbroad. In particular, the
comments state that the illustrations in Sec. 28.2801-2(i)(2)
(regarding property acquired through one or more persons not subject to
the section 2801 tax) and (3) (regarding property paid in satisfaction
of a debt or liability) are not tethered to any consideration of timing
or gratuitous intent. One comment observes that the proposed definition
would require a recipient to trace a potentially long chain of title to
determine whether the property received would be a covered gift or
covered bequest to that recipient. Another comment states that a non-
covered expatriate family member of the covered expatriate and the U.S.
recipient should not be considered an intermediary of the covered
expatriate if that family member had dominion and control over the
property and acted independently of the covered expatriate. Two
comments suggest replacing Sec. 28.2801-2(i)(2) and (5) of the
proposed regulations with a rule that would include, as an indirect
acquisition, only property acquired pursuant to a plan, one of the
principal purposes of which is the avoidance of transfer tax, similar
to the rules in Sec. Sec. 1.643(h)-1 and 1.679-3(c) of the Income Tax
Regulations. The rules in Sec. Sec. 1.643(h)-1 and 1.679-3(c) employ a
substance over form approach with respect to certain transfers made
through an intermediary.
These final regulations modify, in part, the definition of indirect
acquisition of property to address some of the concerns regarding
proposed Sec. 28.2801-2(i)(2), (3), and (5) as expressed in the
comments. The Treasury Department and the IRS agree that the
illustrations in Sec. 28.2801-2(i)(2) and (5) of the proposed
regulations may capture transfers that, in some cases, are not truly
indirect transfers and should not be subject to tax under section 2801.
Thus, the final regulations replace the rules in proposed Sec.
28.2801-2(i)(2) and (5) with a single illustration that refers to an
acquisition that is, in substance, a covered gift or covered bequest
from a covered expatriate. In addition, the final regulations add a
more general description of property that is gratuitously passed from
or conferred by the covered expatriate through another person or
entity, and the rules in proposed Sec. 28.2801-2(i)(1) through (5) are
converted in the final regulations to a nonexclusive list of
illustrations describing the application of the definition for purposes
of section 2801. The suggestion is not adopted to replace the rule in
proposed Sec. 28.2801-2(i)(2) and (5), applicable to acquisitions of
property, with a rule that would add a principal purpose of tax
avoidance test applicable to distributions from and to foreign trusts,
similar to the rules in Sec. Sec. 1.643(h)-1 and 1.679-3(c). As with
other interpretations of terms in section 2801 (for example, U.S.
resident), applying transfer tax principles to section 2801 is the
better interpretation of the statute both because section 2801 is a
transfer tax, and the intent of the transferor generally is irrelevant
for transfer tax purposes.
Finally, comments recommend narrowing the scope of proposed Sec.
28.2801-2(i)(4) to include only property acquired pursuant to a non-
covered expatriate's non-general power of appointment (as opposed to
all types of powers of appointment) granted by a covered expatriate
over property not in trust. Such a change would ensure that the
exercise, release, or lapse of a non-covered expatriate's general power
of appointment over property not in trust would not be a covered gift
or covered bequest, which the commenters contend is consistent with the
general gift tax treatment of the holder of a general power of
appointment as the owner of the property subject to the power. If the
commenters' recommendation were adopted, it would allow a covered
expatriate to avoid the section 2801 tax by granting a general power of
appointment over non-trust property to a person who is neither a
covered expatriate nor a U.S. citizen or resident, but who will
exercise or release the power or allow it to lapse in favor of a U.S.
citizen or resident. Thus, the final regulations continue to describe
the acquisition of property pursuant to a non-covered expatriate's
power of appointment (whether general or non-general) granted by a
covered expatriate over property not in trust as an example of an
indirect acquisition of property for purposes of section 2801. The
final regulations clarify, however, that acquiring property pursuant to
a power of appointment means as the result of an exercise, release, or
lapse of that power, without regard to the de minimis exceptions in
section 2041(b)(2) or 2514(e). This latter clarification is necessary
because section 2801(c) provides the only de minimis exception to the
imposition of section 2801 tax.
E. Other Definitions
Several comments suggest other revisions to Sec. 28.2801-2 of the
proposed regulations to make the regulations more user friendly,
including using consistent terminology. Those suggestions include the
replacement of citizen or resident of the United States with the term
used in the statute, U.S. citizen or resident, the addition of a
definition of the term non-electing foreign trust, and the correction
of the reference in the definition of the term

[[Page 3380]]

general power of appointment to section 2041(b)(1) (rather than section
2041(b)) to clarify that the exclusions for lapses and certain pre-1943
powers under section 2041(b)(2) and (3), respectively, do not apply for
purposes of section 2801. These suggestions have been adopted and the
appropriate changes are reflected in the final regulations. The
suggestion that other terms (such as gift and charitable remainder
trust) used throughout the proposed regulations, as well as other terms
unique to section 2801 that are defined elsewhere in the proposed
regulations (in the particular section where each is relevant), either
be defined in Sec. 28.2801-2 or referred to by cross-references, has
not been adopted. Several such terms are defined elsewhere in the Code
or in the corresponding regulations, and those that are specific to a
particular issue under section 2801 are defined and applied in the
discussion of that particular issue in the relevant section of the
regulations in an effort to make the regulations more readily
understood.

3. Exceptions to Definitions of Covered Gift and Covered Bequest

A. Transfers Otherwise Subject to Gift or Estate Tax
Section 2801(e)(2)(A) and (B) excepts from the definitions of
covered gift and covered bequest, respectively, any taxable gift by a
covered expatriate and any property included in the gross estate of a
covered expatriate, if such property is reported on a timely filed gift
or estate tax return (timely filed requirement).
One comment suggests that a covered expatriate be allowed to treat
transferred property as a transfer of a U.S. situs asset, report the
transfer on a timely filed gift or estate tax return, and thereby avoid
the transfer being a covered gift or covered bequest. By reducing the
effective tax rate on the transfer, the comment states that this
approach would be consistent with the tax neutrality intended at
enactment of section 2801.\1\ These final regulations do not adopt the
commenter's suggestion, because it is inconsistent with section 2801.
Additionally, if adopted, such a filing in effect would override the
provisions of sections 2511(a) (applying the gift tax only to transfers
by nonresident, noncitizens of property situated within the United
States) and 2103 (including in the gross estate of nonresident,
noncitizens only that part of property that is situated within the
United States at the time of death) for certain transfers by covered
expatriates, a result not contemplated by the statutory language of
section 2801. While section 2801 allows a foreign trust to elect to be
treated as a domestic trust, there is no indication that Congress
intended to allow other elections that would operate in the way
suggested by this commenter.
---------------------------------------------------------------------------

\1\ For a discussion of the ``tax neutral'' objective stated in
H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act,
bill, see part 1 of the Summary of Comments and Explanation of
Revisions section of this preamble.
---------------------------------------------------------------------------

i. Timely Paid Requirement
For property reported on the covered expatriate's gift or estate
tax return to be excluded from the definition of a covered gift or
covered bequest, Sec. 28.2801-3(c)(1) and (2) of the proposed
regulations requires not only the timely filing of that return, but
also the timely payment of the tax shown on that return (timely paid
requirement).
Comments state that the timely paid requirement should be
eliminated because there is no statutory basis for imposing that
requirement. Comments also note that the timely paid requirement would
cause a double tax to be imposed on a single transfer if the gift or
estate tax is not timely paid: gift or estate tax due from the covered
expatriate or covered expatriate's estate, as well as section 2801 tax
due from the U.S. recipient of that property. As to the latter comment,
the Treasury Department and the IRS note that the potential for
imposing tax on both the covered expatriate or the covered expatriate's
estate and the U.S. citizen or resident receiving the covered gift or
covered bequest is already created by the timely filed requirement
under section 2801(e)(2)(A) and (B), which would deny the exception if
the gift or estate tax return is filed late. Like the timely filed
requirement, the timely paid requirement limits the potential for tax
avoidance by ensuring that an excepted transfer is timely reported and
that the tax on such excepted transfer is timely paid by the covered
expatriate, over whom it may be difficult for the IRS to assert
jurisdiction to enforce that tax liability.
Providing a timely paid requirement is not beyond the Treasury
Department and IRS's general regulatory authority to implement the
Congressional mandate of section 2801, including addressing compliance
concerns. However, the Treasury Department and the IRS have considered
other existing gift and estate tax enforcement mechanisms which also
could address compliance concerns, such as under subtitle F of the Code
and the ability of the IRS to collect the tax liability of the covered
expatriate or covered expatriate's estate from any transferee of the
property. See section 6324 of the Code (establishing special estate and
gift tax liens that are separate and distinct from the general tax
lien) and section 6901 of the Code (providing transferee gift tax or
estate tax liability is to be assessed, paid, and collected in the same
manner and subject to the same provisions and limitations as the tax
imposed on the decedent or donor). Further, a timely paid requirement
could present administrability and finality challenges--for example,
when the amount paid with the return differs from the amount that is
ultimately owed due to a valuation change or other adjustment after
examination. In view of the above, the final regulations adopt the
commenters' suggestion to eliminate the timely paid requirement as it
relates to this exception from the definitions of covered gift and
covered bequest.
ii. Both Section 2801 Tax and Gift or Estate Tax on Same Transfer
As discussed in part 3.A.i. of the Summary of Comments and
Explanation of Revisions section of this preamble, a late filing of a
gift or estate tax return by a covered expatriate or covered
expatriate's estate prevents the transferred property from being
excluded from the definition of a covered gift or covered bequest and
may lead to the imposition of gift or estate tax as well as the
imposition of the section 2801 tax on the same transfer of that
property. Further, both the gift or estate tax and the section 2801 tax
ultimately may be payable by the U.S. citizen or resident if transferee
liability is imposed if the covered expatriate or covered expatriate's
estate fails to pay the gift or estate tax due. See sections 6324(a)(2)
and (b) and 6901.
Comments suggest that the final regulations provide a remedy to
avoid the payment, on the same transfer, of both gift or estate tax by
the covered expatriate or covered expatriate's estate and the section
2801 tax by the U.S. citizen or resident receiving the covered gift or
covered bequest. The comments suggest alternative proposals to be added
to the final regulations, including (a) providing for a refund to a
U.S. citizen or resident who paid the section 2801 tax when gift or
estate tax has been paid by a covered expatriate or covered
expatriate's estate; (b) providing a credit or refund to the U.S.
citizen or resident, or the covered expatriate or covered expatriate's
estate, of whichever of those taxes is paid last; and (c) eliminating
the timely filed requirement if the gift or estate tax is paid by the
covered expatriate or the covered expatriate's estate prior to the due
date of Form 708.

[[Page 3381]]

Section 2801(e)(2)(A) and (B) excepts from the definitions of
covered gift and covered bequest, and thus from liability for the
section 2801 tax, property reported on a timely filed gift or estate
tax return. These sections explicitly provide an exception only for
property shown on a timely filed return, and any exception from tax for
covered gifts or covered bequests not reported on a timely return would
ignore and give no meaning to the timely filed language in section
2801. Accordingly, eliminating liability for the section 2801 tax when
the transfer of such property is not timely reported by a covered
expatriate or covered expatriate's estate on a gift or estate tax
return is contrary to the statute. Thus, despite the potential for the
imposition of either estate or gift tax on the transfer of such
property as well as the imposition of the section 2801 tax on the
recipient's acquisition of such property, these final regulations do
not adopt the suggestions of the comments.
Similarly, one comment suggests that a recipient who paid the U.S.
gift or estate tax liability of the donor or decedent due to transferee
liability should have a credit for those taxes against the recipient's
section 2801 tax liability. These final regulations do not adopt this
comment for the following reasons. First, a credit given to the
recipient for gift or estate tax paid pursuant to transferee liability
could incentivize the transferor subject to gift or estate tax to
resist payment and force collection from the recipient. Second, section
2801 (unlike section 1446(d) of the Code,\2\ for example) does not
provide for such a credit.
---------------------------------------------------------------------------

\2\ Section 1446(d) provides a credit under section 33 of the
Code for a foreign partner's share of the withholding tax paid by
the partnership under section 1446.
---------------------------------------------------------------------------

Finally, in response to a comment, Example 2 in proposed Sec.
28.2801-3(f) is updated in the final regulations to clarify that, under
the facts of the example, the covered expatriate's estate must file an
estate tax return (Form 706-NA, United States Estate (and Generation-
Skipping Transfer) Tax Return, Estate of nonresident not a citizen of
the United States), and pay the estate tax with respect to certain
property, despite the requirement that the son of the covered
expatriate in that example file Form 708 and pay the section 2801 tax
with respect to the same property.
B. Property Subject to Section 2801 Tax Both as Covered Gift and as
Covered Bequest
Noting that a U.S. citizen or resident may receive property that
constitutes a covered gift and, subsequently, a covered bequest, a
comment suggests that the definition of covered bequest should exclude
any property treated as acquired by reason of the death of a covered
expatriate if the property previously was subject to the section 2801
tax as a covered gift from the same covered expatriate. For instance,
when a covered expatriate transfers a remainder interest in real
property to a U.S. recipient and retains a life estate, the value of
the remainder interest is a covered gift, and the value of the entire
real property is a covered bequest at the covered expatriate's death.
See section 2036(a)(1).
The Treasury Department and the IRS are sympathetic to the
commenter's concern that the same property could be subject to section
2801 tax first as a covered gift and subsequently as a covered bequest
acquired from the same covered expatriate, and agree there should be no
such duplication of the liability under section 2801. However, rather
than excluding from the definition of covered bequest any property
previously subject to the section 2801 tax as a covered gift, it is
appropriate and more in line with the structure of the transfer tax
system to exclude instead the value of the covered gift that was
previously subject to section 2801 tax from the value of the covered
bequest of that same property. In this way, similar to the way that
section 2001(b) does not subject to estate tax the value of a gift that
was previously subject to gift tax, the value already subjected to
section 2801 would not be retaxed and the computation of the section
2801 tax would be able to properly take into account the post-gift
appreciation in the value of the transferred property through the U.S.
persons' receipt of the covered bequest. Accordingly, Sec. 28.2801-
3(c)(3) of the final regulations includes a rule that limits the value
of a covered bequest to the amount that exceeds the value of the
covered gift to which the section 2801 tax previously applied.
C. Transfers to Spouse
Section 2801(e)(3) excepts from the definitions of covered gift and
covered bequest a gift or bequest that would qualify for a marital
deduction under section 2056 or 2523 if the donor or decedent were a
U.S. person.
i. QDOT and QTIP Elections for Non-U.S. Situs Property
Under proposed Sec. 28.2801-3(c)(4), the exception to the
definitions of covered gift and covered bequest for transfers to a
spouse that are dependent upon the making of a qualified terminable
interest (QTIP) or qualified domestic trust (QDOT) election only
applies if a valid QTIP or QDOT election in fact is made. Because these
are elective choices with different tax consequences, the desire to
make the election cannot be presumed in all cases.
Many of the comments received on the proposed rule requiring the
making of a valid QTIP or QDOT election concern non-U.S. situs
property. The comments received generally fall into two categories:
those comments that conclude that a covered expatriate or a covered
expatriate's executor may make a valid QTIP or QDOT election with
respect to only U.S. situs property; and those comments that conclude
that a QTIP or QDOT election also may be made with respect to non-U.S.
situs property and request guidance on how such an election might be
made with respect to non-U.S. situs property. With respect to the
former, the comments state that a covered expatriate or a covered
expatriate's estate is limited to making a QTIP or QDOT election with
respect to U.S. situs property because only the transfer of U.S. situs
property by a covered expatriate is subject to U.S. gift and estate
taxation under sections 2511(a) and 2103. With respect to the latter,
different comments suggest various methods of allowing a QTIP or QDOT
election to be made with respect to non-U.S. situs property, including
on a Form 706-NA filed by a trust, on a Form 708 filed by a U.S.
recipient, and by a trust that is a U.S. recipient of a foreign non-
electing trust.
The Treasury Department and the IRS agree with the comments in the
first category that, for the exception to the definitions of covered
gift and covered bequest to apply under section 2801(e)(3), a covered
expatriate or a covered expatriate's estate is limited to making a QTIP
or QDOT election with respect to only U.S. situs property. Section
2801(e)(3) provides no basis for allowing a QTIP or QDOT election to be
made for property that is not subject to U.S. gift or estate tax, and,
furthermore, it provides no mechanism for making the election and no
indication that the IRS should create such a mechanism through
regulations. In addition, adopting the position of the latter comments
and providing a method to make a QTIP or QDOT election for non-U.S.
situs property (in addition to U.S. situs property) would be
inconsistent with the QTIP and QDOT statutory provisions that defer,
but do not eliminate, transfer tax on property qualifying for the
marital deduction. If such a rule were adopted so that such property
would not be subject to section 2801 tax upon the initial gift or
bequest

[[Page 3382]]

by the covered expatriate, such property also would not be subject to
gift or estate tax under section 2519, 2044, or 2056A(b) upon any
disposition or distribution or on the death of the covered expatriate's
spouse. Consequently, covered expatriates and the estates of covered
expatriates would be afforded more favorable transfer tax treatment
than that available to U.S. citizens. The Treasury Department and the
IRS also note that a covered expatriate may obtain the benefits of the
exception in section 2801(e)(3) with respect to non-U.S. situs property
by making an outright gift or bequest of that property to a U.S.
citizen spouse, or a bequest to a trust described in section 2056(b)(5)
that provides the surviving spouse with both a life estate and a
general power of appointment. For these reasons, the final regulations
retain the proposed rule that requires a valid QTIP and/or QDOT
election in order for property to qualify for this exception to the
definitions of covered gift and covered bequest, and the regulations
further clarify that such an election can be made only with respect to
property subject to gift or estate tax, that is, only with respect to
U.S. situs property.
ii. Distributions From Non-Electing Foreign Trusts
Transfers from a covered expatriate to a non-electing foreign trust
are covered gifts or covered bequests, but are not subject to the tax
under section 2801 until a distribution is made from that trust.
Specifically, section 2801 imposes the tax on distributions from that
trust to a U.S. recipient to the extent those distributions are
attributable to the covered gifts or covered bequests contributed to
the trust.
A few comments suggest that, for transfers to a non-electing
foreign trust, section 2801(e)(4)(B)(i) supports applying the marital
exception at the time of the distribution from the non-electing foreign
trust to the U.S. spouse, because that is when tax under section 2801
tax is imposed. Recognizing that the marital deduction is applied at
the time of the transfer giving rise to gift or estate tax, these
comments contend that this approach would be consistent with transfer
tax principles. These comments also state that this approach would be
consistent with the goal of tax neutrality as applied to surviving
spouses, in that the imposition of the section 2801 tax should not
depend upon whether a non-electing foreign trust (that would qualify
for the marital deduction) is interposed between the donor or decedent
and the receipt by the surviving spouse. See part 1 of the Summary of
Comments and Explanation of Revisions section of this preamble for a
discussion of the ``tax neutral'' objective stated in H.R. Rep. No.
110-431 with regard to an earlier, pre-HEART Act, bill. The comments
acknowledge that, under their interpretation, a transfer of property to
a non-electing foreign trust would be treated differently than a
transfer of property to a domestic trust or an electing foreign trust;
however, they posited that the difference is justified by the timing of
the transfer taxable under section 2801. Specifically, the comments
point out that by its express terms, the statute treats a non-electing
trust differently with regard to the timing of the imposition of the
tax and the payee of that tax.
The Treasury Department and the IRS have carefully considered the
merits and implications of the suggestion to apply the marital
exception at the time of the distribution from the non-electing foreign
trust. The proper interpretation of section 2801(e)(3) and (4)(B)(i),
however, does not permit the creation of a special rule for non-
electing foreign trusts that would provide an opportunity for a marital
exception at the time of a distribution from the trust. Unlike the
marital deduction for estate and gift taxes, the exception for marital
transfers under section 2801 is an exception to the definitions of
covered gift and covered bequest. Those definitions apply to determine
whether a contribution to a non-electing foreign trust is a covered
gift or covered bequest, and thus the availability of that exception is
determined as of the time of the covered expatriate's funding of the
non-electing foreign trust. For this reason, even though the U.S.
spouse's receipt of property attributable to the covered gift or
covered bequest occurs and becomes taxable under section 2801 only upon
its distribution out of the trust, the availability of the marital
exception cannot be applied instead at the time of the distribution
from that trust.
Two other comments suggest that a distribution from a non-electing
foreign trust to a U.S. citizen or resident spouse should be treated as
an indirect gift or bequest to which the exception could be applied.
However, to do so would imply that all trust distributions are indirect
transfers, which would go too far. In addition, if such an indirect
transfer would have qualified for the transfer tax marital deduction at
all, it effectively would override section 2801(e)(4), would confer a
tax advantage on a covered expatriate that is unavailable to a U.S.
person, and would be (as one comment concludes) overly generous. For
example, a transfer of non-U.S. situs property by a covered expatriate
at death outright to the covered expatriate's U.S. citizen spouse is
not a covered bequest, because such transfer would have qualified for
the estate tax marital deduction if the covered expatriate were a U.S.
person. Similarly, a transfer of non-U.S. situs property by a covered
expatriate at death to a non-electing foreign trust that qualifies for
the estate tax marital deduction under section 2056(b)(5) is not a
covered bequest because such transfer would have qualified for the
estate tax marital deduction if the covered expatriate were a U.S.
person. In these situations, because the contributions to the trust are
not covered bequests, not only are distributions from the non-electing
foreign trust to the covered expatriate's U.S. citizen spouse not
subject to the section 2801 tax pursuant to the exception in section
2801(e)(3), but distributions to the remainder beneficiary upon such
spouse's death also are not subject to the section 2801 tax. By
contrast, a transfer of non-U.S. situs property from a covered
expatriate at death to a trust for the benefit of the covered
expatriate's U.S. citizen spouse and U.S. citizen children is a covered
bequest because such transfer would not have qualified for the estate
tax marital deduction if the covered expatriate were a U.S. person. If
such trust is a non-electing foreign trust, the section 2801 tax is not
payable until there is a distribution to a U.S. citizen or resident.
When the trust makes a distribution to the covered expatriate's U.S.
citizen spouse, that spouse is liable for the section 2801 tax because
the distribution is attributable to a covered bequest and is taxed ``in
the same manner as if such distribution were a covered gift or covered
bequest.'' Section 2801(e)(4)(B)(i).
These final regulations explicitly address the application of the
section 2801(e)(3) exception to the definition of covered gift or
covered bequest in Sec. 28.2801-3(c)(5) and in Example 2 to Sec.
28.2801-5(e).
D. Transfers to Charity
To the extent a gift or bequest would qualify for a charitable
deduction under section 2055 or 2522 if the donor or decedent were a
U.S. citizen or resident, such gift or bequest is excepted under
section 2801(e)(3) and Sec. 28.2801-3(c)(3) of the proposed
regulations from the definitions of covered gift and covered bequest.
Regarding distributions to qualifying charitable organizations from a
non-electing foreign trust, a few comments assert that section
2801(e)(4)(B)(i) supports applying the exception at the time of
distribution and explain that this would avoid imposing

[[Page 3383]]

the section 2801 tax on a U.S. charity. The comments explain that their
analysis regarding the marital exception, which is set forth in part
3.C.ii. of the Summary of Comments and Explanation of Revisions section
of this preamble, applies equally to the charitable exception. Because
this exception depends upon the contribution to the trust being
eligible for a transfer tax charitable deduction, and for the reasons
described in part 3.C.ii. of the Summary of Comments and Explanation of
Revisions section of this preamble, these final regulations have not
adopted the interpretation advanced by the comments.
Section 28.2801-4(a)(2)(iii) of the proposed regulations provides
that a domestic trust qualifying as a charitable remainder trust (as
that term is defined in Sec. 1.664-1(a)(1)(iii)(a)) is subject to
section 2801 when it receives a covered gift or covered bequest, and
that the charitable remainderman's share of each transfer to the
charitable remainder trust is not a covered gift or covered bequest.
The proposed regulations further provide that, to compute the amount of
covered gifts and covered bequests taxable to the charitable remainder
trust for a calendar year, the charitable remainder trust will (A)
calculate, in accordance with the regulations under section 664 and as
of the date of the trust's receipt of the contribution, the value of
the remainder interest in each contribution received in such calendar
year that would have been a covered gift or covered bequest without
regard to section 2801(e)(3), (B) subtract the remainder interest in
each such contribution from the amount of that contribution to compute
the annuity or unitrust (income) interest in that contribution, and (C)
add the total of such income interests, each of which is the portion of
the contribution that constitutes a covered gift or covered bequest to
the trust.
One comment notes that the proposed regulations do not indicate
whether the payment of section 2801 tax by a charitable remainder trust
is disregarded in computing the amount of annuity or unitrust
distributions and in determining whether the 10 percent minimum
remainder requirement in section 664(d)(1)(D) and (2)(D) and the
probability of exhaustion test described in Rev. Rul. 70-452, 1970-2
C.B. 199, are satisfied. The comment observes that, if the tax imposed
by section 2801 were considered in determining whether the 10 percent
minimum remainder requirement and probability of exhaustion tests are
satisfied, then most trusts that owe tax under section 2801 are likely
to be disqualified as a charitable remainder trust. The comment also
observes, however, that, if the tax is not considered in determining
the annuity amount, then the charitable remainder will be overvalued.
One comment points out that the proposed regulations do not provide
guidance on whether a charitable remainder trust's payment of section
2801 tax should be allocated to income or principal for the purpose of
determining the character of distributions under section 664(b) and
Sec. 1.664-1(d)(2).
The proposed regulations also do not contain any guidance on how a
domestic trust or electing foreign trust that qualifies as a charitable
lead trust under section 2055(e)(2)(B) or 2522(c)(2)(B) is to compute
the 2801 tax. Several comments suggest that the final regulations
provide that a charitable lead trust should compute the section 2801
tax in a similar manner to a charitable remainder trust, such that the
charitable lead interest could be subtracted from the total value of
the covered gift or bequest to determine the amount that is subject to
the section 2801 tax.
As the comments note, the proposed regulations do not provide any
rules on the effect of a charitable remainder trust's tax payment on
the trust's qualification under section 664. This is a complex and
foundational issue, such that final rules regarding charitable
remainder trusts should not be promulgated without further
consideration and an opportunity for notice and comment. Additionally,
as the comments point out, the proposed regulations do not provide any
rules on charitable lead trusts, and, therefore, final rules regarding
charitable lead trusts should not be promulgated without further
consideration and an opportunity for notice and comment. Accordingly,
Sec. 28.2801-4(a)(2)(iii) of the final regulations is reserved for
these purposes.

4. Computation of Section 2801 Tax

Under section 2801(a) and (c), the section 2801 tax is determined
by reducing the total value of covered gifts and covered bequests
received by a U.S. recipient during the calendar year by the dollar
amount of the per-donee exclusion in effect under section 2503(b) for
that calendar year ($18,000 in 2024) (section 2801(c) amount), and then
multiplying the net amount by the highest estate or gift tax rate in
effect during that calendar year (40 percent in 2024). The reference in
section 2801(c) to section 2503(b) has the sole purpose of defining the
amount by which to reduce the aggregate value of covered gifts and
covered bequests received by a U.S. citizen or resident during the
calendar year, as acknowledged in the comments. Under section 2801(d),
the resulting tax then is reduced by any estate or gift tax paid to a
foreign country with regard to such covered gifts and covered bequests.
Section 28.2801-4(b) (on the computation of the section 2801 tax) and
28.2801-4(e) (on the reduction of the section 2801 tax for foreign gift
or estate tax paid) of the proposed regulations are consistent with
these statutory rules.
A. Effective Tax Rate
Several comments note that the effective tax rate of the section
2801 tax on a covered gift is much higher than the effective tax rate
for a gift subject to gift tax because the base on which the section
2801 tax is imposed includes the amount of the section 2801 tax payable
by the U.S. recipient (making it ``tax inclusive'') while the base on
which the gift tax is imposed does not include the amount of the gift
tax payable by the donor (making it ``tax exclusive''). These comments
contend that this result is a deviation from Congress' stated goal of
tax neutrality, and one comment suggests that the final regulations
allow a covered expatriate instead to elect to treat a gift as a
transfer of U.S. situs property, to reduce the effective section 2801
tax rate on the covered gift.
As discussed in part 1 of the Summary of Comments and Explanation
of Revisions section of this preamble, section 2801 imposes a tax that
does not equal, and in some cases is not similar to, the tax that would
have been imposed on the same transfer by a U.S. transferor. The
effective tax rate on covered gifts under section 2801 as compared to
the effective tax rate on taxable gifts under chapter 12 is another
example of this. While Congress could have allowed a covered expatriate
to elect to treat a covered gift of non-U.S. situs property as a
transfer of U.S. situs property, it did not do so. (But see section
2801(e)(4)(B)(iii) allowing foreign trusts to elect to be treated as a
domestic trust for purposes of section 2801). The statute does not
provide any reasonable regulatory interpretation that the section 2801
tax on covered gifts should be levied on less than the entire amount of
the covered gift, and the statute does not contemplate a regulatory
rule allowing for a deduction or exclusion to estimate a tax exclusive
section 2801 tax rate. Accordingly, these final regulations do not
adopt the commenters' suggestion as it would be contrary to the
statute.

[[Page 3384]]

B. Section 2801(c) Amount
Section 28.2801-3(d) of the proposed regulations provides that the
recipient of a covered gift or covered bequest made to a trust is the
trust and not any individual who holds a general power of appointment
or power of withdrawal over trust property. Several comments recommend
that the final regulations treat a transfer to a trust as a transfer to
an individual to the extent of the individual's general power or
withdrawal right. The comments acknowledge that this would increase the
section 2801(c) amount available to shield a covered gift or covered
bequest from the section 2801 tax when multiple individuals have
withdrawal rights, but state this treatment is consistent with the
treatment of withdrawal rights under gift tax principles and thus
furthers the statutory goal of tax neutrality. See part 1 of the
Summary of Comments and Explanation of Revisions section of this
preamble for a discussion of the ``tax neutral'' objective stated in
H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill.
One comment suggests that there is no authority to deny the status of
recipient to the holder of a withdrawal right. For the reasons stated
below, these final regulations do not adopt the commenters'
recommendation.
The holder of a withdrawal right over trust property is the holder
of a general power of appointment. For gift tax purposes, neither the
grant nor the receipt of a general power of appointment is treated as a
taxable gift; rather, it is the possession of such a power at death, or
the exercise or release of such a power that is a taxable event for
gift and estate tax purposes. Thus, the proposed treatment of a general
power of appointment--that is, not as the receipt of a covered gift or
bequest--is consistent with transfer tax principles. In addition, while
section 2801 is silent on the treatment of general powers of
appointment, section 2801(e)(4) provides specific rules applicable to a
covered gift or covered bequest made to a domestic or electing foreign
trust: specifically, the section 2801 tax is imposed on the recipient
trust. Implementing the recommendation proposed by the commenters would
violate the provisions of section 2801(e)(4)(A)(ii) requiring that the
tax imposed on a covered gift or covered bequest made to a domestic
trust be paid by that trust. By, in effect, defining the donee domestic
trust as the recipient of the covered gift or covered bequest, the
statute imposes the filing and tax payment obligations on the domestic
trust, regardless of the identity and rights of the trust
beneficiaries. As a result, the receipt of property by the domestic
trust does not have to be reported by and taxed to both the trust and
each holder of a general power of appointment or withdrawal right over
trust property. Treating each such power holder as an additional
recipient at the time of the trust contribution would add
administrative complexity and burden both to taxpayers and the IRS.
Similarly, under section 2801(e)(4)(B), it is the recipient of a
distribution from a non-electing foreign trust who is treated as the
recipient of the covered gift or covered bequest to the trust. No
section 2801 tax is imposed on covered gifts or covered bequests to a
non-electing foreign trust until a trust distribution is made to a U.S.
recipient. It is the property distribution pursuant to the exercise,
release, or lapse of a general power of appointment over such a trust,
rather than the grant of such a power, that is a distribution
triggering the imposition of the section 2801 tax.
As a result, in the case of a transfer to a trust, a domestic trust
is the recipient who is entitled to reduce the value of a covered gift
or covered bequest received during the calendar year by the section
2801(c) amount. These rules also apply to an electing foreign trust.
Finally, comments request guidance for trusts in the potential
situation where a domestic trust or an electing foreign trust may be
unable to pay the section 2801 tax upon the exercise of an individual
withdrawal right. Such a situation, where the trustee is faced with
balancing the obligation to satisfy tax obligations with the duty to
make distributions as directed by the trust instrument, is not unique
to the section 2801 tax (for example, an obligation to satisfy an
estate tax obligation may conflict with a specific bequest, or an
obligation to satisfy a GST tax obligation may conflict with a
distribution provision to a trust beneficiary). Given the broader
issues concerning a trustee's duty to administer a trust, such issues
are better addressed in more comprehensive regulations and are
therefore beyond the scope of these final regulations.
C. Foreign Gift or Estate Tax
Consistent with section 2801(d), Sec. 28.2801-4(e) of the proposed
regulations provides that the section 2801 tax is reduced by the amount
of any gift or estate tax paid to a foreign country with respect to a
covered gift or covered bequest. Pointing to section 2014(a), which
allows a credit against estate tax for any estate, inheritance, legacy,
or succession taxes paid to any foreign country, two comments suggest
that, in the interest of tax neutrality, these final regulations also
allow a reduction for any foreign tax imposed on a covered gift or
covered bequest that is similar to, but imposed in lieu of, a gift or
estate tax, such as an inheritance tax or a deemed capital gains tax.
See part 1 of the Summary of Comments and Explanation of Revisions
section of this preamble for a discussion of the ``tax neutral''
objective stated in H.R. Rep. No. 110-431 with regard to an earlier,
pre-HEART Act, bill. These final regulations do not adopt the
commenters' suggestion, because the plain language of section 2801(d)
unambiguously limits the reduction to the amount of gift or estate tax
paid to a foreign country with respect to a covered gift or covered
bequest and does not contain the kind of statutory language that
appears in section 2014.
A comment also suggests that these final regulations allow a refund
of the section 2801 tax if foreign gift or estate tax is paid after
payment of the section 2801 tax. In such a scenario, a refund is
available under section 6511 if the U.S. recipient files a claim for
refund or a protective claim for refund on or before the expiration of
the applicable period of limitations. To confirm the U.S. recipient's
ability to file a protective claim for refund, paragraph (e)(2) is
added to Sec. 28.2801-4 of the final regulations.

5. Value of a Covered Gift or Covered Bequest

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

[[Page 3385]]

on transfers that otherwise would have escaped gift or estate taxation
as a consequence of the donor's or decedent's expatriation. Revising
the section 2801 regulations in the suggested manner would decrease the
value of a covered gift to which sections 2701 and 2702 apply below
what otherwise would have been its gift tax value had the covered
expatriate been a U.S. citizen. This result is inconsistent with the
intended purpose of section 2801, and Congress did not provide an
exception for the special valuation rules. Thus, the requested
revisions are not adopted.
One comment suggests that sections 2701 and 2702 should not apply
in determining the tax liability of a covered bequest, because those
sections have no applicability to the estate tax. While the Treasury
Department and the IRS acknowledge that sections 2701 and 2702
generally apply only to inter vivos transfers, section 2701(d) provides
in certain circumstances for a potential increase in the taxable estate
of a transferor. Accordingly, the final regulations provide that the
special valuation rules under chapter 14 apply only to the extent those
rules are applicable to the specific transfer.

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

Under Sec. 28.2801-4(d)(2) of the proposed regulations, the date
of receipt of a covered gift, which is the date the section 2801 tax is
imposed, generally is determined by reference to the date of the gift
under chapter 12 principles, as if the covered expatriate had been a
U.S. citizen at the time of the transfer. In the event of a transfer of
assets by a covered expatriate to a domestic revocable trust, proposed
Sec. 28.2801-4(d)(2) provides that the date of receipt of the transfer
is the date the covered expatriate relinquishes the right to revoke the
trust. Proposed Sec. 28.2801-4(d)(3) provides that the date of receipt
of a covered bequest generally is the date the property is distributed
from the covered expatriate's estate or revocable trust, unless the
interest passes by operation of law or beneficiary designation, in
which case the date of receipt is the date of the decedent's death.
Comments recommend changing the rules regarding the date of receipt for
both covered gifts and covered bequests.
With respect to the date of receipt of a covered gift, comments
point out that the date on which a covered expatriate makes a gift
often is not the same date on which the property is received by the
U.S. citizen or resident donee. A discrepancy between those dates can
impact a recipient's ability to pay the section 2801 tax liability
because the recipient may not yet have received the economic benefit of
the gifted property. Comments suggest different methods of determining
the date of receipt: (1) the date of ``actual'' receipt; (2) the date
an interest in property becomes possessory; or (3) the date of
distribution to the U.S. citizen or resident. The third method is
intended to be comparable to the proposed rule for the date of receipt
of a covered bequest. A few comments also suggest that the rule
determining the date of receipt for purposes of the section 2801 tax
should distinguish between receipt of a present interest in property
and receipt of a future interest in property. Finally, a comment
requests that the final regulations further elaborate on the date of
receipt when a transfer of assets to a domestic revocable trust is an
incomplete gift, pointing out that relinquishment of the right to
revoke the trust may not be the trigger that completes the gift.
With respect to the date of receipt of a covered bequest, some
comments object to treating interests passing by operation of law or
beneficiary designation as received on the date of death, rather than
on the date property is distributed to the recipient. Comments note
that a decedent's property devolves to heirs at death by operation of
law in civil law jurisdictions, even though significant time may elapse
before the heirs' interests become possessory. Again, this delay could
impact a recipient's ability to pay the section 2801 tax. To address
these concerns, a few comments suggest defining the date of receipt of
a covered bequest as the date of actual receipt by the recipient,
whether a distribution from a decedent's estate or revocable trust or
the transfer of property by operation of law, beneficiary designation,
or other contractual arrangement. Another comment suggests that, if the
date of receipt of a covered bequest is not changed from that
identified in the proposed regulations, the final regulations should
include an election to defer payment of the section 2801 tax and
interest until the recipient's interest becomes possessory. Still
another comment suggests that, because a date of death valuation is
likely to be performed on inherited assets for non-section 2801
purposes, recipients should be able to elect to treat a covered bequest
as received as of the date of death rather than the date of actual
distribution to avoid the need for additional appraisals.
Defining the date of receipt of both a covered gift and a covered
bequest as the date on which the recipient obtains actual receipt or a
possessory interest in the transferred property would eliminate the
concern regarding the recipient's ability to pay the section 2801 tax,
particularly in civil law jurisdictions where property passes by
operation of law to heirs at death but distribution is delayed for a
period during administration of the decedent's estate. However, such a
definition outside of the context of a distribution from a decedent's
estate or revocable trust would raise other issues and administrability
concerns. For instance, in some cases it may be difficult to determine
the date of actual receipt of a covered gift or covered bequest, such
as the receipt of a remainder interest in property or, in the case of a
delay in distribution of property after title has vested in a civil law
jurisdiction during the period of administration. In cases where
property is distributed or an interest becomes possessory long after
the transfer by the covered expatriate, it may be difficult for the
recipient to obtain the information needed to determine whether the
transfer is subject to the section 2801 tax and otherwise comply with
reporting and paying the section 2801 tax. Further, such a definition
could open the door to possible manipulation of the date of receipt and
potential abuse, such as planning designed to ensure a covered gift or
covered bequest is considered non-possessory for an extended period to
delay and possibly defeat any section 2801 tax liability.
In most instances, the lengthy amount of time between the date of
receipt and the due date of the return and payment of the section 2801
tax, which generally is 17.5 months after the close of the year in
which the covered gift or covered bequest is received, should be
sufficient to allow a U.S. recipient to make necessary arrangements to
timely report and pay any section 2801 tax liability. See Sec.
28.6071-1(a). Moreover, the rules for transfers in trust satisfactorily
resolve the potential problems for many situations of deferred
possession.
However, for future interests in property that are not held in a
trust (for example, a remainder interest in real property), the
Treasury Department and the IRS appreciate the administrative and
valuation concerns with the proposed definitions of the date of
receipt. In view of these concerns, Sec. 28.2801-4(d)(8)(i) of the
final regulations includes a special rule providing that the date of
receipt of a covered gift or covered bequest of a future interest in
property that is not held in trust is the earlier of (1) the date the
future interest is disposed of by the U.S. recipient or (2) the date
that is the later of the date that the interest vests

[[Page 3386]]

in the U.S. recipient or the date that the last term interest in the
property held by an intervening recipient terminates. Further, to
assist recipients both in achieving finality regarding the section 2801
tax liability and in avoiding the potential for administrative hurdles
caused by a long delay in receipt, Sec. 28.2801-4(d)(8)(ii) of the
final regulations provides that the U.S. recipient of a covered gift or
covered bequest of a future interest in property not held in trust may
elect to treat the covered gift or covered bequest as having been
received on the date of receipt of the gift or on the covered
expatriate's date of death, respectively. To the extent a domestic or
electing foreign trust receives or may eventually receive a covered
gift or covered bequest that is a future interest in property that is
not in trust, such domestic or electing foreign trust may take
advantage of this election.
Finally, to provide further clarification on the date of receipt of
a transfer to a domestic trust or an electing foreign trust that is an
incomplete gift, a new paragraph is added in Sec. 28.2801-4(d)(4) of
the final regulations. In the event of a transfer by a covered
expatriate to a revocable domestic trust or electing foreign trust, the
date of receipt by the trust is the later of (1) the date the right to
revoke the trust is relinquished or extinguished and (2) the date of
extinguishment of all powers over or interests in the trust that would
prevent the transfer from being a competed transfer for gift tax
purposes. In the event of a transfer by a covered expatriate to an
irrevocable domestic trust or electing foreign trust over or in which
the covered expatriate retains powers or interests that prevents the
transfer from being complete, the trust receives the transfer on the
date all of such powers or interests are extinguished.

7. Non-Electing Foreign Trusts

The section 2801 tax applies to a distribution attributable to a
covered gift or covered bequest to a U.S. citizen or resident from a
non-electing foreign trust. See section 2801(e)(4)(B)(i).
A. Distributions
Section 28.2801-5(b) of the proposed regulations defines the term
distribution broadly to include any direct, indirect, or constructive
transfer from a non-electing foreign trust, including each disbursement
from such non-electing foreign trust pursuant to the exercise, release,
or lapse of a power of appointment. In response to some comments, the
final regulations clarify that a distribution includes a transfer to
the extent made for less than full and adequate consideration in money
or money's worth.
Several comments request clarification as to whether the
uncompensated use of trust property by, or a loan from a non-electing
foreign trust to, a U.S. citizen or resident would constitute a
distribution for section 2801 tax purposes and point out that these are
treated as distributions for income tax purposes under section 643(i).
The comments recommend that neither one be treated as a distribution
for purposes of section 2801 and request that the final regulations
explicitly state that the deemed distribution rules of section 643(i)
do not apply for purposes of section 2801. The comments suggest that,
because there is no specific statutory direction to vary from the
ordinary definition of distribution, the deemed distribution rules of
section 643(i) should not be used to interpret the term as used in
section 2801. The Treasury Department and the IRS agree with the latter
recommendation to clarify that the deemed distribution rules of section
643(i) are not adopted as part of the definition of a distribution for
purposes of section 2801(e)(4)(B)(i). However, that does not mean that
a loan or use of property cannot be a distribution and thus a covered
gift. To the extent that a loan from, or the use of property of, a non-
electing foreign trust constitutes a gift under chapter 12 of the Code,
then the portion of that loan or use received by a U.S. recipient
constitutes a distribution and thus a covered gift to the extent of the
trust's section 2801 ratio. The final regulations include this
clarification.
One comment recommends that the final regulations provide that a
loan from a foreign trust which is a qualified obligation under section
643(i) and Notice 97-34, 1997-1 C.B. 422, should not be treated as a
distribution for section 2801 tax purposes (even if it otherwise would
be treated as a distribution using gift tax principles). The final
regulations provide, as other comments suggest, that distribution
should not be interpreted using principles from section 643(i), because
Congress did not indicate that such standards should be used.
Consistent with this approach of not using section 643(i) principles,
the suggestion to exclude from the definition of a covered gift or
bequest this particular category of loans described in section 643(i)
is not adopted. Comments also recommend that the final regulations
clarify that the uncompensated use of trust property that is de
minimis, whether determined by duration or value, does not constitute a
distribution, noting that it is costly, impractical, and time-consuming
to value the use of property. Because foreign trusts with U.S.
beneficiaries already must determine these values for income tax
purposes (given that there is no de minimis exception under section
643(i)), taxpayers are not subject to any additional administrative
burden. Accordingly, this recommendation has not been adopted.
B. Section 2801 Ratio
Section 28.2801-5(c) of the proposed regulations provides that the
amount of the distribution attributable to a covered gift or covered
bequest is determined by multiplying the distribution by a ratio
(section 2801 ratio) that is redetermined after each contribution to
the non-electing foreign trust. The proposed regulations explain how to
compute the section 2801 ratio and provide that each distribution from
the non-electing foreign trust is considered to be made proportionally,
without any tracing to particular property.
i. Calculating the Section 2801 Ratio
While acknowledging that the proposed method for determining the
section 2801 ratio is based on the existing method for determining the
inclusion ratio of a trust for GST tax purposes, several comments
nonetheless object to this methodology, saying that its complexity,
particularly the requirement to revalue trust property at each
contribution, would discourage compliance. Comments offer multiple
suggestions to avoid the complications of a section 2801 ratio of more
than zero but less than one. Some suggestions involve recognizing
separate accounting or separate shares within, or the severance of, a
single trust so that separate section 2801 ratios could apply to the
separate shares. For instance, such an approach could allow a non-
electing foreign trust to utilize separate accounting for the portion
of the trust that consists of only covered gifts and covered bequests
(similar to separate accounting in the GST context under section
2654(b) and Sec. 26.2654-1(a)(2) of the Generation-Skipping Transfer
Tax Regulations for portions of a trust attributable to transfers from
different transferors). Another approach could allow a non-electing
foreign trust to treat a covered gift or covered bequest earmarked for
a particular beneficiary as a separate share with a distinct section
2801 ratio (similar to separate share rules utilized for other tax
purposes such as Sec. 26.2654-1(a)(1) and Sec. Sec. 1.672(f)-3(b)(3)
and (d) and 1.663(c)-3 of the Income Tax Regulations). Another approach
could allow the trustee to sever a trust with a mixed

[[Page 3387]]

section 2801 ratio into two separate trusts, each with a section 2801
ratio of either zero or one, using the same method provided for
qualified severances in section 2642(a)(3) and Sec. 26.2642-6.
The Treasury Department and the IRS recognize that, in the absence
of an election by the foreign trust to be treated as an electing
foreign trust, computing and re-computing the section 2801 ratio in the
event of additional contributions may pose challenges to U.S.
distributees unless the non-electing foreign trust has a section 2801
ratio of either one or zero. Nevertheless, a rule recognizing separate
section 2801 ratios in the event of separate accounting, separate
shares, or a severance of a single non-electing foreign trust presents
administrability and enforcement concerns. For instance, because of the
lack of jurisdiction over a foreign trust, it will be difficult to
verify whether a single trust consists of substantially separate and
independent shares with no commingling of trust assets and whether a
qualified severance was done in a manner that complies with rules
similar to Sec. 26.2642-6. Although certain reporting and other
administrative requirements are imposed in order for separate
accounting, separate shares, and qualified severances to be recognized,
no similar reporting or other administrative requirements could be
enforced against the trustee of a non-electing foreign trust.
Furthermore, the proposal to allow for separate accounts that are not
actually separated into different shares or trusts similar to section
2654(b) would not eliminate the need for revaluation at each
contribution, because revaluation would be necessary after each
contribution in order to determine the portion of the trust allocable
to each account. See Sec. 26.2654-1(a)(2)(ii) (requiring the
computation of a fraction that utilizes fair market valuations of the
trust as well as of the portions treated as separate trusts).
Accordingly, the final regulations do not adopt the commenters'
suggestions related to separate accountings similar to that provided in
section 2654(b) and Sec. 26.2654-1(a)(2), separate shares similar in
concept to those recognized in Sec. 26.2654-1(a)(1) and Sec. Sec.
1.672(f)-3(b)(3) and (d) and 1.663(c)-3, or severance of a single trust
similar to qualified severances described in section 2642(a)(3) and
Sec. 26.2642-6.
Another comment suggests allowing a non-electing foreign trust to
treat as a separate share gifts and bequests received prior to the
effective date of section 2801. As is explained in part 7.B.ii. of the
Summary of Comments and Explanation of Revisions section of the
preamble, such receipts are not included in the definition of a covered
gift or covered bequest. Because the final regulations provide that
such receipts are merely another example of noncovered receipts, this
suggestion is not adopted for the same administrability concerns
identified in the prior paragraph. See Sec. 28.2801-2(f) and -2(g) and
Example 3 of Sec. 28.2801-5(e) of these final regulations.
One comment suggests that separate accounting for the purpose of
recognizing separate section 2801 ratios be permitted in the event a
covered expatriate's contributions to a non-electing foreign trust can
be traced to specific assets. Another comment recommends that the final
regulations adopt a rule that would treat a distribution from a non-
electing foreign trust as made either first or last from a covered gift
or covered bequest, similar to the income tax treatment of certain
inventory under sections 471 and 472, or in a manner analogous to the
tiers applicable to distributions from a charitable remainder trust.
Requiring the tracing or tracking of specific trust assets has the
potential to be more onerous to administer than the section 2801 ratio,
especially as trust property produces income, is reinvested, or
otherwise changes form over time, and to the extent it is commingled or
reinvested with other assets. Additionally, because the IRS has no
jurisdiction over the foreign trustee, it would be difficult to verify
that the assets were being traced or tracked properly. Given these
administrability concerns, these suggestions are not adopted.
One comment suggests that the final regulations permit a non-
electing foreign trust to use the value of each contribution to the
trust as of the date of its contribution to compute the section 2801
ratio, thus eliminating the need for revaluations at the time of each
subsequent contribution. However, as the comment acknowledges,
computing the section 2801 ratio using contributed values is a less
desirable alternative because, although simpler to administer, it would
be far from accurate, so this suggestion has not been adopted.
The Treasury Department and the IRS recognize that calculation of a
foreign trust's section 2801 ratio may be complicated when a single
trust receives contributions attributable to both covered gifts or
covered bequests and non-covered gifts or non-covered bequests at
different points in time. In some circumstances, the complexity can be
eliminated by establishing separate trusts and making covered gifts or
covered bequests to one trust and non-covered gifts and non-covered
bequests to the other trust. The Treasury Department and the IRS
recognize that this might not always be possible or practical,
particularly in the event of one or more transfers to a non-electing
foreign trust as a result of the death of a covered expatriate.
However, for the reasons previously stated, the final regulations
retain the section 2801 ratio concepts enumerated in the proposed
regulations.
ii. Inadequate Information To Calculate Section 2801 Ratio
Section 28.2801-5(c)(3) of the proposed regulations provides that,
if the trustee of the foreign trust does not have sufficient books and
records to calculate the section 2801 ratio, or if the U.S. recipient
is unable to obtain the necessary information with regard to the
foreign trust, the U.S. recipient must proceed upon the assumption that
the entire distribution for purposes of section 2801 is attributable to
a covered gift or covered bequest. Some comments object to this
assumption, contending that it is unduly harsh in that U.S. recipients
of foreign trust distributions may be unable to determine the section
2801 ratio despite their best efforts. Comments also suggest applying a
presumption under which property acquired by a non-electing foreign
trust prior to June 17, 2008, would be presumed not to be a covered
gift or covered bequest, and property acquired on or after that date
would be presumed to be a covered gift or covered bequest.
The Treasury Department and the IRS are persuaded that the entire
trust should not be assumed to have a section 2801 ratio of one merely
because the U.S. recipient cannot determine whether certain transfers
are attributable to covered gifts and covered bequests. Accordingly,
the final regulations retain the rule in the proposed regulations, but
clarify that the assumption applies only to the extent the section 2801
ratio cannot be substantiated. See Sec. 28.2801-5(c)(3) of these final
regulations. For instance, even if the U.S. recipient lacks adequate
information to determine whether certain transfers to a non-electing
foreign trust are covered gifts or covered bequests, the U.S. recipient
can still treat other transfers to the non-electing foreign trust as
not being covered gifts or covered bequests if the U.S. recipient has
adequate information to show that those transfers are not covered gifts
or covered bequests. Additionally, the final regulations clarify that
the assumption that a distribution is attributable to a covered gift or
covered bequest can be rebutted

[[Page 3388]]

to the extent the taxpayer can supply information sufficient to
persuade the Commissioner that the assumption is not correct.
As to the suggestion to apply a presumption about property acquired
by a non-electing foreign trust prior to the effective date of section
2801, the Treasury Department and the IRS agree that the final
regulations should clarify the status of pre-enactment contributions to
non-electing foreign trusts. However, rather than a presumption, the
final regulations update the definitions of covered gift and covered
bequest to clarify that such terms include only gifts and bequests made
to the non-electing foreign trust after the effective date of section
2801. Thus, property attributable to a covered gift or covered bequest
does not include pre-section 2801 contributions to the non-electing
foreign trust. See Sec. 28.2801-2(f) and -2(g) and Example 3 of Sec.
28.2801-5(e) of these final regulations.
Other comments propose that a U.S. recipient of a distribution from
a non-electing foreign trust may use any reasonable method to estimate
the section 2801 ratio based on the information available, such as
affidavits from persons with relevant knowledge and reasonable
assumptions regarding growth rates, contributions, and other pertinent
information. The adequacy of the method and information used to compute
the section 2801 ratio to avoid application of the assumption is most
appropriately determined on a case-by-case basis. Accordingly, these
final regulations do not contain a detailed list of the types of
information, and the combinations thereof, that may be used to
calculate the section 2801 ratio and rebut the presumption in Sec.
28.2801-5(c)(3) of the final regulations.
One comment suggests that the burden to establish the section 2801
ratio should shift to the IRS if the U.S. recipient (i) affirms under
penalties of perjury that best attempts were made to obtain necessary
information, (ii) discloses all relevant information that the U.S.
recipient has to the IRS, and (iii) identifies parties believed to have
the necessary information. The Treasury Department and the IRS
acknowledge that U.S. recipients of distributions from non-electing
foreign trusts whose trustees do not keep proper records, or who do not
cooperate with the U.S. recipients, may end up computing their section
2801 tax using an overstated section 2801 ratio. However, because all
the information is in the hands of the trustees of the foreign trust
(over which the IRS is unlikely to have any jurisdiction) and the IRS
has limited ability to independently determine the section 2801 ratio
of a non-electing foreign trust, leaving the burden of proof with the
U.S. recipient more likely ensures that section 2801 tax is levied on
all covered gifts and covered bequests. Accordingly, the final
regulations do not adopt the suggestion to shift the burden in
establishing the section 2801 ratio to the IRS.
iii. Impact of Section 2801(c) Amount on Section 2801 Ratio
One comment requests clarification on when a section 2801 tax is
deemed to have been paid and suggests that an example be added to the
final regulations. Section 28.2801-5(c)(2) of the proposed regulations
provides that, once a section 2801 tax has been timely paid on property
that thereafter remains in a foreign trust, that property is no longer
considered to be, or to be attributable to, a covered gift or covered
bequest to the foreign trust for purposes of determining the trust's
section 2801 ratio. Section 28.2801-5(c)(2) of the proposed regulations
further provides that a section 2801 tax is deemed to have been timely
paid on amounts for which no section 2801 tax was due as long as those
amounts were reported as a covered gift or covered bequest on a timely
filed Form 708. The final regulations clarify in Sec. 28.2801-5(c)(1)
that, because a non-electing foreign trust itself is not taxed on its
receipt of covered gifts and covered bequests, the trust is not
entitled to the exclusion under section 2801(c); instead, the section
2801(c) exclusion is allowed to the U.S. recipient with regard to
distributions from the non-electing foreign trust. In addition, the
final regulations expand an example to illustrate this situation. See
Example 4 of Sec. 28.2801-5(e) of the final regulations. In addition,
section 28.2801-5(c)(2) of the final regulations also is modified to
provide that section 2801 tax is deemed to have been timely paid on
amounts for which no section 2801 tax was due as a result of the
section 2801(c) amount, whether or not those amounts were reported as a
covered gift or covered bequest on a timely filed Form 708.
C. Income Tax Deduction for Section 2801 Tax on Certain Distributions
Section 2801(e)(4)(B)(ii) allows a U.S. recipient of a distribution
from a non-electing foreign trust to deduct under section 164 the
section 2801 tax imposed on the portion of the distribution included in
the U.S. recipient's gross income for the year. Section 28.2801-
4(a)(3)(ii) of the proposed regulations provides instructions for
calculating the amount of this deduction. That income tax deduction is
available for the year in which the section 2801 tax is paid.
Commenters questioned whether an accumulation distribution, taxable to
a U.S. person in a given year, is to be included in this reference to
``gross income'' when computing this deduction.
Section 662(a), in effect, determines how to determine the portion
of a trust's distributable net income (DNI) that is taxable to each
beneficiary of the trust in a given year. That section provides that
the gross income of a beneficiary of a complex trust includes both
amounts required to be distributed to the beneficiary and amounts
properly distributed to the beneficiary. That section and Sec.
1.662(a)-3(c) provide that a beneficiary receiving such a distribution
in a given year will recognize the distribution as gross income only to
the extent the distribution is made out of the trust's DNI for the
year.
Under section 665, a foreign trust's distribution to a beneficiary
of income that exceeds that trust's DNI for the year is a distribution
of income earned by the trust in a prior year, which is an accumulation
distribution that is comprised of undistributed net income (UNI). That
amount, therefore, would not be included in the reference to gross
income as used in section 662(a).
Section 667(a) provides that a beneficiary receiving such an
accumulation distribution must include that distribution as income in
the year the distribution is received but must compute the tax on that
distribution (to the extent it would have been included in the
beneficiary's income under section 662) as though it had been received
in a preceding taxable year. Section 667 provides the mechanism to
compute the applicable income tax and interest charge on the
distribution (throwback tax).
One comment suggests that the final regulations permit a deduction
under section 164 of the full amount of the section 2801 tax paid on an
accumulation distribution. The comments observe that, if any portion of
a distribution from a non-electing foreign trust is attributable to a
covered gift or covered bequest and is an accumulation distribution,
the aggregate amount of the section 2801 tax and the throwback tax
might exceed the amount of the distribution.
Other comments suggest limiting the total tax liability under
section 2801 and the throwback tax on a specific distribution to the
amount of the distribution. One comment suggests this

[[Page 3389]]

might be achieved by reducing the amount of the distribution that is
treated as an accumulation distribution. The final regulations do not
adopt the commenters' suggestions that involve limiting the total tax
liability, other than through a deduction under section 164 as provided
in section 2801(e)(4)(B)(ii) and described above. There is no mechanism
under the income tax rules to re-classify an accumulation distribution
as DNI because an accumulation distribution is, by definition, income
in excess of DNI. Section 2801 does not limit the total tax liability
under that section or the throwback tax.
Although section 2801(e)(4)(B)(ii) uses the term gross income, that
section merely limits the available tax deduction to tax paid on income
that was subjected to income tax. The reference to gross income does
not reference any particular definition of that term and thus does not
appear to create a distinction between different types of taxable
income. For that reason, the final regulations provide that the
reference to gross income in this section includes all forms of income
subject to income tax in that year, including an accumulation
distribution.
Section 28.2801-4(a)(3)(ii) of the proposed regulations provides
that the deduction under section 164 provided in section
2801(e)(4)(B)(ii) is available in the year in which the tax is paid or
accrued. As a result, a cash method taxpayer will be entitled to the
deduction only in the tax year in which the section 2801 tax is paid.
Several comments suggest that the deduction instead should be available
to a cash method taxpayer in the year the distribution is received and
subject to income tax. The final regulations do not adopt this
suggestion for the following reasons. Both section 2801(e)(4)(B)(ii)
and section 164(a) allow the deduction only in the year in which the
tax is paid or accrued, and references in the Code to items accrued
generally do not apply to cash basis taxpayers. Congress has not
provided a special rule (such as section 164(b)(4)(B) or 691(c), for
example) allowing the deduction in the year of the distribution.
Additionally, allowing the deduction in the year of the distribution
for cash method taxpayers would be administratively difficult because
the section 2801 tax for a distribution from a non-electing foreign
trust attributable to a covered gift or covered bequest generally is
due in the calendar year after the income tax attributable to that
distribution is due (17.5 months after the close of the calendar year
of receipt versus 3.5 months after the close of the calendar year).
Although the deduction for section 2801 tax paid cannot be taken
against the income carried out from the distribution attributable to
the covered gift or bequest, the deduction can be taken against income
in the year the section 2801 tax is paid (including against
distributions of accumulated income). Accordingly, the final
regulations retain the rule in the proposed regulations that the
deduction under section 164 is available only in the year the section
2801 tax is paid or accrued.

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

Section 2801(e)(4)(B)(iii) allows a foreign trust to elect to be
treated as a domestic trust solely for purposes of section 2801. That
election may be revoked with the consent of the Secretary of the
Treasury or her delegate, but also may be terminated by the trust's
failure to comply with the requirements for maintaining a valid
election. An election to be treated as a domestic trust causes the
electing foreign trust to become liable for the section 2801 tax
liability on covered gifts and covered bequests received by the trust,
thus relieving each U.S. citizen or resident receiving a trust
distribution attributable to such covered gifts or bequests from that
tax liability.
A. Reporting Requirements
Section 28.2801-5(d)(4) of the proposed regulations provides that
the trustee of an electing foreign trust must file a timely Form 708
annually either to report and pay the section 2801 tax on all covered
gifts and covered bequests received by the trust during the calendar
year, or to certify that the electing foreign trust did not receive any
covered gifts or covered bequests during the calendar year. One comment
requests that the final regulations eliminate the requirement to file a
Form 708 for years in which no covered gift or covered bequest was
received. The Treasury Department and the IRS agree that the trustee's
requirement to certify annually that the electing foreign trust did not
receive any covered gifts or bequests creates a burden that outweighs
the benefit to the enforcement and administration of the section 2801
tax. Accordingly, the final regulations do not require annual reporting
for electing foreign trusts. Instead, reporting will be required only
by an electing foreign trust for years in which the total value of the
covered gifts and covered bequests received by the electing foreign
trust in that year exceeds the section 2801(c) amount for that year.
Section 28.2801-5(d)(3)(ii) of the proposed regulations details the
requirements for a valid election. Among these is the requirement to
notify and provide to the IRS information on each U.S. citizen or
resident who is a permissible distributee of the trust. For this
purpose, a permissible distributee is a U.S. citizen or resident who
either may or must receive trust distributions, has a right (whether
current or future) to withdraw income or principal from the trust, or
would have been so described if either the trust or the interest of all
persons so described had just terminated. Comments observe that this
requirement is burdensome, infringes upon disclosure and privacy
standards, and requests information that is not required to ensure that
the tax is adequately administered. One comment suggests revising the
requirements for making the election to be treated as a domestic trust
so that only beneficiaries that have received distributions during the
relevant period must be identified on Form 708. Another comment
suggests adopting the standards devised for the Foreign Account Tax
Compliance Act (FATCA) information reporting under sections 1471 and
1472, so that only beneficiaries who actually receive a distribution or
who have a mandatory payment right during the relevant period must be
identified on Form 708.
It is necessary for the trustee to provide information to the IRS
on all U.S. citizens or residents who may receive distributions from
the trust, because those persons may have to pay tax under section 2801
if the election terminates. Although the Treasury Department and the
IRS are sensitive to the policy concerns of the commenters, this
concern is outweighed by the IRS's need to obtain information from the
trustee that would be necessary to assure the collection of tax should
the election terminate. Additionally, because the final regulations do
not require annual filings in the absence of the receipt of a covered
gift or covered bequest by the electing foreign trust, as the proposed
regulations did, an electing foreign trust's most recent return may be
filed many years before the termination of the election (for example,
if the election terminates for failure to pay 2801 tax or to file a
return in a year that a contribution is made to the trust). In that
event, the commenter's request would deprive the IRS of needed
information about the actual distributees in the year of the
termination of the election. Accordingly, the final regulations retain

[[Page 3390]]

the definition of permissible distributee under the proposed
regulations.
Section 28.2801-5(d)(3)(iv) of the final regulations confirms that
the appointment of the required U.S. agent is made by filing Form 2848,
Power of Attorney and Declaration of Representative, or as may be
directed otherwise in IRS forms or publications. Merely confirming the
name and identifying information of that agent on the electing trust's
Form 708 is not sufficient for this purpose.
B. Termination of Electing Foreign Trust Status
Under Sec. 28.2801-5(d)(5)(ii) of the proposed regulations, an
election to be treated as a domestic trust is terminated by the failure
of the foreign trust to timely file Form 708 or timely pay any required
section 2801 tax. The termination is effective as of the first day of
the calendar year for which the failure occurs.
A comment suggests that the trustee of an electing foreign trust
should be permitted to cure the late filing of Form 708 and/or late
payment of the section 2801 tax to avoid the retroactive termination of
the foreign trust's election to be treated as a domestic trust for
purposes of the section 2801 tax. The comment contends that an
opportunity to cure is needed to avoid placing a reporting burden on a
U.S. citizen or resident who received a distribution during the year
for which the election is being terminated.
As provided in paragraph 8.A. of the Summary of Comments and
Explanation of Revisions section of this preamble, the final
regulations do not require annual filings for electing foreign trusts
for years in which the electing foreign trust receives no covered gifts
or covered bequests. Accordingly, under the final regulations, an
electing foreign trust's election will not terminate for the failure to
file a Form 708 for such a year. The final regulations, however,
require that, unless the total value of the covered gifts and covered
bequests received by the electing foreign trust in a calendar year does
not exceed the section 2801(c) amount, the trustee of an electing
foreign trust must report all covered gifts and covered bequests
received during that calendar year on a timely filed Form 708 and
timely pay the section 2801 tax in full. Because the IRS may lack
jurisdiction to assess tax on a foreign trustee, voluntary payment by
the foreign trustee is the only way to ensure collection of section
2801 tax on an electing foreign trust. If the foreign trustee fails to
pay the section 2801 tax, then the section 2801 tax must be collected
from the U.S. recipient to ensure collection. Providing a grace period
to file a return and make a payment of tax beyond the original due date
of the required return to provide the suggested opportunity to cure is
not tenable because the identity of the taxpayer during this period
would be uncertain, creating confusion and delaying finality as to
whether the U.S. beneficiaries of the trust or the trustee of the trust
is responsible for the payment of the section 2801 tax. In addition,
providing such a grace period could encourage trustees to delay payment
to the end of the grace period, notwithstanding that the original due
date for such payment already is more than 17.5 months after the close
of the year in which the covered gift or covered bequest was received.
For these reasons, the regulations provide that, unless the total value
of the covered gifts and covered bequests received by the electing
foreign trust in a calendar year does not exceed the section 2801(c)
amount, the failure to report all covered gifts and covered bequests
received on a timely filed Form 708 or to timely pay the section 2801
tax in full will result in the termination of the foreign trust's
election. The final regulations in Sec. 28.2801-5(d)(5)(ii)(A)(3)
further provide a method for the trust to affirmatively terminate its
election to be treated as a domestic trust for purposes of section
2801.
C. Dispute as to Amount of Section 2801 Tax Owed
Section 28.2801-5(d)(6)(i) of the proposed regulations describes
the process for resolving or otherwise accounting for proposed
adjustments to the amount of the section 2801 tax owed by an electing
foreign trust. The proposed procedure entails the IRS notifying the
trustee of the foreign trust of the additional tax due, including any
penalties and interest, and the due date of payment. If the trustee of
the electing foreign trust and the IRS are unable to come to an
agreement and the trustee fails to timely pay the additional tax and
other asserted amounts by the stated due date, then the election is
terminated retroactively, effective as of January 1 of the year for
which the Form 708 was filed and is converted as of that same date to
an imperfect election. Any additional value determined by the IRS on
which the foreign trust did not timely pay the section 2801 tax then is
treated as a covered gift or covered bequest to the trust and should be
taken into account as a covered gift or covered bequest by a U.S.
recipient in computing the section 2801 ratio applicable to any
distribution from the trust, although that valuation adjustment is an
issue that may be challenged or otherwise resolved on examination of
that U.S. recipient's Form 708 reporting a distribution.
Comments suggest that the final regulations provide the same
opportunity, procedures, and rights to the electing foreign trust as
are applicable to any other U.S. taxpayer, with regard to any challenge
to the IRS's determination of value. One comment recommends that the
IRS issue a statutory notice of deficiency to make possible these
administrative and judicial review processes. Another comment suggests
that allowing the electing foreign trust to resolve these valuation
issues with the IRS would avoid the possibility that different trust
beneficiaries might reach different resolutions of the same issue as
their individual Forms 708 are separately examined by the IRS.
Establishing a statutory notice of deficiency process for resolving
or otherwise addressing proposed adjustments to the amount of the
section 2801 tax owed by an electing foreign trust would have a harmful
effect on the IRS's ability to collect any unpaid deficiency, even a
deficiency that has been reduced to judgment, given the IRS's lack of
jurisdiction over the trustees and assets of a foreign trust.
Additionally, if the foreign trust in such a situation refuses to pay
the deficiency, it is not clear that the IRS would have the ability to
assert transferee liability against a U.S. citizen or resident
receiving distributions from the trust under section 6901 or 31 U.S.C.
3713. Therefore, allowing the continued validity of the election
despite an unresolved dispute or unpaid tax and issuing a statutory
notice of deficiency would jeopardize the IRS's ability to collect the
unpaid deficiency from either the foreign trust or the U.S. recipient
of a trust distribution.
Given the jurisdictional limitations and because the statute
contemplates that the section 2801 tax will be paid by the electing
foreign trust, the proposed procedures for handling disputes involving
electing foreign trusts are the practical approach and strike the
appropriate balance of fairness, administrability, and enforcement of
the section 2801 tax. However, the final regulations improve
administrability by clarifying in Sec. 28.2801-5(d)(6)(i) that the
payment of any additional amount of section 2801 tax must be made
either by the due date specified in the letter or the due date
otherwise agreed to by the Commissioner. Note that the procedures as
finalized also include the availability of a reasonable cause defense
to the

[[Page 3391]]

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

9. Income Tax Effects of Section 2801 Tax

A. Income Tax Basis
Section 28.2801-6(a) of the proposed regulations provides that the
recipient's basis in property received as a covered gift is determined
under section 1015. The proposed regulations further provide that
section 1015(d) does not apply to increase the basis in a covered gift
by the amount of the section 2801 tax paid with respect to that covered
gift. Several comments state that a basis increase should be allowed
for the section 2801 tax paid with respect to a covered gift based on
simple fairness and to serve the statutory goal of tax neutrality. One
comment acknowledges that section 1015(d) is inapplicable to section
2801 because section 1015(d) applies only to gift taxes paid under
chapter 12 of the Code, not to the taxes on covered gifts defined in
chapter 15. However, this comment states that section 164 does apply to
increase basis in property received as a covered gift by the amount of
the section 2801 tax paid because section 164(a) treats taxes that have
been paid but are not deductible under section 164 as part of the
acquisition cost of the property. As such, the comment concludes that
payment of the section 2801 tax does increase the recipient's basis in
the property.
The comment is correct that the basis adjustment available under
section 1015(d) is applicable only to gift tax paid under chapter 12.
Section 2801 does not apply the rule of section 1015(d) to the section
2801 tax, which is in chapter 15 of subtitle B of the Code. However,
neither does section 164 provide for an increase in the basis of
property received as a covered gift by the amount of the section 2801
tax paid. The flush language in section 164(a) clarifies the treatment
of certain taxes (other than those enumerated in section 164(a)) that
are incurred in a trade or business or in an income-producing activity
and are connected with the acquisition or disposition of property.
Specifically, such taxes are treated as part of the cost of the
acquired property or, in the case of a disposition, as a reduction in
the amount realized on the disposition. See H. Conf. Rept. 99-841 (Vol.
2), at II-20 (1986), 1986-3 C.B. 20 (Vol. 4); Sleiman v. Commissioner,
T.C. Memo. 1997-530 at 10. The section 2801 tax paid on the receipt of
a covered gift or covered bequest does not come within this description
because, by its nature, it is not a tax that is incurred in a trade or
business or an income-producing activity.
The Treasury Department and the IRS understand the general
proposition of the commenters that allowing a basis increase for the
section 2801 tax paid with respect to a covered gift would be
consistent with the rule in section 1015(d) that takes gift tax paid
into account and thus would further serve the goal of tax neutrality
and that such a rule might more fairly represent the acquisition cost
of property received in a covered bequest. However, in order to create
a special rule for an adjustment to the basis in property subject to
the section 2801 tax, a statutory amendment to section 1015, 2801, or
other statutory authority would be needed.
B. Deduction for Portion of Section 2801 Tax Paid Attributable to
Income in Respect of a Decedent
Section 691(c)(1) provides that a person who includes an amount of
income in respect of a decedent (IRD) in gross income under section
691(a) is allowed as an income tax deduction, for the same taxable
year, a portion of the estate tax paid by reason of the inclusion of
that IRD in the decedent's gross estate. A comment likens the estate
tax paid to the section 2801 tax paid and suggests that, in the
interest of tax neutrality, the final regulations should allow a U.S.
recipient to deduct from gross income the portion of the section 2801
tax paid with respect to an item of IRD, when the amount of IRD is
included in the U.S. recipient's gross income for the same taxable
year.
Although estate tax may be similar to section 2801 tax on the
receipt of a covered bequest, in section 691(c)(2)(A), Congress
explicitly defined the term estate tax for purposes of that section as
the tax imposed on the estate of a decedent under section 2001 or 2101,
and did not include analogous taxes imposed under other sections of the
Code such as section 2801. Furthermore, where Congress believed that a
deduction for section 2801 taxes paid is appropriate, it provided for
that deduction explicitly. While section 2801(e)(4)(B)(ii) provides for
an income tax deduction under section 164 for a certain amount of
section 2801 tax imposed on a distribution from a non-electing foreign
trust included in gross income that is attributable to a covered gift
or covered bequest, Congress did not provide an income tax deduction
under section 691(c) for section 2801 tax that is attributable to IRD.
Additionally, the method for computing the deduction under section
691(c)(2) for estate taxes paid uses variables that are not applicable
to the tax under section 2801. For instance, section 691(c)(1)(A)
provides a deduction based on the ``net value'' for estate tax purposes
of all items of IRD described in section 691(a). Section 691(c)(2)(C)
provides that the net value shall be an amount equal to the excess of
the estate tax over the estate tax computed without including in the
gross estate such net value. Therefore, there would be no way to
calculate the amount of an IRD deduction for section 2801 tax paid
using the rules provided under section 691. Accordingly, in order to
establish a similar regime for section 2801, the final regulations
would need to contain a new set of comprehensive rules for determining
the amount of a deduction against items of IRD for section 2801 tax
paid.
For these reasons, adopting the commenter's suggestion would be
both impractical and beyond what is provided by statute.

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

Generally, sections 6039F and 6048(c), respectively, require each
U.S. person (as defined for income tax purposes) who receives a gift or
bequest from a foreign person or a distribution from a foreign trust to
report such receipt or transaction by filing Form 3520, Annual Return
to Report Transactions With Foreign Trusts and Receipt of Certain
Foreign Gifts. However, Sec. 28.2801-6(c)(1) and (2) of the proposed
regulations provides that, for purposes of the information reporting
provisions of sections 6039F and 6048(c), U.S. person is defined to
include a U.S. citizen or resident, as that term is defined in proposed
Sec. 28.2801-2(b), which adopts the gift and estate tax meaning of the
term resident under subtitle B, based on domicile.
Several comments request that the final regulations revise the rule
in Sec. 28.2801-6(c) of the proposed regulations to reflect that the
reporting requirements under sections 6039F and 6048(c) apply to U.S.
residents as the term U.S. person is defined for income tax purposes.
See section 7701(a)(30) and (b)(1)(A). Under this suggestion, the scope
of the reporting requirements on Form 3520 would not be expanded to
individuals who are U.S. residents for transfer tax purposes but not
for income tax purposes. The comments point out that these taxpayers
who are U.S. residents only for transfer tax purposes

[[Page 3392]]

are the same persons (other than an electing foreign trust) who will be
required to file a Form 708 to report the receipt of a covered gift or
covered bequest and thus that the proposed expanded scope of the
reporting requirements would be duplicative and would serve no tax
enforcement purpose. Consequently, the comments contend that the
expanded scope of the reporting requirements would serve only to add
complexity and burden to information reporting and to increase the risk
of the imposition of penalties.
The Treasury Department and the IRS agree that the definition of
U.S. person under section 7701(b)(1)(A) is the appropriate definition
for purposes of the information reporting requirements under sections
6039F and 6048. Accordingly, the final regulations provide that the
information reporting requirements in sections 6039F and 6048(c) apply
only to U.S. persons within the meaning of section 7701(a)(30), and
thus only apply to recipients of a covered gift or covered bequest who
are U.S. persons for income tax purposes. See Sec. 28.2801-6(c)(1) and
(2) of the final regulations. This will include all U.S. citizens and
domestic trusts receiving covered gifts and covered bequests, as well
as U.S. residents as defined for income tax purposes.

11. Determining Responsibility Under Section 2801

The proposed regulations confirm, in Sec. 28.2801-7(a), that it is
the responsibility of the U.S. recipient of a gift or bequest from an
expatriate, or a distribution from a trust funded at least in part by
an expatriate, to determine whether the expatriate is a covered
expatriate and whether the gift or bequest is a covered gift or covered
bequest. Proposed Sec. 28.2801-7(b)(1) further provides that, in some
circumstances to be described in IRB guidance, the IRS may be permitted
to disclose return or return information of the donor or decedent
expatriate upon the request of a U.S. citizen or resident in receipt of
a gift or bequest from such expatriate. In the event of a living donor
expatriate, Sec. 28.2801-7(b)(2) of the proposed regulations creates a
rebuttable presumption that the donor is a covered expatriate and that
the gift is a covered gift if donor does not authorize the disclosure
of the donor's relevant return information.
The proposed rule further provides that a recipient may file a
protective Form 708 in accordance with procedures set forth in proposed
Sec. 28.6011-1(b), to start the running of the period of limitations
for the assessment of any section 2801 tax in the event the recipient
reasonably concludes that a gift or bequest is not subject to section
2801.
Several comments request guidance and suggest additional rules as
to how a U.S. citizen or resident receiving a gift or bequest may avoid
penalties and interest for nonpayment or underpayment of the section
2801 tax if the U.S. recipient incorrectly concludes that section 2801
does not apply. The comments ask how a recipient can satisfy its
responsibility to ascertain whether the donor or decedent is a covered
expatriate, and how to determine whether the gift or bequest is a
covered gift or covered bequest. These comments note that the ability
to comply is based on access to a donor's private information that the
IRS may not be able to provide. These comments predict that the U.S.
recipient of a gift or bequest may encounter significant impediments to
gathering the necessary information about the donor or decedent. Thus,
the comments request that the rebuttable presumption be eliminated, and
that the final regulations provide a safe harbor for making covered
expatriate determinations based on facts reasonably available to the
recipient.
Comments also request that the final regulations elaborate on the
acceptable criteria necessary to satisfy the due diligence requirement
for filing a protective Form 708 as set forth in Sec. 28.6011-1(b) of
the proposed regulations, to start the running of the period of
limitations for the assessment of any section 2801 tax, and to avoid
penalties. For instance, some comments suggest that reliance on a
certification as to covered expatriate status provided by the living
donor or the decedent's estate should be sufficient, unless the U.S.
recipient has reason to believe the certification is false.
Alternatively, the comment suggests that the expatriate be required, on
the Form 8854, Initial and Annual Expatriation Statement, filed at the
time of expatriating, to authorize the IRS to disclose the relevant
return information to each U.S. recipient of a gift from that
expatriate. Another comment suggests that requesting certain
information from the IRS and carrying out a background check on the
donor or decedent should be sufficient for these purposes. Comments
also suggest the creation of a searchable database of Forms 8854 that
would allow the identification of covered expatriates. One comment
suggests requiring the IRS to have a good faith basis for alleging that
a donor or decedent is a covered expatriate before assessing a section
2801 tax because, otherwise, the IRS would be forcing recipients to
prove a negative even where the IRS may have actual evidence to the
contrary. Finally, another comment suggests creating a presumption in
the final regulations that a donor is not a covered expatriate if the
donor files a Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return and provides a copy to the U.S. recipient.
The Treasury Department and the IRS carefully considered during the
development and drafting of the proposed regulations the potential
difficulty a U.S. recipient may face in obtaining the information
necessary to determine whether it has a tax obligation under section
2801. For the reasons stated below, the final regulations do not adopt
the commenters' suggestions.
Regarding a certification as to covered expatriate status or a
background check to establish that a gift or bequest is not a covered
gift or covered bequest from a covered expatriate, requesting
information from the donor or decedent's estate and the IRS is the most
tenable option because of the factual nature of the determination and
jurisdictional limitations with respect to the expatriate. For
instance, although a certification from the donor or the decedent's
estate provides some evidence of covered expatriate status, the
particular facts in a given situation may cause the IRS to require
corroborating information (for example, in the event of conflicting
information discovered during examination or otherwise). As to the
relevance of the filing of a Form 709 by an expatriate, the filing of a
Form 709 does not suggest a determination as to covered expatriate
status, although a timely filing supports a determination that a gift
or bequest is excepted from the definition of a covered gift or covered
bequest.
A comment suggests eliminating the rebuttable presumption in
proposed Sec. 28.2801-7(b)(2) based on the contention that neither
section 2801 nor the general rule-making authority provided in section
7805(a) authorize creating a rule that requires U.S. recipients of
gifts and bequests to demand proof of a living donor's status. The
Treasury Department and the IRS do not agree that providing a
rebuttable presumption that, in certain circumstances, a living donor
is a covered expatriate is beyond its regulatory authority for
implementing the Congressional mandate of section 2801. A rebuttable
presumption is not a mandate or final determination. Rather, a
rebuttable presumption provides an opportunity and an incentive for the

[[Page 3393]]

recipient to overcome the presumption through the exercise of due
diligence. It is the recipient's responsibility to determine whether
section 2801 tax liability applies to a transfer received from a donor
or decedent's estate. In the absence of evidence sufficient to allow
the recipient to determine whether the donor is a covered expatriate,
if the living donor refuses to cooperate or otherwise fails to
authorize the disclosure of relevant return information, the
presumption is reasonable.
Finally, additional comments suggest that the IRS take action
beyond issuing final regulations to make the information about the
covered expatriate status of the donor or decedent more readily
accessible. Specifically, comments suggest creating and administering a
searchable and secure registry or database of expatriates and covered
expatriates; modifying certain IRS forms (for example, Forms 8821, Tax
Information Authorization, or Form W-8 BEN, Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding and
Reporting (Individuals)), or creating new ones, to ensure only limited
information relevant to the covered expatriate status of the donor or
decedent is provided to the recipient. This would require the
reconsideration of the retention policies and procedures of certain tax
forms because section 2801 could require access to decades-old tax
information.
The Treasury Department and the IRS understand the potential
difficulties underlying the commenters' concerns. However, the
resolution of these concerns also must take into account both the IRS's
resource constraints and disclosure and privacy concerns. Additional
procedures, as requested by the commenters, may be forthcoming in
guidance published in the Internal Revenue Bulletin.

12. Recordkeeping Requirements

Section 28.6001-1 of the proposed regulations provides that all
documents and vouchers used in preparing the Form 708 must be retained
by the person required to file the return so as to be available for
inspection whenever required. A comment suggests that this retention
standard be clarified, because it is open-ended and appears not to bear
any relation to the three-to-six-year period of limitations for
assessment for such return prescribed in section 6501.
The retention standard in Sec. 28.6001-1(a) of the proposed
regulations is the same as the retention standard for both the estate
and gift taxes under Sec. Sec. 20.6001-1(a) and 25.6001-1(a),
respectively. This expansive standard is appropriate for estate and
gift tax, because the records associated with estate and gift tax
returns can be relevant many years later in the context of a GST tax
return, a surviving spouse's gift and/or estate tax return, and income
tax basis, well after the period of limitations for assessment under
section 6501 has expired for such returns. Additionally, because the
gift tax and estate tax computations are cumulative in nature, the
records associated with gift tax returns filed during life may be
relevant many years later in the preparation and filing of the estate
tax return.
The section 2801 tax is less likely than the estate and gift taxes
to have application for as long a period of time after the period of
limitations for assessment has expired. Therefore, upon consideration
of the comments, the Treasury Department and the IRS agree that a less
expansive retention standard is appropriate for the section 2801 tax.
Accordingly, the final regulations adopt the more limited income tax
retention standard under Sec. 1.6001-1(e), which requires
documentation be retained so long as the contents thereof may become
material in the administration of any internal revenue law.

13. Miscellaneous

A. Power of Appointment Over Property Not in Trust
Various sections of the proposed regulations refer to a power of
appointment over property that is not in trust. Multiple comments
request an example, explaining that a power of appointment typically is
over trust property. For purposes of the Code, the classification of an
arrangement as a trust is determined under Sec. 301.7701-4 rather than
under local law. Consequently, an arrangement that is classified as a
trust under local law may not be a trust under the Code. Such an
arrangement may include a grant of a power to an individual that is in
substance a power of appointment but, because the arrangement does not
constitute a trust under the Code, the power of appointment is over
property that is not in trust. This is merely one example but, given
the variety of arrangements worldwide that are available to a covered
expatriate seeking to transfer property by gift or by reason of death,
there may be several others. Because the determination of whether a
certain arrangement is a power of appointment not in trust is fact
specific, the final regulations do not include specific examples of a
power of appointment over property that is not in trust.
B. Estate and Gift Tax Treaties
The proposed regulations do not address the effect of estate and
gift tax treaties on the section 2801 tax, except to explicitly state
in several examples that the covered expatriate in the example resides
in a non-treaty country. Several comments request guidance on the
application of estate and gift tax treaties to section 2801 when a gift
or bequest is made by a covered expatriate domiciled in a treaty
country. One comment requests that the final regulations provide that
section 2801 does not apply to property transfers by covered
expatriates domiciled in a treaty country.
Neither the statutory language nor the legislative history of
section 2801 provides any indication of Congressional intent concerning
the effect of existing estate and gift treaties on the application of
section 2801. In the absence of specific language overriding treaties,
statutes generally are to work in harmony with existing treaties but,
with the exception of certain treaty obligations in effect on August
16, 1954, neither the treaty nor the statute has preferential status.
See section 7852(d). The U.S. currently has estate and gift tax
treaties with Australia, Austria, Denmark, France, Germany, Japan, and
the United Kingdom and estate tax-only treaties with Finland, Greece,
Ireland, Italy, the Netherlands, South Africa, and Switzerland. There
are also estate tax provisions in the U.S.-Canada income tax treaty.
The effect of a particular treaty on the application of section 2801 to
a gift or bequest by a covered expatriate in a treaty country must be
evaluated on a case-by-case basis when a particular transfer falls
within the reach of both section 2801 and an estate or gift tax treaty.
Any unresolved issue at that time as to the effect of a particular
treaty may be elevated under the competent authority procedures. In
view of the above, the final regulations do not include guidance on the
effect of existing gift and estate tax treaties on the application of
section 2801.
C. Correction in Sec. 28.2801-6(b)
Section 28.2801-6(b) of the proposed regulations clarifies the
applicability of the GST tax to certain section 2801 transfers. A
comment points out that the last sentence of Sec. 28.2801-6(b) of the
proposed regulations mistakenly refers to the failure to timely file
and pay the section 2801 tax and suggests this language be replaced
with a reference to the failure to timely file and pay the estate or
gift tax under chapters 11 and 12, respectively. In the final
regulations,

[[Page 3394]]

the last sentence of Sec. 28.2801-6(b) is revised to refer to the
failure to timely file an estate or gift tax return. See Sec. 28.2801-
3(c)(1) and (2) of the final regulations and part 3.A.i. of the Summary
of Comments and Explanation of Revisions section of this preamble
(discussing the accepted recommendation of commenters to remove the
timely paid requirement from these final regulations).

Effect on Other Documents

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

Special Analyses

1. Regulatory Planning and Review

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

2. Paperwork Reduction Act

The collection of information contained in these final regulations
under section 2801 is reported on Form 708, United States Return of Tax
for Gifts and Bequests Received from Covered Expatriates, and has been
reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control number 1545-2309. The collection of information in these
final regulations is in Sec. Sec. 28.2801-4(e), 28.2801-5(d), 28.6001-
1, and 28.6011-1.
The collection of information in Sec. 28.2801-4(e) is required to
enable the IRS to verify that the U.S. citizens or residents who
receive covered gifts and covered bequests are entitled to reduce the
section 2801 tax by certain foreign taxes paid with respect to such
gifts and bequests and, if so, the amount of the reduction. The
collection of information is required to obtain a benefit. The likely
respondents are individuals, domestic trusts, and electing foreign
trusts.
The collection of information in Sec. 28.2801-5(d) is required to
notify the IRS and certain U.S. citizen or resident beneficiaries of a
foreign trust that the foreign trust is electing to be treated as a
domestic trust for purposes of section 2801. It also is required for
the IRS to verify the proper amount of the section 2801 tax due. This
alerts the IRS and the U.S. citizen or resident beneficiaries that the
foreign trust will be liable for payment of the section 2801 tax while
the election is in effect. This collection of information is necessary
for the proper performance of IRS functions in the collection of the
section 2801 tax. This collection of information is required to obtain
a benefit. The likely respondents are foreign trusts.
The collection of information in 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 also is required to verify the
receipt of covered gifts and covered bequests by U.S. citizens or
residents and the value of such gifts and bequests. This collection of
information is mandatory. The likely respondents are individuals and
trusts.
The collection of information in Sec. 28.6011-1 is required for
the IRS to verify the receipt of covered gifts and covered bequests and
other information relevant to the tax imposed under section 2801. This
collection of information is necessary for the proper performance of
IRS functions in the collection of the section 2801 tax. This
collection of information is mandatory. The likely respondents are
individuals and trusts.
Estimated total annual reporting burden: 6,000 hours.
Estimated average annual burden hours per respondent: 1 hour to
prepare and attach documentation to Form 708 for the reduction of the
section 2801 tax for foreign taxes paid; 2 hours to elect to treat a
foreign trust as a domestic trust and notify the U.S. citizen or
resident beneficiaries; 1 hour to notify the U.S. citizen or resident
beneficiaries that the election is terminated; and 2 hours to prepare
taxpayer records and the Form 708 to report the section 2801 tax.
Estimated number of respondents: 1,000.
Estimated annual frequency of responses: Annually or less.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Books and records relating to a collection of information must be
retained as long as their contents might become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.

3. Regulatory Flexibility Act

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

4. Unfunded Mandates Reform Act

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

5. Executive Order 13132: Federalism

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

6. Congressional Review Act

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).

Availability of Documents

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

Drafting Information

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

[[Page 3395]]

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

List of Subjects in 26 CFR Part 28

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

Amendments to the Regulations

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

0
Paragraph 1. Part 28 is added to read as follows:

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

Authority: 26 U.S.C. 7805.
Section 28.2801-0 through 28.2801-7 also issued under 26 U.S.C.
2801.
Section 28.6001-1 also issued under 26 U.S.C. 6001.
Section 28.6011(a)-1 also issued under 26 U.S.C. 6011 and
6011(a).
Section 28.6060-1 also issued under 26 U.S.C. 6060 and 6060(a).
Section 28.6071(a)-1 also issued under 26 U.S.C. 6071 and
6071(a).
Section 28.6081-1 also issued under 26 U.S.C. 6081 and 6081(a).
Section 28.6091-1 also issued under 26 U.S.C. 6091 and 6091(a).
Section 28.6101-1 also issued under 26 U.S.C. 6101.
Section 28.6107-1 also issued under 26 U.S.C. 6107 and 6107(c).
Section 28.6109-1 also issued under 26 U.S.C. 6109 and 6109(a).
Section 28.6151-1 also issued under 26 U.S.C. 6151.
Section 28.6694-1 through 28.6694-4 also issued under 26 U.S.C.
6694.
Section 28.6695-1 also issued under 26 U.S.C. 6695.
Section 28.6696-1 also issued under 26 U.S.C. 6696 and 6696(c).
Section 28.7701-1 also issued under 26 U.S.C. 7701.
Sec.
28.2801-0 Table of contents.
28.2801-1 Tax on certain gifts and bequests from covered
expatriates.
28.2801-2 Definitions.
28.2801-3 Rules and exceptions applicable to covered gifts and
covered bequests.
28.2801-4 Liability for and payment of tax on covered gifts and
covered bequests; computation of tax.
28.2801-5 Foreign trusts.
28.2801-6 Special rules and cross-references.
28.2801-7 Determining responsibility under section 2801.
28.6001-1 Records required to be kept.
28.6011-1 Returns.
28.6060-1 Reporting requirements for tax return preparers.
28.6071-1 Time for filing returns.
28.6081-1 Extension of time for filing returns reporting gifts and
bequests from covered expatriates.
28.6091-1 Place for filing returns.
28.6101-1 Period covered by returns.
28.6107-1 Tax return preparer must furnish copy of return or claim
for refund to taxpayer and must retain a copy or record.
28.6109-1 Tax return preparers furnishing identifying numbers for
returns or claims for refund.
28.6151-1 Time and place for paying tax shown on returns.
28.6694-1 Section 6694 penalties applicable to return preparer.
28.6694-2 Penalties for understatement due to an unreasonable
position.
28.6694-3 Penalty for understatement due to willful, reckless, or
intentional conduct.
28.6694-4 Extension of period of collection when tax return preparer
pays 15 percent of a penalty for understatement of taxpayer's
liability and certain other procedural matters.
28.6695-1 Other assessable penalties with respect to the preparation
of tax returns for other persons.
28.6696-1 Claims for credit or refund by tax return preparers and
appraisers.
28.7701-1 Tax return preparer.

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

Sec. 28.2801-0 Table of contents.

This section lists the headings 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) Applicability date.

Sec. 28.2801-2 Definitions.

(a) Overview.
(b) U.S. citizen or resident.
(c) Domestic trust.
(d) Foreign trust.
(1) In general.
(2) Electing foreign trust.
(3) Non-electing foreign trust.
(e) U.S. recipient.
(f) Covered bequest.
(g) Covered gift.
(h) Expatriate and covered expatriate.
(i) Indirect acquisition of property.
(j) Power of appointment.
(k) Section 2801 tax.
(l) Section 2801(c) amount.
(m) Statutory references.
(1) Code.
(2) Subtitle B.
(n) Applicability date.

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) Covered bequest previously subject to section 2801 tax as a
covered gift.
(4) Transfers to charity.
(5) Transfers to spouse.
(6) Qualified disclaimers.
(d) Covered gifts and covered bequests made in trust.
(e) Powers of appointment.
(1) Covered expatriate as holder of power.
(2) Covered expatriate as grantor of power.
(f) Examples.
(g) Applicability date.

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) [Reserved].
(iv) Migrated foreign trust.
(3) Foreign trust.
(i) In general.
(ii) Income tax deduction.
(b) Computation of tax.
(1) In general.
(2) Net covered gifts and covered bequests.
(c) Value of covered gift or covered bequest.
(d) Date of receipt.
(1) In general.
(2) Covered gift.
(3) Covered bequest.
(4) Domestic trusts and electing foreign trusts.
(5) Non-electing foreign trusts.
(6) Powers of appointment.
(i) Covered expatriate as holder of power.
(ii) Covered expatriate as grantor of power.
(7) Indirect receipts.
(8) Future interest in property not in trust.
(i) Date of receipt.
(ii) Date-of-receipt election for future interest in property
not in trust.
(e) Reduction of tax for foreign gift or estate tax paid.
(1) In general.
(2) Protective claim for refund.
(f) Examples.
(g) Applicability date.

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) Filing requirement.
(5) Duration of status as electing foreign trust.

[[Page 3396]]

(i) In general.
(ii) Termination.
(A) Manner of termination.
(B) Effective date of termination.
(C) Notice requirements upon termination.
(iii) Subsequent elections.
(6) Dispute as to amount of section 2801 tax owed by electing
foreign trust.
(i) Procedure.
(ii) Effect of compliance.
(iii) Effect of failing to comply (imperfect election).
(A) In general.
(B) Notice to permissible distributees.
(C) Reasonable cause.
(D) Interim period.
(7) No overpayment caused solely by virtue of defect in
election.
(e) Examples.
(f) Applicability date.

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) Applicability date.

Sec. 28.2801-7 Determining responsibility under section 2801.

(a) Responsibility of U.S. citizens or residents receiving gifts
or bequests from expatriates.
(b) Disclosure of return and return information.
(1) In general.
(2) Rebuttable presumption.
(c) Protective return.
(d) Applicability date.

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 attributable to covered gifts and covered
bequests from non-electing foreign trusts, received by a U.S. citizen
or resident from a covered expatriate during a calendar year. Domestic
trusts, as well as electing foreign trusts, are subject to tax under
section 2801 in the same manner as if the trusts were U.S. citizens.
See section 2801(e)(4)(A)(i) and (B)(iii). Accordingly, the section
2801 tax is paid by the U.S. citizen or resident, domestic trust, or
electing foreign trust that receives the covered gift or covered
bequest, including distributions attributable to covered gifts and
covered bequests from non-electing foreign trusts. For purposes of the
regulations in this part 28 (26 CFR part 28), references to U.S.
citizens are considered to include domestic trusts and electing foreign
trusts.
(b) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

Sec. 28.2801-2 Definitions.

(a) Overview. This section provides definitions of terms applicable
solely for purposes of section 2801 of the Code and the regulations in
this part 28.
(b) U.S. citizen or resident. A U.S. citizen or resident is an
individual who is a citizen or resident of the United States for
purposes of chapter 11 or 12 of subtitle B, as the case may be, at the
time of receipt of the covered gift or covered bequest. Furthermore,
references to a U.S. citizen also include a domestic trust, as well as
an electing foreign trust. See Sec. 28.2801-1(a).
(c) Domestic trust. The term domestic trust means a trust defined
in section 7701(a)(30)(E) of the Code. References to a domestic trust
include an electing foreign trust.
(d) Foreign trust--(1) In general. The term foreign trust means a
trust defined in section 7701(a)(31)(B).
(2) Electing foreign trust. The term electing foreign trust means a
foreign trust that has in effect a valid election to be treated as a
domestic trust for purposes of section 2801. See Sec. 28.2801-5(d).
(3) Non-electing foreign trust. The term non-electing foreign trust
means any foreign trust other than an electing foreign trust described
in paragraph (d)(2) of this section.
(e) U.S. recipient. The term U.S. recipient means a U.S. citizen or
resident, a domestic trust, or an electing foreign trust that receives
a covered gift or covered bequest, whether directly or indirectly,
during the calendar year. The term U.S. recipient includes a U.S.
citizen or resident receiving a distribution from a non-electing
foreign trust if the distribution is attributable (in whole or in part)
to one or more covered gifts or covered bequests received by the non-
electing foreign trust. See Sec. 28.2801-5(c) to determine the amount
of a distribution attributable to covered gifts and covered bequests.
This term also includes the U.S. citizen or resident shareholders,
partners, or other interest-holders, as the case may be (if any), of a
business entity that receives a covered gift or covered bequest.
(f) Covered bequest. The term covered bequest means any property
acquired by a recipient on or after June 17, 2008, directly or
indirectly by reason of the death of a covered expatriate, regardless
of the situs of the property and of whether such property was acquired
by the covered expatriate before or after expatriation from the United
States, but only to the extent the property would have been included in
the covered expatriate's gross estate for Federal estate tax purposes
if the covered expatriate had been a U.S. citizen immediately before
death. See paragraph (i) of this section for guidance in determining
when property is acquired indirectly for purposes of this paragraph
(f). The term covered bequest also includes any other property that
would have been included in the covered expatriate's gross estate for
Federal estate tax purposes (for example, under section 2035 of the
Code) if the covered expatriate had been a U.S. citizen immediately
before death, as well as distributions made by reason of the death of a
covered expatriate from a non-electing foreign trust to the extent the
distributions are attributable to covered gifts and covered bequests
made to the non-electing foreign trust on or after June 17, 2008. See
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 a recipient on or after June 17, 2008, by gift directly or
indirectly from an individual who is a covered expatriate at the time
the property is received by the recipient, regardless of the situs of
such property and of whether such property was acquired by the covered
expatriate before or after expatriation from the United States. See
paragraph (i) of this section for guidance in determining when property
is acquired indirectly for purposes of this paragraph (g). The term
covered gift also includes distributions made, other than by reason of
the death of a covered expatriate, from a non-electing foreign trust to
the extent the distributions are attributable to covered gifts and
covered bequests made to the non-electing foreign trust on or after
June 17, 2008. See 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) of the Code. The term covered expatriate has the same
meaning for purposes of section 2801 as that term has in section
877A(g)(1). The determination of whether an individual is a covered
expatriate is made as of the expatriation date as defined in section
877A(g)(3), and if an expatriate meets the definition of a covered
expatriate, the expatriate is a covered expatriate for purposes of
section 2801 at all times after the

[[Page 3397]]

expatriation date. However, an expatriate is not treated as a covered
expatriate for purposes of section 2801 during any period beginning
after the expatriation date during which such individual is subject to
United States estate or gift tax (chapter 11 or chapter 12 of subtitle
B) as a U.S. citizen or resident. See section 877A(g)(1)(C). An
individual's status as a covered expatriate will be determined as of
the date of the most recent expatriation, if there has been more than
one.
(i) Indirect acquisition of property. For purposes of paragraphs
(f) and (g) of this section, an indirect acquisition of property means
the receipt of an interest in property, gratuitously passed from or
conferred by the covered expatriate, by or on behalf of the recipient
through another person, or by a trust or entity in which the recipient
has an interest, regardless of the means or device employed. Such an
indirect acquisition includes but is not limited to--
(1) Property acquired by a recipient through a transfer to a
corporation or other entity other than a trust or estate, to the extent
of the ownership interest of the recipient in that corporation or other
entity;
(2) Money paid or property distributed by a covered expatriate, or
distributed from a non-electing foreign trust that received a covered
gift or covered bequest, in satisfaction of a debt or liability of the
recipient, regardless of the payee of that payment or distribution;
(3) Property acquired by or on behalf of a recipient pursuant to
the exercise, release, or lapse (without regard to the exception in
section 2041(b)(2) or 2514(e) of the Code) of a non-covered
expatriate's power of appointment granted by a covered expatriate over
property not in trust, unless the property previously was subjected to
section 2801 tax upon the grant of the power or the covered expatriate
had no more than a non-general power of appointment over that property;
and
(4) Property acquired through or from any person not subject to the
section 2801 tax that is, in substance, a covered gift or covered
bequest from a covered expatriate.
(j) Power of appointment. The term power of appointment refers to
both a general and non-general power of appointment, except as
expressly limited to one or the other in a particular provision of the
regulations in this part 28. The term general power of appointment has
the same meaning as in sections 2041(b)(1) and 2514(c). The term non-
general power of appointment means any power of appointment that is not
a general power of appointment. For purposes of section 2801, the term
power of appointment is defined without regard to the exception in
section 2041(b)(2) or 2514(e).
(k) Section 2801 tax. The term section 2801 tax has the meaning
provided in Sec. 28.2801-1(a).
(l) Section 2801(c) amount. The term section 2801(c) amount is the
dollar amount of the per-donee gift tax exclusion in effect under
section 2503(b) for that calendar year.
(m) Statutory references--(1) Code. The term Code means the
Internal Revenue Code.
(2) Subtitle B. The term subtitle B means subtitle B of the Code.
(n) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

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

(a) Covered gift. Subject to the provisions of paragraphs (c)
through (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), (4), and (5) of the Code, the per-donee exclusion under
section 2503(b) of the Code 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)
through (e) of this section, property acquired by reason of the death
of a covered expatriate (one of the types of transfers defined as a
covered bequest in Sec. 28.2801-2(f)) includes any property that would
have been includible in the gross estate of the covered expatriate
under chapter 11 of subtitle B if the covered expatriate had been a
U.S. citizen at the time of death. Therefore, property acquired by
reason of a covered expatriate's death 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, to the extent
the property would have been includible in the covered expatriate's
gross estate if the covered expatriate had been a U.S. citizen at
death;
(2) That was transferred by the covered expatriate during life,
either before or after expatriation, and that would have been
includible in the covered expatriate's gross estate under section 2036,
2037, or 2038 of the Code had the covered expatriate been a U.S.
citizen at 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, United States Gift
(and Generation-Skipping Transfer) Tax Return, Form 709-NA, United
States Gift (and Generation-Skipping Transfer) Tax Return of
Nonresident Not a Citizen of the United States, 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 includible in the covered expatriate's gross estate under
section 2044 of the Code if the covered expatriate had been a U.S.
citizen at death; or
(4) That otherwise passed from the covered expatriate by reason of
his or her 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 includible in the
covered expatriate's gross estate under section 2040 of the Code if the
covered expatriate had been a U.S. citizen at 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 death;
(iii) Property subject to a general power of appointment held by
the covered expatriate at death that would have been includible in the
covered expatriate's gross estate under section 2041 if the covered
expatriate had been a U.S. citizen 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 of the Code if the covered expatriate had
been a U.S. citizen at death.
(c) Exceptions to covered gift and covered bequest. Notwithstanding
the definitions of covered gift and covered bequest in Sec. 28.2801-
2(f) and (g), respectively, as further described in paragraphs (a) and
(b) of this section, the terms covered gift and covered bequest do not
include property described in paragraphs (c)(1) through (6) of this
section.

[[Page 3398]]

(1) Reported taxable gifts. Property transferred as a taxable gift
under section 2503(a) that is reported on the donor's timely filed Form
709 or Form 709-NA is not a covered gift. However, property excluded
from the definition of a taxable gift, such as 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 or Form 709-NA.
(2) Property reported as subject to estate tax. Property that is
includible in the gross estate of the covered expatriate and is
reported on a timely filed Form 706, Form 706-NA, or Form 706-QDT, U.S.
Estate Tax Return for Qualified Domestic Trusts, or any successor form,
is not a covered bequest. 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
reported 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) Covered bequest previously subject to section 2801 tax as a
covered gift. If a covered bequest from a covered expatriate previously
constituted a covered gift from that covered expatriate (for example,
because of a retained power or right described in section 2036), the
property is a covered bequest only to the extent that the value of the
covered bequest exceeds the value of the covered gift that was subject
to section 2801.
(4) Transfers to charity. A gift to a donee described in section
2522(b) of the Code or a bequest to a beneficiary described in section
2055(a) of the Code is not a covered gift or covered bequest to the
extent a charitable deduction under section 2522 or 2055 would have
been allowed if the covered expatriate had been a U.S. citizen at the
time of the transfer.
(5) Transfers to spouse. Property transferred from a covered
expatriate to the covered expatriate's spouse generally is not a
covered gift or covered bequest to the extent a marital deduction under
section 2523 or 2056 of the Code would have been allowed if the covered
expatriate had been a U.S. citizen at the time of the transfer. To the
extent that a gift or bequest of property to a trust (or to a separate
share of the trust) would qualify for the marital deduction, the
property transferred in the gift or bequest is not a covered gift or
covered bequest. To the extent the gift or bequest of property to the
trust (or to a separate share of the trust) would not qualify for the
marital deduction, the property transferred in the gift or bequest is a
covered gift or covered bequest to the trust, and in the case of a non-
electing foreign trust, distributions attributable to such gift or
bequest will subject the U.S. citizen or resident spouse receiving such
distributions to the section 2801 tax. See Sec. Sec. 28.2801-4(a)(3)
and 28.2801-5(a). For qualified terminable interest property (QTIP)
described in section 2056(b)(7) and for property in a qualified
domestic trust (QDOT) described in section 2056A of the Code, a valid
QTIP and/or QDOT election must be made by the covered expatriate or
covered expatriate's estate in order for the gift or bequest of such
property to qualify for the marital exclusion under section 2801(e)(3),
and, thus not be a covered gift or covered bequest under this paragraph
(c)(5). Such an election can be made only with respect to the transfer
of property subject to gift or estate tax under section 2511(a) or 2103
of the Code. Furthermore, to exclude from covered bequests property in
a QDOT for the benefit of a covered expatriate, funded pursuant to a
bequest by the covered expatriate's predeceased spouse who also was a
covered expatriate, a valid QDOT election must have been made in the
predeceased covered expatriate's estate.
(6) Qualified disclaimers. Property transferred pursuant to a
covered expatriate's qualified disclaimer, as defined in section
2518(b) of the Code, is not a covered gift or covered bequest from that
covered expatriate.
(d) Covered gifts and covered bequests made in trust. For transfers
of property to a trust that are covered gifts or covered bequests as
described in Sec. Sec. 28.2801-2 and 28.2801-3, the 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
made to a domestic trust or to an electing foreign trust is the
domestic or electing foreign trust, and the U.S. recipient of a covered
gift or a covered bequest made to a non-electing foreign trust is each
U.S. citizen or resident receiving a distribution from the non-electing
foreign trust (without regard to whether that distribution is or is not
pursuant to the exercise or release of a general power of appointment).
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. For this purpose, the
lapse of a general power of appointment held by a covered expatriate is
treated as a release to the extent provided in sections 2041(b)(2) and
2514(e) of the Code. 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 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 resident of a
general power of appointment over property not held in trust 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:
(1) 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)(5) of this section, the $100,000 exclusion 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), 2523(i), and 2503(b). The remaining amount ($300,000, less
the $100,000 exclusion for a noncitizen spouse, as indexed for
inflation) is a covered gift from CE to W. W must timely file Form 708,
United States Return of Tax for Gifts and Bequests Received 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,

[[Page 3399]]

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).
(2) Example 2: Reporting property as subject to estate tax--(i)
Year 1. 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) Year 2. 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 Internal Revenue Service grants both extensions, but
CE's executor fails to file the Form 706-NA until after March 14 of
Year 3.
(iii) Analysis. S learns that the executor of CE's estate did not
timely file Form 706-NA. CE's estate remains liable for estate tax on
CE's interest in the condominium. In addition, because CE is a covered
expatriate and CE's estate failed to timely file the tax return
reporting the transaction, S received a covered bequest as defined in
Sec. 28.2801-2(f) and paragraph (b) of this section and 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).
(3) Example 3: Covered gift in trust with grant of general power of
appointment over trust property--(i) Facts. 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. The foreign trust does not elect to be
treated as a domestic trust for purposes of section 2801. 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) Effects on Q. On October 20, Year 1, the irrevocable, non-
electing 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 receives a distribution
attributable to a covered gift and section 2801 tax is imposed on Q.
See Sec. 28.2801-4(d)(5). 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).
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).
(iii) Effects on A. Although A has no section 2801 reporting
requirement, 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) of this chapter.
(4) Example 4: Lapse of power of appointment held by covered
expatriate. 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 by CE, 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.
(5) Example 5: Property subject to section 2801 tax as a covered
gift and as a covered bequest. F, a CE, transfers an income interest in
property to A, a U.S. citizen, while retaining the remainder interest.
F was not required to, and did not, file a gift tax return. Upon F's
death, A receives full title to the property. The initial transfer of
the income interest was a covered gift valued at $1,000,000, upon which
A paid the section 2801 tax. The value of the property at F's death is
$4,500,000. Because the full value of the property would have been
included in F's gross estate if F had died as a U.S. citizen, there is
a covered bequest at F's death. The covered bequest is subject to
section 2801 tax on the excess of the value of the covered bequest over
the value of the covered gift ($4,500,000 minus $1,000,000), or
$3,500,000.
(g) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

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 of the Code 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) [Reserved].
(iv) Migrated foreign trust. A non-electing foreign trust 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) of the Code (migrated foreign trust), must file a timely
Form 708, United States Return of Tax for Gifts and Bequests Received
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 were

[[Page 3400]]

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 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 non-electing foreign trusts.
(ii) Income tax deduction. The U.S. recipient of a distribution
from a non-electing foreign trust is allowed a deduction against income
tax under section 164 in the calendar year in which the U.S. recipient
paid or accrued the section 2801 tax. Thus, for cash method taxpayers,
the calendar year in which the payment of the section 2801 tax occurs
is later than the year in which the distribution is received and
becomes subject to income tax. 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 (which, for this purpose, also
includes accumulation distributions under section 665(b)). 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 all non-electing foreign trusts 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
included in the U.S. recipient's gross income for that calendar year.
For purposes of this paragraph (a)(3)(ii)(B), distributions from non-
electing foreign trusts included 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 non-electing foreign
trusts that also are 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
[non-electing 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 highest rate of estate tax
under section 2001(c) in effect for that calendar year. See paragraph
(f)(1) 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. The
total value of all covered gifts and covered bequests received by a
U.S. recipient during the calendar year includes distributions made
from a non-electing foreign trust to the extent the distributions are
attributable to covered gifts or covered bequests made to the foreign
trust on or after June 17, 2008.
(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, as of the date of
receipt, 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, to the extent
applicable, 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 of subtitle B as if
the covered expatriate had been a U.S. citizen at the time of the
transfer (subject to the other provisions of this paragraph (d)). For
example, 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. However, for an asset
or property interest 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 (subject
to the other provisions of this subparagraph (d)). However, the date of
receipt for property passing on the death of the covered expatriate by
operation of law, or by beneficiary designation or other contractual
agreement, is the date of death of the covered expatriate.
Notwithstanding the previous sentences, for an asset subject to a claim

[[Page 3401]]

of right of another involving a bona fide dispute, the date of receipt
is the date on which such claim is extinguished.
(4) Domestic trusts and electing foreign trusts. The U.S. recipient
of a covered gift or covered bequest made to a domestic trust or an
electing foreign trust is the trust. For a lifetime transfer of assets
by a covered expatriate to a domestic trust or an electing foreign
trust, the date of receipt of the covered gift is the date of the gift
for purposes of chapter 12 of subtitle B, determined as if the covered
expatriate had been a U.S. citizen at the time of the transfer. For
example, in the event of a transfer by a covered expatriate to a
revocable trust, the date of receipt is the later of the date the right
to revoke the trust is relinquished or extinguished and the date when
all powers over or interests in the trust (if any) that would prevent
the transfer from being a completed transfer for gift tax purposes
(determined as if the covered expatriate had been a U.S. citizen) are
extinguished. Similarly, in the event of a transfer by a covered
expatriate to an irrevocable domestic trust or electing foreign trust
over or in which the covered expatriate retains powers or interests
that would prevent the transfer from being a completed gift for gift
tax purposes (determined as if the covered expatriate had been a U.S.
citizen), the date of receipt by the trust is the date all such powers
or interests are extinguished. Additionally, if before the
relinquishment of the right to revoke the trust or relinquishment of
some other powers or interests that would render the gift incomplete
(determined as if the covered expatriate had been a U.S. citizen), such
trust distributes property to a U.S. recipient not in discharge of a
support or other obligation of the donor, then the U.S. recipient of
that distribution receives a covered gift on the date of that
distribution.
(5) Non-electing foreign trusts. A U.S. citizen or resident is
treated as receiving a covered gift or covered bequest on the date that
person receives a distribution from a non-electing foreign trust
attributable to a covered gift or covered bequest that was received by
the trust. The date of such a receipt by a U.S. citizen or resident is
the date of each distribution from the non-electing foreign trust. In
the event of a sale, encumbrance, monetization, or other disposition of
a U.S. recipient's interest in a non-electing foreign trust, the date
of receipt is the date of such sale, encumbrance, monetization, or
other disposition of the interest.
(6) 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 the date the property subject to the power is
distributed from the decedent's estate or any trust if the power of
appointment is over property in such estate or trust, or the date of
the covered expatriate's death if the power of appointment is over
property passing on the covered expatriate's death by operation of law,
or by beneficiary designation, or 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 general power
of appointment is exercisable by the U.S. citizen or resident and the
property subject to the general power of appointment 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) through (4) of this section, and over
property in a non-electing foreign trust is determined in accordance
with paragraph (d)(5) of this section. See Sec. 28.2801-3(d) for the
rule applying to covered gifts and covered bequests made in trust.
(7) Indirect receipts. The date of receipt by a U.S. recipient of a
covered gift or covered bequest received indirectly from a covered
expatriate is the date of its receipt, as determined under this
paragraph (d), 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 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. recipient in whose favor the power was
exercised. Further, the date of receipt of property received through
one or more entities not subject to section 2801 is the date of its
receipt by the U.S. recipient from a conduit entity.
(8) Future interest in property not in trust--(i) Date of receipt.
The date of receipt by a U.S. recipient (including a domestic trust or
an electing foreign trust) of a future interest in property not held in
trust is the earlier of the date such interest may be transferred by
the U.S. recipient and the date that is the later of the date that such
interest vests in the U.S. recipient or the date that the last
intervening interest in the property is extinguished. For this purpose,
a transfer includes a sale, encumbering, monetization, or other
disposition of the interest.
(ii) Date-of-receipt election for future interest in property not
in trust. A U.S. recipient of a covered gift or covered bequest that is
a future interest in property not held in trust instead may elect to
treat the date of receipt as the date of the donor's transfer of that
future interest in the event of a covered gift, or as the date of death
of the covered expatriate in the event of a covered bequest. Such an
election will be made on Form 708 for the year in which this elective
date of receipt occurs, in accordance with the instructions for such
form.
(e) Reduction of tax for foreign gift or estate tax paid--(1) In
general. 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
territories 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
gift or estate tax return and a copy of the receipt or cancelled check
for payment of the foreign gift or estate tax. The U.S. recipient also
must report on an attachment to the Form 708:
(i) The amount of foreign gift or estate tax paid with respect to
each covered gift or covered bequest and the amount and date of each
payment thereof;
(ii) A description and the value of the property with respect to
which such taxes were imposed;
(iii) Whether any refund of part or all of the foreign gift or
estate tax has been or will be claimed or allowed, and the amount of
such refund; and
(iv) All other information necessary for the verification and
computation of the amount of the reduction of section 2801 tax.
(2) Protective claim for refund. A protective claim for refund
under this section may be filed to preserve the U.S. recipient's right
to claim a refund in the

[[Page 3402]]

event any gift or estate tax with respect to the covered gift or
covered bequest is owed but not yet paid to a foreign country until
after the expiration of the period of limitation for filing a claim for
refund. Such a protective claim may be filed at any time before the
expiration of the period of limitation prescribed in section 6511(a)
for the filing of a claim for refund and shall be made in accordance
with the usual procedures for filing a claim for refund. See https://www.irs.gov and Form 843, Claim for Refund and Request for Abatement,
and its instructions. Action on a protective claim will proceed after
the U.S. recipient has notified the Internal Revenue Service within a
reasonable period that the gift or estate tax with respect to the
covered gift or covered bequest has been paid to a foreign country.
(f) Examples. The provisions of this section are illustrated by the
following examples.
(1) 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 tax rate is 40 percent and the section 2801(c) amount is
$16,000. 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 $114,000, 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 $16,000. A's section 2801 tax liability then is reduced by
any foreign gift or estate tax paid under paragraph (e) of this
section. Assuming A, B, and C paid no foreign gift or estate tax on the
transfers, A's section 2801 tax liability for Year 1 is $45,600
($114,000 x 0.4).
(2) 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 $16,000. Based on information provided by
the trustee of the non-electing foreign trust, B includes $50,000 of
the aggregate distributions from the non-electing 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 non-
electing foreign trust and pays $43,600 in section 2801 tax (($125,000-
$16,000) 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 non-electing 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 includible
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 non-electing foreign trust that are both covered
gifts or covered bequests and includible in B's taxable income is
$17,440 ($43,600 x ($50,000/$125,000)). Therefore, B's deduction under
section 164 is $17,440. See paragraph (a)(3)(ii)(C) of this section.
(3) 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
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) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

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 non-
electing 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 non-electing foreign
trust, the term distribution means any direct, indirect, or
constructive transfer from a non-electing foreign trust, including a
transfer to the extent made for less than full and adequate
consideration in money or money's worth. Although section 643(i) of the
Code does not apply for the purpose of defining a distribution under
this section, certain loans from or uncompensated use of property held
by a non-electing foreign trust nevertheless may satisfy the definition
of a distribution under this paragraph if the loan or use of trust
property would be a gift as defined for purposes of chapter 12 of
subtitle B. For purposes of determining whether a U.S. recipient has
received a distribution from a non-electing foreign trust, the term
distribution also includes each distribution from a non-electing
foreign trust pursuant to the exercise, release, or lapse (without
regard to the exception in section 2041(b)(2) or 2514(e) of the Code)
of a power of appointment, whether or not such power is a general power
of appointment. In addition, the term distribution also includes the
domestication of a foreign trust, and any sale, encumbering,
monetization, or other disposition by the U.S. recipient of the
recipient's interest in the trust to the extent of that disposition.
See Sec. 28.2801-4(a)(2)(iv). The determination of whether a U.S.
recipient has received a distribution is made without regard to whether
any portion of the non-electing foreign 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. A U.S. recipient receiving a distribution for purposes of
this section must determine whether the information reporting
requirements of section 6048(c) apply. See Sec. 28.2801-6(c)(2).

[[Page 3403]]

(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 one and the full amount of
each distribution from that foreign trust to a U.S. citizen or resident
would be attributable to the foreign trust's covered gifts and covered
bequests and subject to the imposition of section 2801 tax. Because the
non-electing foreign trust itself is not taxed on its receipt of
covered gifts and covered bequests, the trust is not entitled to an
annual exclusion pursuant to section 2801(c); that exclusion is
available only in computing the section 2801 tax payable by the U.S.
recipient filing a Form 708, United States Return of Tax for Gifts and
Bequests Received from Covered Expatriates.
(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] TR14JA25.001

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)(1) of this section (Example 1), for
an illustration of this computation.

(2) Effect of reported transfer and tax payment. With regard to the
value of property on which a section 2801 tax has been timely paid,
even though that property thereafter remains in a non-electing foreign
trust, that value no longer is considered to be, or to be attributable
to, a covered gift or covered bequest to that 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, provided those amounts were reported as a covered gift or
covered bequest on a timely filed Form 708 or the total covered gifts
and covered bequests received in a calendar year do not exceed the
section 2801(c) amount. An amount for which no section 2801 tax was due
refers to the amount of a covered gift or covered bequest received by
an electing foreign trust not in excess of the section 2801(c) amount.
See Sec. 28.2801-5(e) (Example 4).
(3) Inadequate information to calculate section 2801 ratio. A U.S.
citizen or resident receiving a distribution from a non-electing
foreign trust must proceed upon the assumption that the distribution is
attributable to a covered gift or covered bequest to the extent the
trustee of the foreign trust does not have sufficient books and records
to calculate the section 2801 ratio or the taxpayer is unable to obtain
the necessary information regarding the foreign trust to calculate the
section 2801 ratio. The assumption is rebuttable to the extent the
taxpayer can supply information sufficient to persuade the Internal
Revenue Service (IRS) that the distribution is not entirely
attributable to covered gifts and covered bequests.
(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 all covered gifts and covered
bequests received by the foreign trust during that calendar year, 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 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 (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 U.S. recipient.
(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). See Sec. 28.2801-6(c)(2).
(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.

[[Page 3404]]

(ii) Requirements for a valid election. To make a valid election to
be treated as a domestic trust for purposes of section 2801, the
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 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 timely file Form 708 to report each covered gift and
bequest made to the trust in accordance with Sec. 28.2801-5(d)(4);
(D) Identify 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;
(E) Provide a copy of the governing instrument of the trust and
provide the name, address, and taxpayer identification number of each
permissible distributee described in paragraph (d)(3)(ii)(F) of this
section; and
(F) Affirm under penalties of perjury that each permissible
distributee was notified that the trustee is making (or has made) the
election, effective as of January 1 of the calendar year for which the
Form 708 on which the election is made is filed. 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 during that
year or in a future year, regardless of whether the right arises or
lapses upon the occurrence of a future event; and
(3) Would be described in either or both of paragraphs
(d)(3)(ii)(F)(1) and (2) of this section upon an immediate termination
of either the trust or the interest of any person described in either
or both of paragraphs (d)(3)(ii)(F)(1) and (2) of this section.
(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. The trustee must proceed upon the assumption that the corpus
and undistributed income are attributable to covered gifts and covered
bequests to the extent the trustee does not have sufficient books and
records to determine what amount of the corpus and undistributed income
is attributable to prior covered gifts and covered bequests. The
assumption is rebuttable by the taxpayer's furnishing information
sufficient to persuade the IRS that corpus and undistributed income is
not attributable to prior covered gifts or covered bequests. 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) of the Code, to act as an agent for the
trust for purposes of section 2801. The designation and authorization
are made on a duly filed Form 2848, Power of Attorney and Declaration
of Representative, or as may be directed otherwise in IRS forms or
publications. By designating a U.S. agent, the trustee of the trust
agrees to provide the agent with all information necessary to comply
with any information request or summons issued by the Secretary of the
Treasury or her delegate (Secretary) that is relevant to the collection
or determination of tax under section 2801. 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 an electing
foreign trust for purposes of section 2801 includes serving as the
trust's agent for purposes of section 7602 of the Code (Examination of
books and witnesses), section 7603 of the Code (Service of summons),
and section 7604 of the Code (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 foreign trust and
distributions of such contributions and the income therefrom; 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 foreign trust and distributions of such
contributions and the income therefrom.
(C) Effect of appointment of 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) Filing requirement. The trustee of an electing foreign trust
must timely file a Form 708 to report and pay the section 2801 tax on
all covered gifts and covered bequests received by the trust during the
calendar year. See Sec. 28.6071-1. Nevertheless, the trustee of an
electing foreign trust is not required to file Form 708 for a calendar
year in which either the trust received no covered gifts or covered
bequests, or the total fair market value of all covered gifts and
covered bequests received by the electing foreign trust during that
calendar year is less than or equal to the section 2801(c) amount.
(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--(A) Manner of termination. An election to be
treated as a domestic trust for purposes of section 2801 is terminated
by--
(1) A failure of the foreign trust to timely file a required Form
708 and timely pay the section 2801 tax, as required by paragraph
(d)(4) of this section;
(2) A failure of the foreign trust to enter into a closing
agreement and to timely pay any additional amount of section 2801 tax
(in accordance with the requirements of paragraph (d)(6)(i) of this
section) with respect to recalculations described in paragraph (d)(6)
of this section (a termination that

[[Page 3405]]

also results in the conversion of the trust's election to an imperfect
election); or
(3) An affirmative revocation of the election made in accordance
with the instructions for Form 708.
(B) Effective date of termination. The effective date of the
termination of an election to be treated as a domestic trust for
purposes of section 2801 is as follows:
(1) For a termination described in paragraph (d)(5)(ii)(A)(1) of
this section, the termination is effective as of the first day of the
calendar year for which the Form 708 was required under paragraph
(d)(4) of this section.
(2) For a termination described in paragraph (d)(5)(ii)(A)(2) of
this section, the termination is effective as of the first day of the
calendar year for which the Form 708 was filed with respect to which
the additional amount of section 2801 tax is claimed to be due by the
IRS.
(3) For a termination described in paragraph (d)(5)(ii)(A)(3) of
this section, the termination is effective as of the first day of the
calendar year for which a Form 708 was filed to affirmatively revoke
the election.
(C) Notice requirements upon termination. In the case of a
termination of the election, the trustee should notify promptly each
permissible distributee of the trust, as defined in paragraph
(d)(3)(ii)(F) of this section and determined as of the effective date
of the termination of the election, that the foreign trust's election
was terminated (or terminated and converted to an imperfect election)
and the effective date of the termination, and that each U.S. recipient
of a distribution made from the foreign trust on or after the effective
date of that termination 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 IRS 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 IRS
will issue a letter (but not a notice of deficiency as defined in
section 6212 of the Code) to the trustee of the trust and the appointed
U.S. agent that details the disputed information and the proper amount
of section 2801 tax as recalculated. The trustee of the foreign trust
must pay the additional amount of section 2801 tax including interest
and penalties, if any, on or before the due date specified in the
letter (or other date agreed to by the IRS) and enter into a closing
agreement with the IRS as described in section 7121 to maintain its
election.
(ii) Effect of compliance. If the trustee of the foreign trust
complies with the requirements of paragraph (d)(6)(i) of this section,
then the foreign trust's election to be treated as a domestic trust
under paragraph (d) of this section remains in effect. In the absence
of fraud, malfeasance, or misrepresentation of a material fact, any
value determined in the closing agreement will be deemed to be final
and binding on both the IRS and the foreign trust. Subsequently, the
IRS will not challenge the amount of section 2801 tax due from either
the foreign trust or any of its distributees 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. In addition, neither the foreign trust nor any
of its distributees 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 comply (imperfect election)--(A) In
general. If the foreign trust fails to enter into the closing agreement
and to timely pay any of the additional amount of section 2801 tax
(with interest and penalties, if any) determined to be due by the IRS
in accordance with the procedure in paragraph (d)(6)(i) of this
section, then the foreign trust's valid election is terminated and is
converted to an imperfect election. The conversion to an imperfect
election is retroactive to the first day of the calendar year (subject
year) for which the Form 708 was filed with respect to which the
additional amount of section 2801 tax is claimed to be due by the IRS.
The trust will be a non-electing foreign trust for the subject year and
for each subsequent year until another valid election (if any) is made
by the trust. However, the value the foreign trust reported on the Form
708 for the subject year and each other year during the interim period
described in paragraph (d)(6)(iii)(D) of this section, and on which the
trust 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)
that will be applicable to distributions made by the foreign trust to
U.S. recipients during the subject year and thereafter until the
effective date of any subsequent election meeting the requirements of
paragraph (d)(3) of this section. 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 distributees. If the trustee of the
foreign trust fails to enter into the closing agreement and to remit,
by the due date specified or otherwise agreed to by the IRS, the
additional section 2801 tax, including all interest and penalties, in
accordance with the procedure in paragraph (d)(6)(i) of this section,
the trustee should notify promptly each permissible distributee, as
defined in paragraph (d)(3)(ii)(F) of this section:
(1) That the foreign trust's election was terminated and the
effective date of the termination (see paragraph (d)(5)(ii)(B)(2) of
this section);
(2) Of the amount of additional value on which the foreign trust
did not timely pay the section 2801 tax as determined or otherwise
agreed to by the IRS, which value the IRS thus deems to be attributable
to covered gifts and covered bequests; and
(3) That each U.S. recipient of a distribution made from the
foreign trust on or 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 the foreign 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

[[Page 3406]]

not more than six months after the U.S. recipient is notified by the
trustee or 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) that begins on the effective date of the termination
of the election (see paragraph (d)(5)(ii)(B) of this section) 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 ends
on the earlier of December 31 of the calendar year during which the
additional amount of section 2801 tax was due to be paid, as described
in paragraph (d)(6)(i) of this section, or the effective date of a
subsequent valid election to be treated as a domestic trust for
purposes of section 2801. As described in paragraph (d)(6)(iii)(A) of
this section regarding imperfect elections, the value of the covered
gifts and covered bequests received by the foreign trust during this
interim period, which the foreign trust has reported on one or more
filed Forms 708 and on which the foreign trust has paid the section
2801 tax, is no longer considered to be attributable to 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. If, once the interim period has ended, the
foreign trust has no election in place, 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 an electing foreign 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 value of the covered gifts
or covered bequests on which the section 2801 tax was paid by the
foreign trust and such value on which the section 2801 tax has been
paid is no longer treated as attributable to 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 (6)(iii) of this section.
(e) Examples. The provisions of this section are illustrated by the
following examples.
(1) Example 1: Computation of section 2801 ratio. A and B each
contribute $100,000 to a new foreign trust. A (but not B) is a covered
expatriate and A's contribution is a covered gift. The trustee of the
trust does not make a valid election to have the trust treated as a
domestic trust for purposes of section 2801. The section 2801 ratio
immediately after these two contributions is 0.50, computed as follows:
the pre-contribution value of the trust ($0) multiplied by 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 to a U.S. recipient 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.
(2) Example 2: Distribution to spouse. In Year 1, A contributes
$300,000 to a foreign trust. A is a covered expatriate. B, A's U.S.
citizen spouse, and A's issue may receive discretionary distributions
of income and principal. The transfer would not have qualified for the
gift tax marital deduction if A had been a U.S. citizen or resident at
the time of the gift; therefore, A's contribution is a covered gift.
See sections 2801(e)(3) and 2523. No one pays foreign gift taxes on A's
contribution. The trustee of the trust does not make a valid election
to have the trust treated as a domestic trust for purposes of section
2801. The section 2801 ratio immediately after A's contribution is one.
The highest gift tax rate is 40 percent, and the section 2801(c) amount
is $17,000. The trustee distributes $200,000 to B in Year 1. The entire
amount is a covered gift to B. See section 28.2801-3(c)(5). This is the
only covered gift B receives in Year 1. B receives no covered bequests
in Year 1. B's section 2801 tax for Year 1 is computed by multiplying
B's net covered gift by 40 percent. B's net covered gift for Year 1 is
$183,000, which is determined by reducing B's covered gift received
during Year 1 by the section 2801(c) amount. B's section 2801 tax
liability for Year 1 is $73,200 ($183,000 x 0.4).
(3) Example 3: 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. 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.
None of these contributions is a covered gift because the gifts
predated the effective date of section 2801. 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. The trustee of
the foreign trust does not make a valid election to have the trust
treated as a domestic trust for purposes of section 2801. 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, only $100,000 of that total was a covered gift,
being the only contribution made by A both after the enactment of
section 2801 and after A's expatriation. 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,

[[Page 3407]]

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).
(4) Example 4: Termination of election. (i) In Year 1, A
contributes $200,000 and B contributes $100,000 to Trust, a foreign
trust. A and B are covered expatriates. A's and B's contributions are
covered gifts. No one pays foreign gift taxes on A's and B's
contributions. The trustee of Trust makes a valid election to have
Trust treated as a domestic trust for purposes of section 2801. The
highest gift tax rate is 40 percent, and the section 2801(c) amount is
$17,000. The section 2801 tax for Year 1 is computed by multiplying the
net covered gifts and covered bequests by 40 percent. The net covered
gifts and covered bequests for Year 1 total $283,000, determined by
reducing the covered gifts and covered bequests received by Trust
during Year 1, $300,000, by the section 2801(c) amount, $17,000.
Trust's 2801 tax liability for Year 1 is $113,200 ($283,000 x 0.4). Any
distributions made to U.S. recipients before the trust receives another
contribution have a section 2801 ratio of zero and are not subject to
the section 2801 tax. See paragraph (d)(2)(i) of this section.
(ii) In Year 2, A contributes $100,000 to Trust, all of which is a
covered gift. The trustee of Trust fails to timely file a Form 708 for
Year 2 and timely pay the section 2801 tax. The fair market value of
Trust was $400,000 immediately prior to A's contribution. The section
2801 ratio immediately after A's contribution is 0.20, computed as
follows: the pre-contribution value of Trust ($400,000) multiplied by
the section 2801 ratio in effect immediately prior to the Year 2
contribution (0), plus the fair market value of the Year 2 contribution
that constitutes a covered gift ($100,000), divided by the fair market
value of Trust after the Year 2 contribution ($500,000). See paragraph
(c)(1) and (2) of this section. If the trustee distributes $40,000 to
C, a U.S. citizen, after the contribution in Year 2, then $8,000
($40,000 x 0.20) is a covered gift to C. In Year 2, C also receives a
covered gift of $50,000 directly from B. No one pays foreign gift taxes
on B's covered gift. C receives no covered bequests in Year 2. C's
section 2801 tax for Year 2 is computed by multiplying C's net covered
gifts and covered bequests by 40 percent. C's net covered gifts and
covered bequests for Year 2 total $41,000, determined by reducing the
covered gifts and covered bequests received by C during Year 2, $58,000
($8,000 + $50,000), by the section 2801(c) amount, $17,000. C's section
2801 tax liability for Year 2 is $16,400 ($41,000 x 0.4).
(5) Example 5: Imperfect election of 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,
reports the fair market value of the covered gift as $500,000, and
timely pays the section 2801 tax on the reported fair market value of
the covered gift. 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. 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 terminated and converted into an
imperfect election as of January 1 of Year 1. In computing the foreign
trust's section 2801 ratio for Year 1, the $500,000 of value on which
the section 2801 tax was timely paid is no longer considered to be
attributable to 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
six months 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 a Form 708 to report the Year 1 distribution, the
IRS will verify whether A treated the $300,000 undervaluation claimed
by the IRS as a 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 (plus
interest from the due date of the tax as if reported on a Form 708 that
was timely filed as to Year 1).
(v) Although the foreign trust timely filed the Form 708 for Year 2
and timely paid the section 2801 tax shown on that return, and although
the foreign trust's election had not yet been terminated and converted
into an imperfect election during Year 2, the foreign trust
nevertheless did not have a valid election for Year 2 because the trust
did not timely pay the section 2801 tax on all covered gifts and
covered bequests received in prior years as required in paragraph
(d)(3) of this section, specifically, 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
the Form 708 and paid the section 2801 tax on the Year 2 covered gift
of $200,000, the $200,000 amount is no longer considered a covered gift
for purposes of computing the section 2801 ratio after that
contribution.
(6) Example 6: Subsequent election after termination of election.
The facts are the same as in paragraph (e)(5) of this section (Example
5). 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

[[Page 3408]]

(d)(3)(iii) of this section. The foreign trust is an electing foreign
trust in Year 3.
(f) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

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 of the Code, respectively. However,
the basis adjustment provided in section 1015(d) does not apply to
increase the basis in a covered gift to reflect the tax paid under this
section.
(b) Generation-skipping transfer tax. Transfers made by a
nonresident not a citizen of the United States (NRNC transferor) are
subject to generation-skipping transfer (GST) tax only to the extent
those transfers are subject to Federal estate or gift tax as described
in Sec. 26.2652-1(a)(2) of this chapter. In applying this rule,
taxable distributions and taxable terminations are subject to the GST
tax only to the extent the NRNC transferor's contributions to the
trust, as defined in Sec. 26.2652-1(b)(1) of this chapter, were
subject to Federal estate or gift tax as described in Sec. 26.2652-
1(a)(2) of this chapter. See Sec. 26.2663-2 of this chapter. 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 of the Code applies
because of a covered expatriate's failure to timely file an estate or
gift tax return.
(c) Information returns--(1) Gifts and bequests. Pursuant to
section 6039F of the Code and any corresponding regulations and Form
3520, Part IV, each U.S. person who treats an amount received from a
foreign person (other than through a foreign trust) as a gift or
bequest (whether or not 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. For purposes of
this provision, a U.S. person is as defined in section 7701(a)(30) of
the Code and includes a U.S. resident within the meaning of section
7701(b)(1)(A) of the Code.
(2) Foreign trust distributions. Pursuant to section 6048(c) of the
Code and the corresponding regulations, and to the extent provided in
Notice 97-34 and Part III of Form 3520 and its Instructions, a U.S.
person must report each distribution received during the taxable year
from a foreign trust on Part III of Form 3520. Under section 6677(a) of
the Code, 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. For purposes of this
provision, the term U.S. person is as defined in section 7701(a)(30)
and includes both U.S. citizens and U.S. residents within the meaning
of section 7701(b)(1)(A).
(3) Penalties and use of information. The filing of Form 706, Form
706-NA, Form 706-QDT, Form 708, Form 709, or Form 709-NA, or any
successor form, 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) of the Code for failure to
comply with section 6039F(a). Pursuant to section 6039F(c)(1)(A), the
Secretary of the Treasury or her delegate 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) Applicability date. This section applies on and after January
14, 2025.

Sec. 28.2801-7 Determining responsibility under section 2801.

(a) Responsibility of U.S. citizens or residents receiving gifts or
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 foreign trust funded at
least in part by an expatriate) to ascertain the taxpayer's obligations
under section 2801 of the Code, 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. See section 6103 of the
Code. 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 or incomplete.
The circumstances under which such information may be disclosed to a
U.S. citizen or resident, the process for authorizing disclosures, 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) of this chapter).
(2) Rebuttable presumption. Unless a living donor expatriate
authorizes the disclosure of the donor expatriate's 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.
(c) Protective return. A taxpayer who reasonably concludes that a
gift or bequest is not subject to section 2801 may file a protective
Form 708 to start the period of limitations for the assessment of any
section 2801 tax. See Sec. 28.6011-1(b) that provides safe harbor
procedures for filing a protective Form 708.
(d) Applicability date. This section applies on and after January
14, 2025.

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 subtitle B 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
Received from Covered Expatriates, or any successor form. All documents
and vouchers used

[[Page 3409]]

in preparing Form 708 must be retained by the person required to file
the return so as to be available for inspection so long as the contents
thereof may become material in the administration of any internal
revenue law.
(b) Supplemental information. The U.S. recipient, as defined in
Sec. 28.2801-2(e), must furnish such supplemental information as may
be deemed necessary by the Internal Revenue Service (IRS) to allow the
IRS to determine the correct amount of tax. 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 of the Code 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, Life Insurance Statement, or any
successor form, and file it with the IRS office where the return is
filed. If specifically requested by the IRS, the insurance company must
file this statement directly with the IRS.
(c) Applicability date. This section applies on and after January
14, 2025.

Sec. 28.6011-1 Returns.

(a) Return required. The return of any section 2801 tax imposed by
chapter 15 of subtitle B of the Internal Revenue Code (Code) must be
made on Form 708, United States Return of Tax for Gifts and Bequests
Received from Covered Expatriates, in accordance with the instructions
applicable to the form (or on such other form as may be provided in
future guidance or instructions). 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 of this chapter. The U.S.
recipient must file Form 708 for each calendar year in which the U.S.
recipient receives a covered gift or covered bequest. 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 (as defined in Sec.
28.2801-2(l)).
(b) Protective return safe harbor. A U.S. citizen or resident (as
defined in Sec. 28.2801-2(b)) who 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 to start the running of the period of limitations
for assessment of tax. Under the safe harbor procedure of this
paragraph (b), a Form 708 will start the running of the period of
limitations for assessment of tax if the return includes all of the
information otherwise required on Form 708, along with an affidavit,
signed under penalties of perjury, setting forth the information on
which the 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. For purposes of this safe harbor, if
the U.S. citizen or resident has obtained, and is permitted to rely on,
information from the Internal Revenue Service (IRS) (as described in
Sec. 28.2801-7(b)(1)), the U.S. citizen or resident must attach a copy
of such information to the protective return. For purposes of this safe
harbor, the U.S. citizen or resident also must attach a copy of a
completed Part III of Form 3520, Annual Return to Report Transactions
With Foreign Trusts and Receipt of Certain Foreign Gifts, for all trust
distributions, or Part IV of Form 3520 for all gifts and bequests, if
applicable.
(c) Applicability date. This section applies on and after January
14, 2025.

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 section
2801 tax, other than for that 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) Applicability date. This section applies with regard to returns
and claims for refund filed on or after January 14, 2025

Sec. 28.6071-1 Time for filing returns.

(a) In general--(1) Due Date. A U.S. recipient, as defined in Sec.
28.2801-2(e), must file Form 708, United State.s Return of Tax for
Gifts and Bequests Received from Covered Expatriates, or any substitute
or successor form specified in guidance or instructions, 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 with 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)
(electing foreign trust) 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.
(d) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

Sec. 28.6081-1 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, United States
Return of Tax for Gifts and Bequests Received from Covered Expatriates,
by filing an appropriate form for extension as specified by guidance or
instructions. A U.S. recipient must include on the form for extension
an estimate of the amount of

[[Page 3410]]

section 2801 tax liability and must file the form for extension with
the Internal Revenue Service in the manner designated in the
instructions issued with respect to such form.
(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 the
form for extension 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 of the Code regarding penalties for
failure to file the required tax return or failure to pay the amount
shown as tax on the return.
(e) Applicability date. This section applies on and after January
14, 2025.

Sec. 28.6091-1 Place for filing returns.

(a) In general. A U.S. recipient, as defined in Sec. 28.2801-2(e),
must file Form 708, United States Return of Tax for Gifts and Bequests
Received from Covered Expatriates, with the Internal Revenue Service in
the manner prescribed by the instructions issued with respect to that
form.
(b) Applicability date. This section applies on and after January
14, 2025.

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 section 2801 tax 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) Applicability date. This section applies to returns and claims
for refund filed on or after January 14, 2025.

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 section
2801 tax 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) Applicability date. This section applies to returns and claims
for refund filed on or after January 14, 2025.

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

(a) In general. The section 2801 tax shown on the return must be
paid at the time prescribed in Sec. 28.6071-1 for filing the return,
and in the manner prescribed in Sec. 28.6091-1 for filing the return.
(b) Applicability date. This section applies to covered gifts or
covered bequests received on or after January 1, 2025.

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

(a) In general. For general rules regarding penalties under section
6694 of the Code applicable to preparers of returns or claims for
refund of the section 2801 tax, see Sec. 1.6694-1 of this chapter.
(b) Applicability date. This section applies with regard to returns
and claims for refund filed, and advice provided, on or after January
14, 2025.

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 section 2801 tax is subject to penalties
under section 6694(a) of the Code in the manner stated in Sec. 1.6694-
2 of this chapter.
(b) Applicability date. This section applies to returns and claims
for refund filed, and advice provided, on or after January 14, 2025.

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 section 2801 tax is subject to penalties
under section 6694(b) of the Code in the manner stated in Sec. 1.6694-
3 of this chapter.
(b) Applicability date. This section applies to returns and claims
for refund filed, and advice provided, on or after January 14, 2025.

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 the section 2801 tax 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) of the Code, the rules under
Sec. 1.6694-4 of this chapter apply.
(b) Applicability date. This section applies to returns and claims
for refund filed, and advice provided, on or after January 14, 2025.

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 section 2801 tax 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), failure to
furnish an identification number under section 6695(c), failure to
retain a copy or list under section 6695(d), failure to file a correct
information return under section 6695(e), and negotiation of a check
under section 6695(f), in the manner stated in Sec. 1.6695-1 of this
chapter.
(b) Applicability date. This section applies to returns and claims
for refund filed on or after January 14, 2025.

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

(a) In general. With respect to claims for credit or refund by a
tax return preparer who prepared a return or clai for refund for any
section 2801 tax, 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) Applicability date. This section applies to returns and claims
for refund filed, appraisals, and advice provided, on or after January
14, 2025.

Sec. 28.7701-1 Tax return preparer.

(a) In general. For the definition of the term tax return preparer,
see Sec. 301.7701-15 of this chapter.
(b) Applicability date. This section applies to returns and claims
for refund filed, and advice provided, on or after January 14, 2025.

Douglas W. O'Donnell,
Deputy Commissioner.
Approved: December 23, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00284 Filed 1-10-25; 8:45 am]
BILLING CODE 4830-01-P