ALI-ABA Course of Study International Trust and Estate Planning ...

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20 4. Partnership Withholding Section 1446 requires a non-publicly traded partnership to withhold and pay over quarterly a tax on a foreign taxpayer's effectively connected taxable income at the highest individual or corporate tax rate, whether or not distributed. • Capital gains rates are applicable • Certification by a foreign partner of partner level deductions and losses (who is not a trust or estate). Form 8804-C. • Certification relieves penalty but not liability of partnership. • Partnerships refuse individual investors. A nonresident alien who is a resident of a country with which the United States has concluded an income tax treaty may be able to reduce (or eliminate) the flat 30% tax on his FDAP Income. The exact amount of the reduction in this tax will vary from treaty to treaty. 82 VI. ESTATE AND GIFT TAXATION OF ALIENS Under the Code, the manner in which an alien is subject to estate and gift tax depends on whether he is classified as a resident or a nonresident with respect to the United States. 83 A. Gift Tax 1. Resident Aliens A resident alien who transfers property by gift is subject to U.S. federal gift tax. 84 A transfer of property will be subject to gift tax "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." 85 Moreover, "[d]onative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer." 86 Rather, gift tax is imposed on the donor's act of making the transfer, 87 and a transfer of property will be subject to gift tax if "the donor has so parted with dominion and control as to leave in him no power to change [the property's] disposition." 88 82 83 84 85 86 87 88 For a summary of the income tax rates applicable to FDAP Income under income tax treaties concluded by the United States, see the Service's Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (January 2006) and Joseph Henderson's presentation, infra. For a discussion of the classification of aliens as residents or nonresidents with respect to the United States for estate and gift tax purposes, see supra Section II.B. and Virginia Coleman's accompanying outline. §2501(a). §2511(a). Treas. Reg. §25.2511-1(g)(1). Treas. Reg. §25.2511-2(a). Treas. Reg. §25.2511-2(b). {00187507-1} 16
21 Since 1976, a unified rate schedule has applied for both estate and gift tax purposes. These unified rates currently range from 18% to 46%. 89 The unified rate applicable to a taxable gift is determined on a cumulative basis (i.e., by taking into account not only taxable gifts made during the current calendar year, but also taxable gifts made during preceding calendar years). 90 Resident aliens, i.e., domiciliaries, are only subject to gift tax once the amount of their cumulative taxable gifts exceeds the amount of the "unified credit." 91 exclusions: In addition to the unified credit, resident aliens benefit from a number of gift tax Resident aliens are entitled annually to transfer $12,000 worth of property to any person free of gift tax. 92 Resident aliens are entitled to transfer an unlimited amount of property free of gift tax for the benefit of any person, provided that the transfer is either (i) a payment of tuition made directly to an educational institution or (ii) a payment for medical care made directly to a medical care provider. 93 Resident aliens are entitled to transfer an unlimited amount of property to their spouses free of gift tax, provided that their spouses are U.S. citizens. 94 Resident aliens are entitled annually to transfer $120,000 worth of property to their non-citizen spouses free of gift tax. 95 Resident aliens are entitled to transfer an unlimited amount of property to charity free of gift tax. 96 A person who acquires property from a resident alien by gift will generally take a "transferred" basis in the property (i.e., a basis equal to the resident alien's basis in the 89 90 91 92 93 94 95 96 §2502(a); §2001(c). §2502(a). §2505. This credit is referred to as the "unified credit" because, like the unified rate schedule, it applies for both estate and gift tax purposes. For example, assuming the unified credit permits the transfer of $1,000,000 worth of property free of estate and/or gift tax, a resident alien who made $300,000 worth of taxable gifts prior to his death would be entitled to transfer $700,000 worth of property free of estate tax. However, had the same resident alien made $1,000,000 worth of taxable gifts prior to his death, he would not be entitled to offset any of his estate tax liability because he would already have exhausted the unified credit. §2503(b)(1). This $12,000 exclusion is adjusted annually for inflation. §2502(b)(2). §2503(e). §2523(a). However, a resident alien may generally not transfer a life estate or other terminable interest in property to his citizen spouse free of gift tax. See §2523(b) and (f). §2523(i). This exclusion is adjusted annually for inflation. §2522(a). {00187507-1} 17
Page 1 and 2: 1 ALI-ABA Course of Study Internati
Page 3 and 4: 3 PAGE 1 a. Derek Jeter (change of
Page 5 and 6: 5 I. INTRODUCTION 2 This outline ad
Page 7 and 8: 7 Nevertheless, the following days
Page 9 and 10: 9 (ii) Closer Connection For purpos
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Page 25 and 26: 25 nonresident alien decedent will
Page 27 and 28: 27 the most part, of passive income
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Page 31 and 32: 31 the foreign trust. 164 In additi
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Page 35 and 36: 35 Care should be taken in making t

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