What is U.S. Situs: A Tax Guide for Foreigners with U.S. Assets

What is U.S. Situs: A Tax Guide for Foreigners with U.S. Assets

What is U.S. Situs for Estate Tax  

U.S. Situs Definition

• • • “The place to which, for purposes of legal jurisdiction or taxation, a property belongs.”

Estate Tax Return Filing Requirements for Estates with International Issues

• • • The U.S. estate tax filing requirements of a decedent’s estate are determined by whether, at death, the decedent was a U.S. citizen; whether, at death, the decedent was a U.S. resident for estate tax purposes; and if the decedent was not a U.S. citizen nor a U.S. resident, at death, whether the decedent had U.S. situs property. For estate tax purposes, residence of a decedent is determined based on domicile; it is not the same definition of residence that applies for income tax purposes under IRC 7701(b).

    • The world-wide estate of a U.S. citizen or a U.S. resident is subject to U.S. estate tax and the executor of such an estate is required to file a U.S. estate tax return. A noncitizen nonresident decedent will be subject to U.S. estate tax on U.S. situs assets. If the value of the gross estate plus the decedent’s lifetime gifts, subject to certain adjustments, exceeds the filing threshold the executor of an estate of a U.S. citizen or U.S. resident decedent is required to file a Form 706, and report the fair market value of all of the decedent’s world-wide ownership interests.

    •  In contrast, the executor of an estate of a noncitizen, nonresident decedent is required to file a Form 706-NA to report property located within the United States worth more than $60,000. Note that certain bank deposits and debt obligations are not considered property located within the United States. See IRC 2105(b). The filing requirements are the same for estates of U.S. citizens (regardless of whether they die abroad) and non-United States citizens resident in the United States for estate tax purposes (domiciled in the United States). There are special rules that apply to certain expatriates and residents of United States possessions.

What is Form 706-NA?

• • • “Form 706-NA , United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States, is filed by estates of decedents who were (i) nonresidents, noncitizens of the United States, or (ii) residents of U.S. possessions whose U.S. gross estate (made up of U.S. situs property) value exceeded the filing requirement of $60,000 at the time of death.”

How to Determine U.S. Resident/Citizen or Not

• • • The examiner should conduct a complete factual and legal analysis of each case where the decedent and/or donor are identified as a non-domiciled, non-United States citizen. Verifying the domicile of the decedent and/or donor is critical since all foreign situs property owned by a nonresident, noncitizen is not subject to U.S. gift or estate tax.

    • The examiner should also verify when a decedent and/or donor is identified as a resident of a possession of the United States. A decedent who was a U.S. citizen and a resident of a U.S. possession at the time of death will be treated as a U.S. citizen for estate tax purposes unless such individual acquired U.S. citizenship solely by being a citizen of the possession or by birth or residence within such possession. See IRC 2209.

Determining Whether Property is Located in the United States

Real estate and tangible personal property

• • • Imported solely for public exhibition,

    • On loan to a nonprofit public gallery or museum, and

    • On exhibition or en route to or from exhibition.

Stock

• • • Generally, no matter where stock certificates are physically located, stock of corporations organized in or under U.S. law is property located in the United States, and all other corporate stock is property located outside the United States.

Insurance proceeds.

• • •  Proceeds of insurance policies on the decedent’s life are property located outside the United States.

Debt obligations within United States.

• • • Debt obligations are generally property located in the United States if they are debts of a U.S. citizen or resident, a domestic partnership or corporation, a domestic estate or trust, the United States, a state or state’s political subdivision, or the District of Columbia.

Debt obligations outside United States.

• • • The following debt obligations are generally treated as located outside the United States.

    • Debt obligations (whether registered or unregistered) issued after July 18, 1984, if the interest on them would be eligible for tax exemption under section 871(h)(1) had such interest been received by the decedent at the time of the decedent’s death. However, if the debt earns contingent interest, some or all of it may be considered property in the United States (section 2105(b)(3)).

    • Certain short-term original issue discount debt obligations.

    • See section 2105(b)(4) for details.

Deposits

• • • The following deposits are treated as located outside the United States if they are not effectively connected with conducting a trade or business within the United States.

    • A deposit with a U.S. bank or a U.S. banking branch of a foreign corporation.

    • A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law.

    • An amount held by a U.S. insurance company under an agreement to pay interest.

    • A deposit in a foreign branch of a U.S. bank.

    • If an asset is included in the total gross estate because  the decedent owned it at the time of death, apply the above location rules as of the date of the decedent’s death. However, if an asset is included in the decedent’s total gross estate under one of the transfer provisions (sections 2035, 2036, 2037, and 2038), it is treated as located in the United States if it fulfills these rules either at the time of the transfer or at the time of death.

    • For example, if an item of tangible personal property was physically located in the United States on the date of a section 2038 transfer but had been moved outside the United States at the time of the decedent’s death, the item would be considered still located in the United States and should be listed on Schedule A.

    • If the decedent was a U.S. expatriate subject to 877(b) at the time of death, the decedent is treated as owning a prorated share of the U.S. property held by a foreign corporation in which the decedent directly or indirectly owned at least 10% of the voting stock and, directly, indirectly, or constructively, owned more than 50% of the stock by vote or value (section 2107(b)).

The Impact of Tax Treaties on U.S. Estate Tax

1. 1. • Estate and gift tax treaties provide rules to minimize and avoid double taxation that can arise when two countries both have the right to tax the decedent under their domestic laws. Treaties do so by providing primary and secondary taxing rights, situs rules, and special rules dealing with credits, deductions and exemptions.

      • Each United States estate tax treaty is unique and must be consulted if applicable. Estate tax treaties vary; some provide a list of rules whereby the two countries party to the treaty agree as to the situs of certain property and thus the primary taxing right with respect to that property. Other estate tax treaties generally provide that unless property is expressly addressed in the treaty, the state of residence has the primary right to tax. In these residence-type treaties, the nonresidence country can usually exercise taxing rights over real property and business property located in such country. The United States generally retains the right to tax its U.S. citizens and residents under the treaty.

      • Liability for estate or gift tax for a nonresident, noncitizen may vary based on the governing treaty. A list of current treaty agreements may be found at: Estate and Gift Treaties.

      • If an estate claims treaty benefits that change the tax treatment that property would normally be subject to under the Code, a notice invoking those treaty rights must be filed with the return. The notice is provided by attaching a statement or Form 8833, Treaty-Based Return Position Disclosure, under Section 6114 or 7701(b) .

      • Some treaties increase the unified credit allowed to nonresident noncitizens by the Code and allow a prorated unified credit based on the ratio of property in the U.S. over the gross estate, wherever situated. Examiners must consult the applicable treaty for specific provisions, as each treaty has unique terms and provisions.

      • Some of the most common estate tax treaty issues arise from the United States’ treaties with Canada and the United Kingdom. IRM 4.25.4.3.1 and IRM 4.25.4.3.2 highlight some, but not all, of the rules from those treaties.

What is the Unified Credit?

• • • In general, a unified credit against estate tax of $13,000 is available to estates filing Form 706-NA.

    • If the decedent was a resident of a United States possession, the unified credit is the greater of $13,000 or $46,800 multiplied by the ratio of U.S. situs property to the gross world-wide estate.

    • Treaty provisions and any unified credit previously allowed against gift tax can change the amount of available unified credit.

    • The Canadian Marital Credit (IRM 4.25.4.6.3) may be allowed in addition to the unified credit.

Tax Treaty May Provide More Favorable Terms

1. 1. 1. 1. If an estate tax treaty provides more favorable terms than the statute to the estate of a U.S. citizen or resident decedent and the executor of such estate elects to claim the benefits of the applicable treaty, the treaty provisions apply (rather than the IRC statute). The Form 706 should indicate the treaty provision being invoked.

         2. For a list of countries with current estate and gift tax treaties, see the instructions for Form 706 or Estate and Gift Tax Treaties.

A credit claimed under a treaty is also figured on Schedule P (similar to statutory credits) with the following exceptions:

• • • • The situs rules of the treaty determine whether the property is located in one or the other treaty country.

      • Credit is only allowed for taxes specified in the treaty. Local taxes may not be eligible for the credit unless specifically stated in the treaty.

      • If allowed under the treaty, credit may be apportioned among properties deemed situated outside or within both countries.

      • The amount entered on line 4, Schedule P is the amount from Part 2, line 12 on page 1 of Form 706, less any amounts claimed as credit for pre-1977 gifts or credit for tax on prior transfers.

If the credit is authorized by treaty, it is equal to the most beneficial of:

• • • • The credit figured under the treaty provisions, or

      • The credit figured under the statute, or

      • A combination of the credit figured under the treaty plus the credit figured under the statute in the case of death taxes paid to a political subdivision or possession not covered by the treaty.

Decedent Foreign Asset Reporting or U.S. Tax Non-Compliance

Late Filing Penalties May be Reduced or Avoided

Current Year vs Prior Year Non-Compliance

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

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