28.2801-2 Regulation: Expatriation Definitions Explained

§28.2801-2 Regulation: Expatriation Definitions Explained

§28.2801-2 Regulation: Expatriation Definitions Explained

Under the newly finalized regulations for IRS Section 2801, it is important to understand how certain terms are defined for purposes of taxes being imposed on covered gifts and requests. While some of the terms are relatively straightforward, other definitions have various nuances that taxpayers should be cognizant of when assessing what their tax status and potential tax implications will be if they are deemed to be a covered expatriate at the time that they formally terminated their U.S. person status. Let’s take a look at some of the definitions under section 28.2801- 2 along with certain explanations for taxpayers to better understand what their requirements are.

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 §28.2801-1(a).

    • • • Tip: Taxpayers should be cognizant of the fact that a U.S. citizen may also include a domestic trust. The reason why this is important, is because if a covered expatriate gives a gift or request to a domestic trust, section 2801 taxes can apply.

    • (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 §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 §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.

    • • Tip: The term ‘U.S. recipient’ is a very broad term, with the goal of the IRS ensuring that of any U.S. person, individual or otherwise that receives a gift/bequest from a covered expatriate properly pays tax. Presumably, some taxpayers will attempt to plan around the definition to avoid a U.S. person recipient from having to pay tax, the taxpayer should be aware that the government has showing that its intent is for any U.S. person, individual or otherwise that receives a gift from a covered expatriate to have to pay the necessary taxes.

  • (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 §28.2801-3 for additional rules and exceptions applicable to the term covered bequest.

    • • Tip: While more often than not the section 2801 tax refers to gifts, it is equally applied to bequests as well. The taxation on bequests is not limited to just U.S. property but includes situs located in the United states or abroad, presuming that it would be “included in the covered expatriates gross estate for federal tax purposes if the covered expatriate had been a U.S. citizen immediately before death.

  • (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 §28.2801-3 for additional rules and exceptions applicable to the term covered gift.

    • • Tip: Covered gifts typically include gifts from covered expatriates that were made on or after June 17th, 2008. The gift does not have to be directly made to the U.S. person from the covered expatriate and may include indirect gifts which may happen through third parties and trusts. There are specific reference as well to non-electing foreign trusts that taxpayer should be aware of in case the covered expatriate is using a non electing foreign trust to make covered gifts to U.S. persons.

  • (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 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.

    • • Tip: The most important component of the definition for expatriating covered is that if a person is considered a covered expatriate, they will always be considered a covered expatriate unless at anytime after the taxpayer expatriates, they are subject to United States estate or gift tax as a U.S. citizen or resident.

  • (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 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.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

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

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.