“Covered Bequests” and “Covered Gifts”: Treasury Regulations 2801 Around the Corner?

POSTED ON JUNE 7, 2024

Tax professionals advising on tax expatriation cases in the United States have been anxiously awaiting final regulations for more than a decade. See previous post in 2014 –  Proposal to US Treasury and IRS: Await Final Regulations on “Covered Gifts” and “Covered Bequests”

See also a 2014 post,   The “Hidden Tax” of Expatriation – Section 2801 and Its “Eternal Stain.”

Now the rumor is out: Treasury and the IRS are actively working to finalize these long-awaited regulations. Coming soon . . . ?

These proposed regulations were published almost 10 years ago in 2015. Please see  Guidance under Section 2801 on the Imposition of Taxes on Certain Covered Expatriate Gifts and Bequests.

The Treasury and the IRS recently published proposed regulations related to foreign trusts. See  Transactions with Foreign Trusts and Reporting of Information on Transactions with Foreign Trusts and Large Foreign Gifts  : Rule proposed by the   Internal Revenue Service   on   05/08/2024  .

See, proposed rules –

• § 1.6039F-1
• § 1.6048-1
• § 1.6048-2
• § 1.6048-3
• § 1.6048-4
• § 1.6048-5
• § 1.6048-6
• § 1.6048-7
• § 1.6677-1
• § 1.643(i)-1
• With several
• reviews to –
• § 1.679-1
• § 1.679-2
• § 1.679-3
• § 1.679-4
• § 1.679-5
• § 1.679-6, and
• § 1.679-7

These regulations are extensive and provide an explanation of the purpose of these rules.

II. Purpose of Foreign Gift and Trust Provisions

During the mid- to late-1990s, abusive tax schemes, including offshore schemes involving foreign trusts, reemerged in the United States after reaching their last peak in the 1980s. GAO, Efforts to Identify and Combat Abusive Tax Schemes Have increased, but challenges remain, GAO–02–733 (Washington, DC: May 22, 2002). In these schemes, foreign trusts were used to transfer large amounts of assets abroad, where it was much more difficult for the IRS to identify whether U.S. persons owned a trust.

interest in such trusts, and whether such persons were reporting and paying the required taxes on their income from such trusts. Many of the foreign trusts were established in tax haven jurisdictions with bank secrecy laws. Before the 1996 Act amended sections 6048 and 6677, there was no Form 3520-A), which was limited to five percent of the transfer or corpus of the trust, as applicable, not to exceed $1,000. In light of this, it was difficult for the IRS to obtain information about income earned by U.S.-owned foreign trusts and distributions to U.S. beneficiaries from foreign trusts, and Sections 6048 and 6677 were generally ineffective in ensuring that U.S. persons provided this information. information. The result was “rampant tax evasion.” 141 Cong. Rec. S13859 (daily edition of September 19, 1995) (comments by Senator Moynihan). Requirement for U.S. Persons to Report Distributions from Foreign Trusts and the Penalty for Failure to Report Transfers to a Foreign Trust or an Annual Foreign Trust Information Statement (in Federal Register/Vol. 89, No. 90/Wednesday, May 8 of 2024/Proposed Rules and 141 Cong. Rec. S13859 (daily edition of September 19, 1995) (comments by Senator Moynihan).