Reg. § 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 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 tax. See section and .
(ii) Generation-skipping transfer tax A trust's payment of the section 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 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 tax, if any, must be paid by the due date of that Form 708. On that Form 708, the section tax is calculated in the same manner as if such trust were making an election under to be treated as a domestic trust solely for purposes of the section tax. Accordingly, the trustee must report and pay the section 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 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 .
(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 tax unless the trust makes an election to be treated as a domestic trust solely for purposes of section as provided in . Absent such an election, each U.S. recipient is liable for payment of the section 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 and 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 in the calendar year in which the U.S. recipient paid or accrued the section tax. Thus, for cash method taxpayers, the calendar year in which the payment of the section 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 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 ). The amount of the deduction allowed under section 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 tax payment relates.
(B) Second, of the amount determined in 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 , 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 tax paid for that calendar year that is attributable to the amount determined in 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 tax paid during the calendar year by the ratio of the amount determined in 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 tax is computed by multiplying the net covered gifts and covered bequests (as defined in of this section) received by a U.S. recipient during the calendar year by the highest rate of estate tax under section in effect for that calendar year. See 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 amount, which is the dollar amount of the per-donee exclusion in effect under section 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 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 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 and chapter 14, to the extent applicable, and the corresponding regulations, but without regard to sections and .
(d) Date of receipt
(1) In general The section 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 ). 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 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 , 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 , 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 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 through of this section, and over property in a non-electing foreign trust is determined in accordance with of this section. See 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 , by the U.S. citizen or resident who is the first recipient of that property from the covered expatriate to be subject to section 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 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 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 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 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 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 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 amount is $16,000. A's section 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 amount of $16,000. A's section tax liability then is reduced by any foreign gift or estate tax paid under of this section. Assuming A, B, and C paid no foreign gift or estate tax on the transfers, A's section tax liability for Year 1 is $45,600 ($114,000 × 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 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 of this section, B (a cash basis taxpayer) is entitled to an income tax deduction under section for the calendar year in which the section tax is paid. In Year 2, B timely reports the distributions from the non-electing foreign trust and pays $43,600 in section tax (($125,000−$16,000) × 0.4). In Year 2, B is entitled to an income tax deduction because B paid the section 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 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 tax ($100,000). Thus, the entire amount included in B's gross income ($50,000) also is subject to the section tax, and is used in the numerator to determine the income tax deduction available to B. See of this section.
(iii) The portion of B's section 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 × ($50,000/$125,000)). Therefore, B's deduction under section is $17,440. See 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 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.