IRS Ends Foreign Goodwill Tax Exception

The US Internal Revenue Service (IRS) has issued a New Regulation removing the foreign goodwill tax exception for transfers to an overseas buyer.

The regulation (TD9739) also limits the type of property eligible for the "going concern" exception to tangible property and financial assets.

Its aim is to counter companies' attempts to avoid tax on the disposal of intangible property by attributing a large part of the property's value to goodwill or going concern value, which are currently tax-free under s367(d) of the Tax Code.

This provision allows a US company that transfers intangible property to a foreign corporation to be treated for tax purposes as having sold it in exchange for arm's-length royalty payments over the property's useful lifetime.

 
US companies making offshore disposals on or after  September 16, 2015 must now pay tax on the recognized current gain of foreign goodwill included in the disposal. The rule also removes the previous 20-year limit on the useful life of intangible property. The lifetime is now the whole period during which the intangible property is reasonably expected to be exploited.

American citizens are subject to U.S. estate taxation with respect to their worldwide assets. An estate tax return, Form 706, United States Estate (and Generation-Skipping) Tax Return, Estate of a citizen or resident of the United States, is required for a deceased American citizen, if the fair market value at death of the decedent's worldwide assets exceeds the "unified credit exemption" amount in effect on the date of death. However, if the U.S. citizen made substantial lifetime gifts, and used the applicable “unified credit exemption” amount to eliminate or reduce any gift tax on the lifetime gifts, a U.S. estate tax return may still be required even if the value of the decedent’s worldwide assets is less than the “unified credit exemption” amount at the date of death (due to the decrease in the “unified credit exemption” for the lifetime gifts). To determine the “unified credit exemption” amount for American citizens for any particular year, refer to the Instructions to Form 706 or to Publication 559, Survivors, Executors, and Administrators.

The Internal Revenue Service may collect any unpaid estate tax from any person receiving a distribution of the decedent’s property under transferee liability provisions of the tax code.

U.S. citizens and long-term residents who relinquished their U.S. citizenship or ceased to be U.S. lawful permanent residents (green card holders) on or after June 17, 2008, and who meet specific average tax or net worth thresholds on the day prior to their expatriation are considered “covered expatriates” – subject to IRC section 877A. See Expatriation Tax for more information on covered expatriates.


U.S. citizens and residents who receive gifts or bequests from covered expatriates under IRC 877A may be subject to tax under new IRC section 2801, which imposes a transfer tax on U.S. persons who receive gifts or bequests on or after June 17, 2008, from such former U.S. citizens or former U.S. lawful permanent residents.

In addition, covered expatriates under IRC 877A are not considered U.S. expatriates for purposes of Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States.

Robert S. Blumenfeld  - 

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

In August last year, two women, Gwen Deegan of Toronto and Virginia Hillis of Windsor, launched a challenge to the Ottawa government's implementation of the US Foreign Account Tax Compliance Act (FATCA). Both are US citizens by birth but have lived in Canada since infancy and have no US passport, but are still liable to US worldwide taxation and FATCA reporting requirements.

FATCA requires banks in every country to identify their US clients and report their accounts to the US Internal Revenue Service (IRS), either directly or indirectly through the banks' own domestic tax agency. In February 2014, the Canadian government signed a 'Model 1 agreement' with the US requiring Canadian banks to make FATCA reports to the Canada Revenue Agency (CRA), which will automatically forward the information to the IRS. This agreement was later translated into Canadian law through implementing legislation.

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• Financial Post
• Offshore Newsflash
• STEP news story (14 August 2014)
• Canadian Federal Finance Ministry
• Moody
• STEP International News Digest Lead Story August 27, 2015

The United States Internal Revenue Service has issued proposed regulations to give guidance under section 2801 of the US tax code that imposes a tax (at the highest applicable gift or estate tax rates) on US residents and citizens receiving gifts and bequests from expatriates.

The number of people giving up their U.S. citizenship has accelerated in recent years, in part due to the Foreign Account Tax Compliance Act (FATCA). As we previously posted "It Must Be The Time To Expatriate?" where we discussed that the list of recent US expatriates’ is a diverse: one of the world’s greatest soul singers; a best-selling author, a professional basketball player, architects, artists, lawyers, retirees and financiers. The register of individuals who have “chosen to expatriate”, as the US puts it, shows an increase in the number of Americans who are renouncing their US citizenship or turning in their green card.

When the number reached 3,415 last year it was a record, although the figures are still tiny, especially in comparison with those being granted US citizenship, nearly 780,000 in 2013. But it is also the case that the numbers have risen more than 10-fold since 2008. 

These newly issued proposed regulations relate to the 2008 Heroes Earnings Assistance and Relief Tax Act (HEART Act) which introduced two new sections to the Tax Code, 877A and 2801. Section 877A imposed an exit tax on such individuals and the Treasury and the IRS released guidance in 2009 for Section 877A. However until now, the Treasury and the IRS had not issued guidance for Section 2801. Before these proposed regulations there have been no forms or means to comply or report the tax consequences of any of these transactions.

As provided for in the HEART Act, the regulations impose a gift and/or estate tax on gifts or bequests received from "covered expatriates" who relinquished US citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008.

"Covered expatriate" is defined as an individual who expatriated on or after that date, and who, on the expatriation date, had an average annual net income tax liability greater than USD124,000 (indexed for inflation) for the previous five taxable years, had a net worth of at least USD2m (not indexed), or had failed to certify that he or she had complied with all US tax obligations for the five preceding taxable years.

The tax will be payable by US residents and citizens who receive gifts or bequests from such individuals, but is reduced by any estate or gift tax paid to a foreign jurisdiction. For the purposes of section 2801, domestic trusts and foreign trusts electing to be treated as domestic trusts are treated as US citizens.

In addition, section 2801 tax applies with regard to any property transferred to a US citizen or resident which qualifies as a gift or bequest, regardless of whether the property transferred was acquired by the donor or decedent covered expatriate before or after expatriation. Its value is its fair market value at the time the gift or bequest is received.

However, a gift or bequest to a covered expatriate's US citizen spouse is excepted from the provisions of section 2801, if such a gift or bequest would, if given by a US citizen or resident, qualify for the US gift or estate tax marital deduction. Charitable donations that would qualify for the US gift or gift tax charitable deduction are also excepted.

One area that could is still uncertain is how section 2801applies to life insurance. Someone who is a covered expat could buy a life insurance policy, be that term or variable, have some type of insurance payment go to a US residents and citizens and that probably would not be included as a covered gift or bequest from such individuals.

However, the proposed regulations do mention that life insurance proceeds payable upon the covered expatriate’s death that would have been includible in the covered expatriate’s gross estate under section 2042 if the covered expatriate had been a U.S. citizen at the time of death.