June 9, 2015 - Haoshen Zhong

Covered gift and bequest from covered expatriate

Hello again from Phil Hodgen.

You signed up for my “Expatriation Only” email list. To stop receiving these emails, just click the “unsubscribe” link at the bottom of this email and you will never get another one of these. If you want more of this kind of email from me, sign up for one of my other mailing lists.

Every Tuesday I answer a question about expatriation from a list subscriber. I also send other emails on this list from time to time, but only about expatriation-related topics.

This week we will have Haoshen Zhong answer a question we received from one of our readers.

If you want to ask an expatriation question, hit “reply” and send me an email. 🙂

Tax on gifts, bequests from covered expatriates

We received the following question via e-mail from a reader of a Wall Street Journal article in which Phil was quoted:

In the article, ‘The New Rules of Offshore Accounts’, that last paragraph states that if a person receives a gift/bequest from certain wealthy people who have renounced U.S. ties could have to pay tax on it at a 40% rate.

What form is filed to calculate this tax liability?

40% tax on gifts, inheritances from covered expatriates

The tax that the reader refers to is the covered gift and bequest tax imposed under Internal Revenue Code Section 2801:

(a) In general. If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to the product of —

(1) the highest rate of tax specified in the table contained in section 2001(c) as in effect on the date of such receipt (or, if greater, the highest rate of tax specified in the table applicable under section 2502(a) as in effect on the date), and

(2) the value of such covered gift or bequest.

(b) Tax to be paid by recipient. The tax imposed by subsection (a) on any covered gift or bequest shall be paid by the person receiving such gift or bequest.

So if you are a US citizen or resident, and you receive a gift from a covered expatriate, generally you must pay the tax under section 2801. The rate of tax is 40%. I.R.C. §2001(c).

IRS: “We’re working on this; stand by”

The IRS issued Notice 2009-85 to give guidance on expatriation under the covered expatriate rules. Section 9 says the IRS will issue guidance in the future. Until then, you do not need to file anything or pay any tax.  The specific passage is:

Gifts or bequests from a covered expatriate on or after June 17, 2008, are subject to a transfer tax under new section 2801. Separate guidance will be issued for U.S. persons who receive gifts or bequests on or after June 17, 2008, from expatriates who are subject to the rules of this notice. Satisfaction of the reporting and tax obligations for covered gifts or bequests received will be deferred, pending the issuance of guidance. That guidance will provide a reasonable period of time between the issuance of that guidance and the date prescribed for such reporting and tax payments. Notice 2009-85, §9; 2009-2 C.B. 598.

The IRS followed up with Announcement 2009-57, which announced new Form 708 and promised further guidance:

The Internal Revenue Service intends to issue guidance under section 2801, as well as a new Form 708 on which to report the receipt of gifts and bequests subject to section 2801. The due date for reporting, and for paying any tax imposed on, the receipt of such gifts or bequests has not yet been determined. The due date will be contained in the guidance, and the guidance will provide a reasonable period of time between the date of issuance of the guidance and the date prescribed for the filing of the return and the payment of the tax. Announcement 2009-57; 2009-2 C.B. 158.

The IRS has yet to issue Form 708 and provide any guidance. The reporting and payment requirements are deferred until the IRS has issued guidance. You do not have to pay any tax or file anything until then.

Keep an eye out for new guidance every year

The IRS has deferred collection of the covered gift and bequest tax until further guidance is issued. The IRS will provide guidance in the future for when to report and pay the tax. You will be required to report the transfer and pay the tax at that time.

If you received a gift or inheritance from a covered expatriate, and you are a US citizen or resident, then you should keep an eye out for news to see what the IRS has said. At a minimum, search for new Form 708 every year.


This is not tax advice. You know what to do: talk to a professional tax advisor before trying this at home.