1996 Tax Law Changes Affecting Foreign Gifts

1996 TAX LAW CHANGES AFFECTING FOREIGN GIFT REPORTING

PRIOR LAW -- GIFTS WERE NOT TAXABLE OR REPORTABLE

Under prior law, gifts of non-U.S. property by a foreign donor to a U.S. donee were not taxable nor reportable. The same was true for bequests from foreign sources.

Persons (other than charities) that receive foreign gifts during the tax year totaling more than $10,000 must now provide information to the IRS. IRC Sec. 6039F.

Note: The draft legislation provided for the reporting of gifts in amounts over $100,000. This reduction to $10,000 will affect many donees, however, gifts from foreign individuals must be reported if the amount is $100,000 or greater. See IRS Notice 97-37, Foreign Gift Reporting. Foreign donees must file Form 3520.

A U.S. person is a citizen or resident of the United States, a domestic partnership or corporation or any estate or trust (other than a foreign estate or trust). IRC Sec. 7701(a)(30).
The definition of a gift excludes qualified tuition or medical payments under IRC Sec. 2503(e)(2).
Also excluded are amounts distributed to a U.S. beneficiary of a foreign trust if such amounts are properly disclosed under the new reporting requirements.
The $10,000 annual limitation is adjusted for inflation for tax years after December 31, 1996.

DEFINITION OF A GIFT

A gift is any amount received from a donor who is not a U.S. person that is treated as a gift or bequest by the recipient.

Note: Focus on the donor, not the location or source of the gift. The term "foreign gift" is deceptive.
Excluded from this definition are gifts of more than $100,000 from a spouse who is a U.S. person to a non-resident alien spouse.
Apparently included in this definition would be the creation of a joint tenancy in stock, though the creation of the tenancy must be treated as a gift by the recipient.

Query: Would the creation of a joint tenancy by a non-resident alien who owns U.S. real property with his U.S. person daughter be a reportable transaction under this provision? In such a case, the donor made a taxable gift of U.S. real property and has the obligation to report it.

FAILURE TO PROVIDE INFORMATION

If the donee fails to provide the proper information, the IRS may determine the tax consequences of the transfer, subject to judicial review under the "arbitrary and capricious" standard (which provides a high degree of deference to the determination), and may impose a penalty of 5% of the gift amount for each month the information is not furnished.

The penalty cannot exceed 25% of the gift amount.
There is a good cause exception to these penalties.

EFFECTIVE DATE

These provisions apply to amounts received after August 20, 1996, in tax years ending after that date.

**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**