DOCSLIB.ORG

Tax Guide for Foreign Investors in U.S. Residential Real Estate 2019 EDITION in THIS GUIDE

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Tax Guide for Foreign Investors in U.S. Residential Real Estate 2019 EDITION in THIS GUIDE Tax Guide For Foreign Investors In U.S. Residential Real Estate 2019 EDITION IN THIS GUIDE I. Introduction 2 VIII. U.S. Income Taxation of U.S. Persons 10 II. The U.S. Tax System 3 A. Individual Income Tax Rates 10 A. U.S. Persons 3 B. Corporate Income Tax Rates 10 1. Basic Rules 3 C Qualified Business Income 10 2. U.S. Persons 3 Deduction for Pass-Through Income 3. U.S. Domestic Corporations 3 D. Income Tax Rates for 4. U.S. Domestic Trusts 3 Trusts and Estates 11 B. Non-Resident Aliens (“NRAs”) 3 IX. U.S. Income Taxation of NRAs 12 III. Estate Taxation 4 A. U.S. Source Income 12 A. U.S. Persons 4 1. Rents 12 B. Nonresident Aliens 4 2. Dividends 12 IV. U.S. Estate Tax Consequences of 3. Interest 12 Real Estate Ownership Structures 5 4. Gains on Sale of U.S. Real Estate 12 A. Direct Ownership By NRA 5 B. Character of U.S. Income 13 B. Domestic (U.S.) Corporation 5 1. FDAP Income 13 C. Foreign Corporation 5 2. U.S. Trade or Business Income 13 D. U.S. Domestic Trusts 5 3. Deductions from Rental Income 13 E. Irrevocable Foreign Trust 5 4. Special Rules for Corporations 14 F. Revocable or Grantor 5. Capital Gains 14 Foreign Trusts 5 6. U.S. Income Tax Returns 14 G. Partnership Interests 5 X. U.S. Income Tax Consequences of V. U.S. Estate Tax Planning 6 Real Estate Ownership Structures 15 A. Foreign Corporation 6 A. Foreign Corporation 15 B. U.S. Corporation with B. U.S. Corporation with Foreign Foreign Corporation Parent 6 Corporation Parent 15 C. Foreign Irrevocable Trust 6 C. Foreign Irrevocable Trust 15 D. Limited Liability Company with D. Limited Liability Company 15 Foreign Irrevocable Trust Parent 7 XI. FIRPTA Tax On Capital Gains 16 VI. U.S. Gift Taxes 8 A. FIRPTA 16 A. U.S. Persons 8 B. FIRPTA Withholding 16 B. Non-Resident Aliens 8 C. U.S. Real Property Holding Companies 16 VII. U.S. Gift Tax Planning 9 XII. Summary 17 XIII. About Davis Malm 18 Updated February 2019. 1 I. INTRODUCTION The U.S. income tax code contains numerous traps for the unwary foreign investor. This guide is intended to assist the foreign investor in U.S. real estate in understanding how the U.S. estate, gift and income tax rules affect his or her investment and the planning opportunities available to minimize U.S. taxes. With proper legal advice, a foreign investor should • minimize the annual U.S. income tax liability be able to: on the net income generated by his or her • avoid U.S. estate and gift taxation on his or her investment; and investment; • minimize the potential capital gain on the • avoid the 30% withholding tax on the gross income profitable sale of his or her investment. generated by his or her investment; This edition reflects the changes in U.S. income tax law made by the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, and generally effective for 2018 and subsequent tax years. 2 II. THE U.S. TAX SYSTEM A. U.S. PERSONS For U.S. estate tax purposes, a different test is used: 1. Basic Rules Whether the person resides in and has “domicile” in U.S. persons are subject to U.S. income taxation on the U.S. A person has domicile in a country by living their worldwide income; individuals who are U.S. there indefinitely, with no intention of relocating to residents are subject to U.S. estate, gift and another country. generation-skipping transfer (“GST”) taxation on their worldwide assets. 3. U.S. Domestic Corporations A corporation organized in the U.S. (usually under Non-U.S. persons are subject to income tax only on state law) is a U.S. person. their U.S. source income; individuals who are non- U.S. residents are subject to U.S. estate, gift and GST 4. U.S. Domestic Trusts taxation only on U.S. situs assets. A trust is a U.S. person if (a) it is subject to the primary jurisdiction of a U.S. court over its 2. U.S. Persons administration and (b) one or more U.S. persons U.S. persons include U.S. citizens (including have the power to control all substantial decisions of persons with dual citizenship in the U.S. and a the trust. foreign country) and U.S. residents, regardless of citizenship. B. NON-RESIDENT ALIENS (“NRAS”) For U.S. income tax purposes, a U.S. resident A person is an NRA if he, she or it is not a U.S. includes a “green card” holder (or other lawful person. NRAs include foreign individuals, foreign permanent resident) who is present in the U.S. A corporations, and foreign estates and trusts. person is also a U.S. resident if he has a “substantial presence” in the U.S. One is deemed to have a substantial presence if he or she is (a) present in the U.S. for 183 days in a calendar year; (b) present in the U.S. for at least 31 days in a calendar year and has been present in the U.S. for an average of more than 121 days per year during that year and the two prior years; or (c) elects to be classified as a U.S. resident in certain circumstances. The tax code contains numerous exceptions for persons temporarily in the U.S. 3 III. ESTATE TAXATION A. U.S. PERSONS U.S. property included in an NRA’s estate include (i) U.S. real estate owned or under his control; An estate of a U.S. citizen or resident is subject to an (ii) corporate stock in a U.S. corporation; (iii) debt estate tax based upon the value of the worldwide obligations of a U.S. person (with exceptions for property, tangible and intangible, owned by the certain bank deposits and “portfolio interest decedent on the date of death or over which he has obligations”); (iv) interests in U.S. partnerships; certain rights or powers. The current estate tax rate and (v) interests in U.S. trusts (discussed below). for 2018 is 40% for taxable estates in excess of an Life insurance proceeds, even if paid by a U.S. $11.2 million exemption, which is adjusted annually insurer, are not included in an NRA’s estate. A credit for inflation. A U.S. estate may also deduct from the against the estate tax is allowed for gift taxes paid. taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of The U.S. has tax treaties with several foreign lifetime taxable gifts during the decedent’s life is countries which may limit the amount of U.S. estate also included in calculating the gross estate. See tax on an NRA’s estate.* Section VI below. Massachusetts has an estate tax applicable to real B. NON-RESIDENT ALIENS estate and tangible personal property located in Massachusetts. Rates range from 0.8% to 16%; The gross estate of an NRA includes all tangible estate tax returns need not be filed if the gross and intangible property situated in the U.S. estate is $1 million or less. Other U.S. states also (“U.S. property”), in which the decedent has an impose estate or inheritance taxes (so-called “death interest at the time of his death, or over which he taxes”) on NRA estates. These tax rates are lower has certain rights or powers. than the U.S. estate tax rate, but these taxes should not be ignored when planning an investment in U.S. The taxable estate of an NRA is taxed at rates real estate. ranging from 26% to 40% of the value of estates in excess of a $60,000 exemption (the 40% rate applies to taxable estates over $1 million in value). Moreover, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a U.S. citizen. Taxable gifts are not included in the gross estate, but are separately taxed. See Section VI below. * The U.S. has estate tax treaties with the following countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, South Africa, Norway, Switzerland, and the U.K. 4 IV. U.S. ESTATE TAX CONSEQUENCES OF REAL ESTATE OWNERSHIP STRUCTURES A. DIRECT OWNERSHIP By NRA F. REVOCABLE OR GRANTOR FOREIGN TRUSTS U.S. real property directly owned by an NRA on his death is subject to U.S. estate taxes (and any If an NRA possesses the right to revoke the trust, or applicable state death taxes). possesses any of the proscribed powers or interests in any U.S. property held by the trust on the date of B. DOMESTIC (U.S.) CORPORATION his death, he will be subject to U.S. estate taxes (and any applicable state death taxes). Shares of a U.S. corporation owned by an NRA on his death are subject to U.S. estate taxes (and any G. PARTNERSHIP INTERESTS applicable state death taxes). An investment in a partnership may be considered C. FOREIGN CORPORATION to be U.S. property if the partnership is engaged in business in the U.S. or holds U.S. assets; the tax law Shares of a foreign corporation owned by an NRA is unsettled on this issue. on his death are not subject to U.S.
Load more

Recommended publications
  • Explanation of Proposed Estate and Gift Tax Treaty Between the United States and the Kingdom of Denmark
    [JOINT COMMITTEE PRINT] EXPLANATION OF PROPOSED ESTATE AND GIFT TAX TREATY BETWEEN THE UNITED STATES AND THE KINGDOM OF DENMARK SCHEDULED FOR A HEARING BEFORE THE COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE ON APRIL 26, 1984 PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON TAXATION APRIL 25, 1984 U .S. GOVERNMENT PRINTING OFFICE 33-7070 WASHINGTON: 1984 JCS-18-84 CONTENTS Page [NTRODUCTION .......................... ...................... ........................... .......... 1 1. SUMMARy..... ..... ........................................................................... 3 II. OVERVIEW OF UNITED STATES TAXATION OF INTERNATION- AL GRATUITOUS TRANSFERS AND TAX TREATIES ................ A. United States Estate and Gift Tax Rules ... ............. B. Causes of Double Taxation ......................... .. .. ............ C. United States Estate and Gift Tax Treaties ........ .. .. III. EXPLANATION OF PROPOSED TAX TREATy................................ 11 Article 1. Personal Scope........ .... .. ........... ...................... ... 11 Article 2. Taxes Covered...... ......... .... ............................... 11 Article 3. General Definitions.... ......................... ............. 12 Article 4. Fiscal Domicile ................................................. 13 Article 5. Real Property..... .. ............................................. 14 Article 6. Business Property of a Permanent Estab- lishment and Assets Pertaining to a Fixed Based Used for the Performance of Independent Person- al Services...... .................
    [Show full text]
  • International Tax Planning and Reporting Requirements
    international tax planning and reporting requirements Foreign earned income exclusions and foreign tax credits can significantly reduce the U.S. tax liability incurred on foreign- source income and help to avoid double taxation. Complex reporting is required for U.S. persons owning foreign assets including bank accounts and other financial investments. 106 NEW IN 2018 filed electronically. It is due April 17, 2018 and can be extended. Reportable transactions between the U.S. LLC and its foreign The Tax Cuts and Jobs Act of 2017 will have a significant impact owner include contributions and distributions between the two, in the international tax arena. Most notably, there is a manda- and would certainly include the setup and closure of the LLC. 2018 personal tax guide tory one-time repatriation of offshore foreign earnings held in There are onerus penalties for non-filing. a specified foreign entity. All U.S. shareholders with at least 10% ownership in a specified foreign entity are required to include EisnerAmper their share of the offshore earnings and profits which have not FOREIGN TAX ISSUES previously been taxed in the U.S. Only a portion of the foreign earnings are taxable based on the applicable percentage. U.S. Multinational clients with cross-border income from employ- shareholders will be allowed a 77.1% deduction for non-cash ment and investments are in today’s mainstream. Many taxpayers amounts and a 55.7% reduction for cash amounts. The effec- are discovering that they are subject to taxation and/or report- tive tax rate will ultimately depend on the U.S.
    [Show full text]
  • 2021 Tax Rates, Schedules, and Contribution Limits
    2021 tax rates, schedules, and contribution limits Income tax Tax on capital gains and qualified dividends If taxable Income income But Of the Single Married/Filing jointly/Qualifying Widow(er) Tax rate is over not over The tax is amount over $0–$40,400 $0–$80,800 0% Married/Filing $0 $19,900 $0.00 + 10% $0 jointly and $19,900 $81,050 $1,990 + 12% $19,900 Over $40,400 but not Over $80,800 but not over qualifying over $445,850 $501,600 15% widow(er)s $81,050 $172,750 $9,328 + 22% $81,050 Over $445,850 Over $501,600 20% $172,750 $329,850 $29,502 + 24% $172,750 Additional 3.8% federal net investment income (NII) tax applies to individuals $329,850 $418,850 $67,206 + 32% $329,850 on the lesser of NII or modified AGI in excess of $200,000 (single) or $250,000 $418,850 $628,300 $95,686 + 35% $418,850 (married/filing jointly and qualifying widow(er)s). Also applies to any trust or $628,300 $168,993.50 + 37% $628,300 estate on the lesser of undistributed NII or AGI in excess of the dollar amount Single $0 $9,950 $0.00 + 10% $0 at which the estate/trust pays income taxes at the highest rate ($13,050). $9,950 $40,525 $995 + 12% $9,950 Kiddie tax* $40,525 $86,375 $4,664 + 22% $40,525 Child’s unearned income above $2,200 is generally subject to taxation at $86,375 $164,925 $14,751 + 24% $86,375 the parent’s marginal tax rate; unearned income above $1,100 but not $164,925 $209,425 $33,603 + 32% $164,925 more than $2,200 is taxed at the child’s tax rate.
    [Show full text]
  • Ten Years Without the Swedish Inheritance Tax – Mourned by No
    www.svensktnaringsliv.se DECEMBER 2015 Storgatan 19, 114 82 Stockholm Phone: +46 8 553 430 00 ANDERS YDSTEDT, AMANDA WOLLSTAD Ten years without the Swedish inheritance tax Mourned by no one – missed by few Arkitektkopia AB, Bromma, 2015 Arkitektkopia It is ten year since the Swedish inheritance tax was abolished by a unanimous riksdag (parlia- ment). How did it happen? How come all political parties in parliament – from the conservative right to the socialist left – agreed on its demise? This book tells the history of the tax, its abolishment and what consequences it had on Swedish business owners and Swedish business. It also takes a broader perspective and looks out to Europe and the world, proving that Sweden is far from as alone in refraining from taxing inheritance as we are sometimes led to believe. The abolishment of inheritance and gift tax marked the start of a broader debate on ownership issues in Sweden, a debate that eventually led to the abolishment of wealth tax and a more reasonable taxation of owner led corporations. The fact that it was the inheritance and gift tax that managed to gather both politicians and the industry around a common goal says a thing or two about which consequences the taxation had on Swedish wealth and business. The authors: Anders Ydstedt is an advisor, entrepreneur and author. He has previously written about genera- tional shifts in family businesses, the road to lower taxes and the Swedish chapter in Taxation in Europe – IREF Yearbook 2013 Amanda Wollstad is an editorial writer and public affairs consultant.
    [Show full text]
  • Estate and Gift Tax, Federal 125
    Estate and gift tax, federal 125 Estate and gift tax, federal A third objective is a reduction in wealth con- centration. By taxing the wealth holdings of the David Joulfaian wealthiest estates, the estate and gift taxes are ex- Department of the Treasury pected to reduce the size of bequests, reducing the wealth accumulated over generations. This is also The federal tax treatment of wealth transferred accomplished by subjecting capital income that has in contemplation of, or at the time of, death. escaped the personal income tax to estate taxation. Another objective is taxation of each genera- tion’s wealth. Wealth transfers to grandchildren are The estate and gift tax is the only wealth tax levied taxed under the estate and gift taxes. However, be- by the federal government. The estate tax was first cause of the emphasis on taxing each generation, an enacted in 1916 and applied to the wealth of dece- additional tax—the GSTT—is also levied on these dents with estates in excess of $50,000. It has un- transfers. The rationale for the GSTT is that a tax dergone numerous changes, especially in 1976 and should be levied on wealth transfers to children, 1981, and it currently applies to taxable estates in coupled with another tax when they, in turn, transfer excess of $600,000, with a maximum tax rate of wealth to their children. 55 percent. To minimize state objections to the enactment The gift tax was first enacted in 1924, repealed of death taxes by the federal government, the estate in 1926, and reenacted in 1932 in an attempt to re- tax provides a tax credit for state death taxes, duce estate tax avoidance via the initiation of inter thereby keeping the state tax base intact.
    [Show full text]
  • Handbuch Investment in Germany
    Investment in Germany A practical Investor Guide to the Tax and Regulatory Landscape in Germany 2016 International Business Preface © 2016 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Germany 3 Germany is one of the most attractive places for foreign direct investment. The reasons are abundant: A large market in the middle of Europe, well-connected to its neighbors and markets around the world, top-notch research institutions, a high level of industrial production, world leading manufacturing companies, full employment, economic and political stability. However, doing business in Germany is no simple task. The World Bank’s “ease of doing business” ranking puts Germany in 15th place overall, but as low as 107th place when it comes to starting a business and 72nd place in terms of paying taxes. Marko Gründig The confusing mixture of competences of regional, federal, and Managing Partner European authorities adds to the German gift for bureaucracy. Tax KPMG, Germany Numerous legislative changes have taken effect since we last issued this guide in 2011. Particularly noteworthy are the Act on the Modification and Simplification of Business Taxation and of the Tax Law on Travel Expenses (Gesetz zur Änderung und Ver einfachung der Unternehmensbesteuerung und des steuerlichen Reisekostenrechts), the 2015 Tax Amendment Act (Steueränderungsgesetz 2015), and the Accounting Directive Implementation Act (Bilanzrichtlinie-Umsetzungsgesetz). The remake of Investment in Germany provides you with the most up-to-date guide on the German business and legal envi- ronment.* You will be equipped with a comprehensive overview of issues concerning your investment decision and business Andreas Glunz activities including economic facts, legal forms, subsidies, tariffs, Managing Partner accounting principles, and taxation.
    [Show full text]
  • Dr. Somnath, International Journal of Research In
    Dr. Somnath, International Journal of Research in Management, Economics and Commerce, ISSN 2250-057X, Impact Factor: 6.384, Volume 07 Issue 10, October 2017, Page 85-94 Developments in Indirect Taxation in India: Road Ahead Dr. Somnath (Assistant Professor of Economics, Mukand Lal National College, Yamunanagar, Haryana, India) Abstract: India is the largest Federal democracy in the world. The Constitution of India provides that no tax shall be levied or collected by anyone except by the authority of law. Under the constitution, only the Parliament and State legislative assemblies have exclusive powers to make laws for levy of taxes. Prior to July,2017 multiple indirect taxes were levied by centre as well as states, by multiple agencies, due to which, not only avoidable leakages in tax collection taken place but also free flow of goods and services was affected. Doing business in such an environment became difficult and cumbersome affecting the national growth of the country negatively. In such a scenario Indian parliament has shown extraordinary foresight in conceiving a single indirect tax applicable throughout the country, which will make doing business easy, will help in increase business volumes leading to increased national growth, and will also help the government increase its welfare budget with higher collection of taxes ultimately resulting in overall prosperity of its citizens. With this aforementioned importance, On July 1, 2017, India unleashed its most revolutionary taxation reform in form of goods and services tax (GST) that promise to infuse a fresh energy into the economy by unifying the entire country into one Single Market. More than, twenty six years after liberalizing its economy to the outside world, India has now rolled out another significant financial reform that aims to carry forward and cement on the growth benefits of liberalization.
    [Show full text]
  • Taxation and Investment in Norway 2016 Reach, Relevance and Reliability
    Taxation and Investment in Norway 2016 Reach, relevance and reliability A publication of Deloitte Touche Tohmatsu Limited Contents 1.0 Investment climate 1.1 Business environment 1.2 Currency 1.3 Banking and financing 1.4 Foreign investment 1.5 Tax incentives 1.6 Exchange controls 1.7 Labor environment 2.0 Setting up a business 2.1 Principal forms of business entity 2.2 Regulation of business 2.3 Accounting, filing and auditing filing requirements 3.0 Business taxation 3.1 Overview 3.2 Residence 3.3 Taxable income and rates 3.4 Capital gains taxation 3.5 Double taxation relief 3.6 Anti-avoidance rules 3.7 Administration 3.8 Other taxes on business 4.0 Withholding taxes 4.1 Dividends 4.2 Interest 4.3 Royalties 4.4 Branch remittance tax 4.5 Wage tax/social security contributions 5.0 Indirect taxes 5.1 Value added tax 5.2 Capital tax 5.3 Real estate tax 5.4 Transfer tax 5.5 Stamp duty 5.6 Customs and excise duties 5.7 Environmental taxes 5.8 Other taxes 6.0 Taxes on individuals 6.1 Residence 6.2 Taxable income and rates 6.3 Inheritance and gift tax 6.4 Net wealth tax 6.5 Real property tax 6.6 Social security contributions 6.7 Other taxes 6.8 Compliance 7.0 Deloitte International Tax Source 8.0 Contact us Norway Taxation and Investment 2016 1.0 Investment climate 1.1 Business environment Norway is a constitutional monarchy, with a parliamentary democratic system of government. Powers are allocated among the executive, the legislature (Storting) and the court system.
    [Show full text]
  • Affirmed by the Oregon Supreme Court
    854 September 21, 2017 No. 49 IN THE SUPREME COURT OF THE STATE OF OREGON George WITTEMYER, Petitioner on Review, v. CITY OF PORTLAND, Respondent on Review. (CC 130304234; CA A154844; SC S064205) On review from the Court of Appeals.* Argued and submitted March 6, 2017, at Lewis & Clark Law School, Portland. George Wittemyer, Pro Se, Portland, argued the cause and filed the briefs on behalf of himself as petitioner on review. Denis M. Vannier, Deputy City Attorney, City of Portland, argued the cause and filed the brief on behalf of respondent on review. John A. Bogdanski, Pro Se, Portland, argued the cause and filed the on behalf of himself as amicus curiae. Kristian Roggendorf, Lake Oswego, filed the brief on behalf of amicus curiae Eric Fruits, Ph.D. Sean O’Day, League of Oregon Cities, Salem, filed the brief for amicus curiae League of Oregon Cities. P.K. Runkles-Pearson, Miller Nash Graham & Dunn LLP, Portland, filed the brief on behalf of amicus curiae Portland Public School District. ______________ * On appeal from Multnomah County Circuit Court, Kelly Skye, Judge. 278 Or App 746, 377 P3d 589 (2016). Cite as 361 Or 854 (2017) 855 Before Balmer, Chief Justice, and Kistler, Walters, Landau, Nakamoto, and Flynn, Justices.** LANDAU, J. The decision of the Court of Appeals and the limited judgment of the circuit court are affirmed. Case Summary: Plaintiff alleged that the City of Portland’s arts tax was a prohibited poll or head tax. The trial court determined that the tax was not a poll or head tax. The Court of Appeals affirmed the trial court’s decision and plaintiff petitioned for review.
    [Show full text]
  • Advising the Foreign Private Client on Fundamentals of Us Estate, Gift And
    STILL THINKING OF COMING TO AMERICA? ADVISING THE FOREIGN PRIVATE CLIENT ON FUNDAMENTALS OF U.S. ESTATE, GIFT AND GST TAX PLANNING By M. Katharine Davidson, Esq. Henderson, Caverly, Pum & Charney, LLP 12750 High Bluff Drive, Suite 300 San Diego, California 13th Annual International Estate Planning Institute NYSB and STEP New York March 23, 2017 New York, New York © 2017 M. Katharine Davidson TABLE OF CONTENTS Page I. WHO IS SUBJECT TO TAXATION BY THE U.S.? ........................................................1 A. Reach of U.S. Citizenship. .......................................................................................1 B. U.S. Tax Residency..................................................................................................2 C. U.S. Transfer Tax Treatment. ..................................................................................2 1. Domicile. ......................................................................................................3 2. Estate and Gift Tax Rules for NRAs............................................................4 3. Use Of Entities. ............................................................................................8 D. Problems Associated with Noncitizen Spouses. ......................................................8 1. Lifetime Transfers. .......................................................................................8 2. Transfers Upon Death. .................................................................................9 3. Problems with Joint Property
    [Show full text]
  • Federal Gift Tax Exclusions: Gifts to Corporations
    FEDERAL GIFT TAX EXCLUSIONS: GIFTS TO CORPORATIONS W HETHER A DONATION to a corporation is regarded as a gift to the corporate entity or to its individual stockholders1 is a determination that has at least two crucial federal gift tax consequences. First, because a donor is allowed an annual exclusion of but $3,000 for each donee,2 the taxable amount of the gift may largely depend upon judicial definition of the recipient. Secondly, where the donor is also a stockholder in the corporation, it has been urged that a ratable deduction in the taxable amount of the gift is indicated if the stockholders are deemed to be the donees, because of the logical impossibility of the donor's affecting a gift to himself. Infrequent consideration of these problems, coupled with a recent marked change in judicial response to analogous questions, 3 has rendered hazardous any conclusion as to the continued validity of early precedents in this area. In this conriection, a recent decision of the Court of Appeals for the Ninth Circuit, however, is significant in that it may well indicate the course of subsequent judicial interpretation. In Heringer v. Commissioner,4 the taxpayers had gratuitously con- veyed jointly-held property to a corporation in which they and their eleven children were the sole stockholders. Each taxpayer claimed both 'A gift by a donor-corporation is treated as a gift by the stockholders. U.S. Treas. Reg. so8, § 86.z(a)(i) (1943). This is done because the Internal Revenue Code of 1954 provides only for the taxing of gifts by individuals.
    [Show full text]
  • Assignment of Income: Gifts of Stock and Dividend Income
    Assignment of Income: Gifts Of Stock and Dividend Income By JANET A. MEADE According to the author, the 1989 decision It is a fundamental principle of income tax of the Fifth Circuit in Caruth Corp. v. law that a taxpayer cannot escape tax liability on Commissioner, which appears to allow part of his income merely by assigning his right taxpayers to avoid the recognition of income to receive the income to another party.' But it on gifts of stock taking place between the is equally well established that he can avoid tax dividend declaration date and the record liability if he assigns the income-producing prop- date, should be interpreted cautiously. erty, rather than the income itself.' Applying this Analysis of Caruth in light of the long- principle to the receipt of dividends on stock, established rule in Estate of Smith and in Reg. § 1.61-9(c) specifies that when stock is sold light of several related cases suggests that controlling stockholders may be placed between the dividend declaration date and the in a more tenuous position in this situation record date, the dividend ordinarily is taxable to than minority stockholders. the purchaser. The Third Circuit Court of Ap- peals, however, has stated in Estate of Smith3 that if a gift of stock occurs after a dividend has been declared, but before the record date, the dividend is taxable to the donor of the stock. 1See, e.g., Lucas v. Earl, 2 usTc 1496, 281 U. S. 111 (1930), rev'g 1929 CCH D-9120, 30 F.2d 898 (CA-9), rev'g CCH Dec.
    [Show full text]