Guidance Under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates, 3376-3410 [2025-00284]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Rules and Regulations]
[Pages 3376-3410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00284]



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Vol. 90

Tuesday,

No. 8

January 14, 2025

Part III





 Department of the Treasury





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Internal Revenue Service





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26 CFR Part 28





Guidance Under Section 2801 Regarding the Imposition of Tax on Certain 
Gifts and Bequests From Covered Expatriates; Final Rule

Federal Register / Vol. 90 , No. 8 / Tuesday, January 14, 2025 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 28

[TD 10027]
RIN 1545-BJ43


Guidance Under Section 2801 Regarding the Imposition of Tax on 
Certain Gifts and Bequests From Covered Expatriates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the application of a tax on United States citizens and residents, as 
well as certain trusts, that receive, directly or indirectly, gifts or 
bequests from certain individuals who relinquished United States 
citizenship or ceased to be lawful permanent residents of the United 
States. The final regulations also provide guidance on the method of 
reporting and paying this tax. The final regulations primarily affect 
United States citizens and residents, as well as certain trusts, that 
receive one or more such gifts or bequests.

DATES: 
    Effective Date: These regulations are effective January 14, 2025.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
28.2801-1(b), 28.2801-2(n), 28.2801-3(g), 28.2801-4(g), 28.2801-5(f), 
28.2801-6(e), 28.2801-7(d), 28.6001-1(c), 28.6011-1(c), 28.6060-1(b), 
28.6071-1(d), 28.6081-1(e), 28.6091-1(b), 28.6107-1(b), 28.6109-1(b), 
28.6151-1(b), 28.6694-1(b), 28.6694-2(b), 28.6694-3(b), 28.6694-4(b), 
28.6695-1(b), 28.6696-1(b), and 28.7701-1(b).

FOR FURTHER INFORMATION CONTACT: Mayer R. Samuels, Daniel J. Gespass, 
or Karlene M. Lesho at (202) 317-6859 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    This document contains additions and amendments to 26 CFR part 28 
(Imposition of Tax on Gifts and Bequests from Covered Expatriates) 
addressing the application of section 2801 of the Internal Revenue Code 
(Code) and related provisions (the ``final regulations''). The 
additions and amendments are issued under sections 2801, 6001, 6011, 
6060, 6071, 6081, 6091, 6101, 6107, and 6109 pursuant to the express 
delegations of authority provided under those sections. The express 
delegations relied upon are referenced in the Background section of 
this preamble and in the Summary of Comments and Explanation of 
Revisions describing the individual sections of the final regulations. 
The final regulations are also issued under the express delegation of 
authority under section 7805 of the Code.

Background

    This document amends subchapter B of 26 CFR chapter 1 (Estate and 
Gift Taxes) by adding part 28 under section 2801 and by expanding 
several existing regulations to also apply to the filing and furnishing 
of returns and payment of the tax imposed by section 2801 (section 2801 
tax). Section 301 of the Heroes Earnings Assistance and Relief Tax Act 
of 2008 (HEART Act), Public Law 110-245, 122 Stat. 1624 (2008), added 
chapter 15 (Gifts and Bequests from Expatriates) to subtitle B of the 
Code (subtitle B), effective June 17, 2008. Before the addition of 
chapter 15, subtitle B contained chapters 11 through 14 relating to the 
estate tax, the gift tax, and the generation-skipping transfer (GST) 
tax, as well as special valuation rules applicable for purposes of 
subtitle B. Chapter 15 consists solely of section 2801 and imposes the 
section 2801 tax on certain transfers of property by gift (covered 
gifts) and on certain transfers of property by bequest (covered 
bequests) from certain individuals who expatriate on or after June 17, 
2008 (covered expatriates).
    The section 2801 tax is imposed on each United States (U.S.) 
citizen or resident receiving a covered gift or covered bequest (U.S. 
recipient). For this purpose, domestic trusts and foreign trusts that 
elect to be treated as domestic trusts solely for purposes of section 
2801 (electing foreign trusts) are included in the definition of a U.S. 
citizen. Foreign trusts that do not elect to be treated as domestic 
trusts for purposes of section 2801 (non-electing foreign trusts) are 
not U.S. citizens or residents and, therefore, do not become subject to 
the section 2801 tax upon receipt of covered gifts and covered 
bequests. Instead, the beneficiaries of non-electing foreign trusts who 
are U.S. citizens or residents (U.S. citizen or resident beneficiaries) 
become subject to the section 2801 tax upon their receipt of a 
distribution from a non-electing foreign trust that is attributable to 
covered gifts and covered bequests made to that non-electing foreign 
trust.
    The section 2801 tax will be computed on Form 708, United States 
Return of Tax for Gifts and Bequests Received from Covered Expatriates, 
on which a U.S. recipient will report covered gifts and covered 
bequests received during the calendar year. If the aggregate value of 
the covered gifts and covered bequests received by the U.S. recipient 
during the calendar year exceeds the amount of the inflation-adjusted 
annual exclusion under section 2503(b) of the Code ($18,000 for 2024), 
the section 2801 tax is computed by multiplying the excess by the 
highest estate tax rate specified in section 2001(c) of the Code in 
effect on the date of receipt, and then reducing the product by any 
gift or estate taxes paid to a foreign country with respect to the 
covered gifts and covered bequests. The value of each covered gift and 
covered bequest is its fair market value as of the date of its receipt.
    On September 10, 2015, a notice of proposed rulemaking and a notice 
of public hearing (REG-112997-10) were published in the Federal 
Register (80 FR 54447) proposing rules related to the section 2801 tax 
(proposed regulations). A total of sixteen comments on the proposed 
regulations were received and are available at https://www.regulations.gov or upon request. A public hearing on the proposed 
regulations was held on January 6, 2016. After consideration of all the 
comments, this Treasury decision adopts the proposed regulations, with 
revisions, as final regulations. The revisions are discussed in the 
following Summary of Comments and Explanation of Revisions section. 
Unless otherwise indicated in the Summary of Comments and Explanation 
of Revisions, provisions of the proposed regulations for which no 
comments were received are adopted without substantive change. The 
final regulations include non-substantive modifications, including 
modifications that promote consistency across definitions, rules, and 
examples and improve the overall clarity of the guidance. Such 
modifications are not addressed in the Summary of Comments and 
Explanation of Revisions.

Summary of Comments and Explanation of Revisions

1. General Comments on Section 2801 and the Tax-Neutral Objective

    The Department of the Treasury (Treasury Department) and the IRS 
received several general comments on section 2801. One comment objects 
to the enactment of section 2801, opining that the section 2801 tax is 
unnecessary, infringes on privacy rights, and unfairly applies to 
former long-term permanent residents. Other comments object by pointing 
out several ways in which the statutory provisions of section 2801 are 
not tax neutral, treat expatriates more harshly than if they had 
remained

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subject to U.S. gift and estate taxes, and thus violate what the 
commenters described as the intent of Congress in enacting section 2801 
to make expatriation a tax-neutral event with regard to U.S. transfer 
taxes. Some comments request changes and additions to the proposed 
regulations to create a more tax-neutral outcome than under the 
statute.
    The Background section of the preamble of the proposed regulations 
describes the history of the addition of chapter 15 and section 2801 to 
the Code and references the idea, as explained in a report of the House 
Ways and Means Committee regarding an earlier, pre-HEART Act, bill to 
enact chapter 15 and section 2801, that the decision to relinquish 
citizenship ought to be ``tax neutral.'' See H.R. Rep. No. 110-431, at 
113 (2007). More specifically, the report states that an individual's 
decision to relinquish citizenship or terminate long-term residency 
should not affect the total amount of taxes imposed; that is, the 
decision should be ``tax neutral.'' The report further states that, if 
U.S. estate or gift taxes are avoided with respect to a transfer of 
property to a U.S. person by reason of the expatriation of the donor, 
it is appropriate for the recipient to be subject to a tax similar to 
the transfer tax that the donor or donor's estate would have been 
subject to, had the donor not expatriated. Id. at 114.
    Despite the language in the report, section 2801 imposes a tax on 
the receipt by a U.S. citizen or resident of certain gifts or bequests 
which does not equal, and in some cases is not similar to, the tax that 
would have been imposed on the transfer of such gifts or bequests by a 
U.S. transferor (that is, one who had not expatriated), as illustrated 
by a comparison of the relevant statutory provisions of chapter 11 
(estate tax), chapter 12 (gift tax), and chapter 13 (GST tax), with 
chapter 15 (section 2801 tax). Obvious dissimilarities between section 
2801 and the provisions of chapters 11 through 13 include the absence 
in chapter 15 of an applicable credit amount that can be applied to 
offset or reduce the estate or gift tax liability (see sections 2010 
and 2505 of the Code, for which transfers of up to $13.99 million (the 
2025 inflation-adjusted amount) over a lifetime may be offset for 
purposes of gift and estate taxes) and the absence of a GST tax for 
covered gifts and covered bequests to a U.S. recipient who is a skip 
person (see section 2601 of the Code, imposing an additional transfer 
tax on GSTs). There are many other dissimilarities between section 2801 
and the other transfer tax provisions.
    The role of the Treasury Department and the IRS is to implement 
section 2801, as enacted by the HEART Act. Thus, to the extent the 
comments suggest changes to the statutory text of chapter 15 and 
section 2801, the Treasury Department and the IRS do not further 
address those comments in this preamble. To the extent the comments 
suggest changes or additions to the proposed regulations to create a 
more tax-neutral outcome, the Treasury Department and the IRS have 
responded to specific comments as the relevant issues are discussed in 
this preamble, and in doing so considered both the statutory language 
of section 2801 and the scope of regulatory authority granted by 
Congress.

2. Definitions

A. Expatriate and Covered Expatriate
    Section 2801(f) and proposed Sec.  28.2801-2(h) define the term 
covered expatriate by reference to section 877A(g)(1) of the Code. 
Proposed Sec.  28.2801-2(h) defines the term expatriate by reference to 
section 877A(g)(2). Proposed Sec.  28.2801-2(h) further provides that, 
if an expatriate meets the definition of a covered expatriate, the 
expatriate is considered a covered expatriate for purposes of section 
2801 at all times after the expatriation date, except during any period 
beginning after the expatriation date during which such individual is 
subject to United States estate or gift tax (estate or gift tax) as a 
U.S. citizen or resident. For this exception, the proposed regulations 
cite to section 877A(g)(1)(C) of the Code, which indicates that an 
individual will not be treated as a covered expatriate for certain 
purposes during the time that they are subject to tax as a U.S. citizen 
or resident.
    Section 877A relies on the income tax definition of the term 
resident as described in section 7701(b)(1)(A). Section 28.2801-2(b) of 
the proposed regulations, however, applies the estate and gift tax 
rules under chapters 11 and 12 of subtitle B to define U.S. resident 
for purposes of section 2801, which also is in subtitle B, thereby 
providing consistency across the provisions.
    One comment suggests that the exception in proposed Sec.  28.2801-
2(h), which excludes an expatriate from being treated as a covered 
expatriate during any period in which the expatriate is subject to 
estate or gift tax, creates a coherent structure for purposes of 
section 2801, but leaves open the possibility that an individual could 
be a covered expatriate for purposes of section 877A but not for 
purposes of section 2801 and vice versa. The comment states that this 
result seems to conflict with sections 2801(f) and 877A(g)(1)(C) and 
suggests that the final regulations provide that an expatriate who is 
deemed to be an income tax resident of the U.S. will be deemed not to 
be a covered expatriate. Another comment expresses support for the rule 
in proposed Sec.  28.2801-2(h) as arguably necessary because applying 
sections 2801(f) and 877A(g)(1)(C) using the income tax definition of 
U.S. resident would create a convenient and simple way to avoid 
imposition of the section 2801 tax. For instance, a covered expatriate 
could become an income tax resident in one year during which such 
person does not also satisfy the transfer tax definition of resident. 
During that year, the covered expatriate could make gifts that would 
not be subject to gift tax. The following year, the covered expatriate 
could terminate the covered expatriate's income tax residency, thereby 
allowing the gifts to completely escape transfer taxation. The Treasury 
Department and the IRS agree with the latter comment that using the 
transfer tax definition of resident for the exception in proposed Sec.  
28.2801-2(h) avoids creating an opportunity to circumvent the section 
2801 tax. Further, section 2801 is a transfer tax and is part of 
subtitle B; section 7701(b) of the Code specifically provides that the 
definitions in section 7701(b)(1) do not apply for purposes of subtitle 
B. Accordingly, applying the definition of resident under subtitle B 
for purposes of this transfer tax under section 2801 and the 
corresponding regulations is consistent with the purpose of the 
statute. Moreover, as one comment acknowledges, the use of the transfer 
tax definition is consistent with the concept of neutrality because it 
eliminates the avoidance of estate and gift tax that otherwise would 
result from expatriation. For these reasons, the final regulations 
adopt the transfer tax definition of U.S. resident without change.
    One comment points out that the date on which a person loses U.S. 
citizenship was changed by the HEART Act. The comment explains that 
this change could create ambiguity as to the exact date of a taxpayer's 
expatriation under certain circumstances. The comment requests 
clarification of how that date is determined for persons who had 
determined that they had expatriated before the effective date of the 
HEART Act, and for those with dual citizenship under section 
7701(a)(50)(B). The

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Treasury Department and the IRS agree that such clarification would be 
both appropriate and helpful. Such clarification, however, would impact 
significantly more issues than those related to the section 2801 tax, 
and would be better addressed in guidance under sections 877A and 7701, 
rather than in regulations under section 2801. This issue is, 
therefore, beyond the scope of these final regulations. Accordingly, 
the final regulations adopt the language in proposed Sec.  28.2801-2(h) 
without change.
B. Foreign Trust and Domestic Trust
    Section 2801(a) provides that the section 2801 tax is imposed on a 
covered gift or covered bequest received by a U.S. citizen or resident. 
Section 2801(e)(4)(A) and (B)(iii) explains that a domestic trust or an 
electing foreign trust that receives a covered gift or covered bequest 
is treated as a U.S. citizen for the purposes of section 2801. If a 
covered gift or covered bequest is received by a non-electing foreign 
trust, however, section 2801(e)(4)(B)(i) provides that the section 2801 
tax is imposed on any distribution attributable to the covered gift or 
covered bequest from the trust to a U.S. citizen or resident. 
Therefore, it is important to properly classify a trust receiving a 
covered gift or covered bequest as either a domestic or foreign trust 
in order to determine the identity of the U.S. citizen or resident 
liable for, and the timing of, payment of the section 2801 tax. Section 
28.2801-2(c) and (d)(1) of the proposed regulations defines the terms 
domestic trust and foreign trust by reference to section 7701(a)(30)(E) 
and (31)(B), respectively. No comments were received regarding the 
definitions of domestic trust or foreign trust. These final regulations 
maintain the same definitions as in the proposed regulations.
C. Covered Bequest
    Section 2801(e)(1)(B) defines a covered bequest as any property 
acquired directly or indirectly by reason of the death of an individual 
who, immediately before such death, was a covered expatriate. The 
proposed regulations define covered bequest in section 28.2801-2(f) and 
confirm that this definition includes any property acquired directly or 
indirectly by reason of the death of a covered expatriate, regardless 
of the situs of such property and whether such property was acquired by 
the covered expatriate before or after the covered expatriate's 
expatriation from the United States. Proposed Sec.  28.2801-3(b), which 
contains additional rules and exceptions applicable to covered 
bequests, provides that property acquired by reason of the death of a 
covered expatriate for purposes of the definition of covered bequest in 
Sec.  28.2801-2(f) includes any property that would have been 
includible in the gross estate of the covered expatriate under chapter 
11 of subtitle B had the covered expatriate been a U.S. citizen at the 
time of death.
    One comment acknowledges that including property that would have 
been includible in the gross estate of the covered expatriate had the 
covered expatriate been a U.S. citizen at the time of death appears to 
be consistent with legislative intent. However, the comment expresses 
concern that the definition of covered bequest in Sec.  28.2801-2(f), 
which includes all property passing by reason of the decedent's death, 
was too broad. The comment points out that not all property passing by 
reason of a decedent's death would be includible in the decedent's 
gross estate. The comment provides, as an example, property passing to 
a child from a trust created by a grandparent after a term measured by 
a now deceased parent's life. The comment suggests revising the 
definition of covered bequest in Sec.  28.2801-2(f) to include property 
acquired by reason of the death of a covered expatriate, but only to 
the extent the property would have been included in the gross estate of 
the covered expatriate had the covered expatriate been a United States 
citizen immediately before death.
    The comment correctly observes that including any property acquired 
directly or indirectly by reason of the death of a covered expatriate 
may inappropriately subject property to section 2801 tax, such as in 
the example provided by the comment (assuming the facts do not support 
an indirect gift). However, the suggestion to limit the definition of 
covered bequest to property acquired by reason of the death of a 
covered expatriate that would have been included in the gross estate of 
the covered expatriate is too narrow. Such a definition, for example, 
would wrongly exclude property that would otherwise be included in the 
gross estate of a covered expatriate even though the property was not 
acquired on the death of the covered expatriate (for example, under 
section 2035, which increases the gross estate by the value of certain 
property transferred within the 3-year period ending on the date of the 
covered expatriate's death). The comment's suggested definition also 
would exclude all distributions made by reason of the death of a 
covered expatriate from non-electing foreign trusts to the extent the 
distributions are attributable to covered gifts and covered bequests 
made to the foreign trust on or after June 17, 2008. Under section 
2801(e)(4)(B)(i), a distribution from a non-electing foreign trust that 
is attributable to a covered gift or covered bequest made to the trust 
is subject to section 2801 tax in the same manner as if the 
distribution were a covered gift or covered bequest. When such a 
distribution is made by reason of a death of a covered expatriate, the 
distribution is more similar to a covered bequest described in section 
2801(e)(1)(B) than a covered gift described in section 2801(e)(1)(A) 
and, therefore, is appropriately classified as a covered bequest.
    To address the concern expressed in the comment as to property that 
would not have been included in the gross estate of the decedent, the 
definition of covered bequest in the final regulations instead 
describes three categories of property that are included in the 
definition of covered bequest. The first category includes in the 
definition of covered bequest property acquired by a recipient on or 
after June 17, 2008, directly or indirectly by reason of the death of a 
covered expatriate but only to the extent the property would have been 
included in the covered expatriate's gross estate if the covered 
expatriate had been a U.S. citizen immediately before death. The second 
category includes in the definition property received from a covered 
expatriate that would have been included in the covered expatriate's 
estate, even if not acquired directly or indirectly by reason of the 
death of a covered expatriate, for example property includible under 
section 2035. The third category includes in the definition 
distributions made by reason of the death of a covered expatriate from 
a non-electing foreign trust to the extent the distributions are 
attributable to covered gifts and covered bequests made to the foreign 
trust on or after June 17, 2008.
D. Indirect Acquisition of Property
    A covered gift or covered bequest is defined in section 2801(e) as 
any property acquired directly or indirectly by gift from or by reason 
of the death of a covered expatriate. Using transfer tax principles, 
Sec.  28.2801-2(i) of the proposed regulations identifies the transfers 
that constitute indirect acquisitions of property, to include property 
(1) acquired through ownership of an interest in a corporation or other 
entity, (2) acquired through one or more foreign trusts, entities, or 
persons not subject to the section 2801 tax, (3) paid in satisfaction 
of a debt or liability, (4) acquired

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through a power of appointment over property not in trust granted by a 
covered expatriate to a non-covered expatriate, and (5) acquired as a 
result of any other indirect transfer by a covered expatriate. Comments 
were received with respect to each example.
    One comment states that the examples of an indirect acquisition of 
property in Sec.  28.2801-2(i)(2) and (3) of the proposed regulations 
go too far in that they are not limited by the extent to which the 
interest indirectly received is attributable to a covered gift or 
covered bequest. Although these examples illustrate the definition of 
``indirect acquisition of property'' for purposes of the 2801 tax, this 
definition is relevant only to the extent that the indirect acquisition 
is of an interest in a covered gift or covered bequest. When the 
definition of indirect acquisition is applied in relation to a covered 
gift or covered bequest, the appropriate limitation is applied. As a 
result, no change is needed in the final regulations to achieve the 
limitation sought by the commenter.
    Several comments observe that the rule in Sec.  28.2801-2(i)(1) of 
the proposed regulations is consistent with the rule in Sec.  25.2511-
1(h)(1) of the Gift Tax Regulations, which describes the gift tax 
consequences of a transfer made to a corporation. One comment requests 
that proposed Sec.  28.2801-2(i)(1) be revised to clarify the metrics 
used for determining a U.S. citizen or resident owner's share of a 
covered gift or covered bequest made to the entity. For instance, the 
commenter noted that an owner of an interest in an entity could have a 
mix of interests and/or rights in capital, profits, voting, 
distribution, liquidation, etc., and suggested that the final 
regulations permit taxpayers to use any reasonable method to account 
for these interests and rights. The Treasury Department and the IRS 
note that this issue is not unique to section 2801; the same issue 
arises in the gift tax context under chapter 12. See, e.g., Sec.  
25.2511-1(h)(1) (extent of a shareholder's interest relevant to 
determine the gift tax consequences of a transfer made by a corporation 
to another shareholder). Given the broader, more factual nature of 
determining the extent of an owner's interest and rights in an entity, 
this issue is better addressed under the Gift Tax Regulations, and 
therefore is beyond the scope of these final regulations. As a result, 
this suggestion is not adopted.
    Several comments state that the illustrations in proposed Sec.  
28.2801-2(i)(2), (3), and (5) are overbroad. In particular, the 
comments state that the illustrations in Sec.  28.2801-2(i)(2) 
(regarding property acquired through one or more persons not subject to 
the section 2801 tax) and (3) (regarding property paid in satisfaction 
of a debt or liability) are not tethered to any consideration of timing 
or gratuitous intent. One comment observes that the proposed definition 
would require a recipient to trace a potentially long chain of title to 
determine whether the property received would be a covered gift or 
covered bequest to that recipient. Another comment states that a non-
covered expatriate family member of the covered expatriate and the U.S. 
recipient should not be considered an intermediary of the covered 
expatriate if that family member had dominion and control over the 
property and acted independently of the covered expatriate. Two 
comments suggest replacing Sec.  28.2801-2(i)(2) and (5) of the 
proposed regulations with a rule that would include, as an indirect 
acquisition, only property acquired pursuant to a plan, one of the 
principal purposes of which is the avoidance of transfer tax, similar 
to the rules in Sec. Sec.  1.643(h)-1 and 1.679-3(c) of the Income Tax 
Regulations. The rules in Sec. Sec.  1.643(h)-1 and 1.679-3(c) employ a 
substance over form approach with respect to certain transfers made 
through an intermediary.
    These final regulations modify, in part, the definition of indirect 
acquisition of property to address some of the concerns regarding 
proposed Sec.  28.2801-2(i)(2), (3), and (5) as expressed in the 
comments. The Treasury Department and the IRS agree that the 
illustrations in Sec.  28.2801-2(i)(2) and (5) of the proposed 
regulations may capture transfers that, in some cases, are not truly 
indirect transfers and should not be subject to tax under section 2801. 
Thus, the final regulations replace the rules in proposed Sec.  
28.2801-2(i)(2) and (5) with a single illustration that refers to an 
acquisition that is, in substance, a covered gift or covered bequest 
from a covered expatriate. In addition, the final regulations add a 
more general description of property that is gratuitously passed from 
or conferred by the covered expatriate through another person or 
entity, and the rules in proposed Sec.  28.2801-2(i)(1) through (5) are 
converted in the final regulations to a nonexclusive list of 
illustrations describing the application of the definition for purposes 
of section 2801. The suggestion is not adopted to replace the rule in 
proposed Sec.  28.2801-2(i)(2) and (5), applicable to acquisitions of 
property, with a rule that would add a principal purpose of tax 
avoidance test applicable to distributions from and to foreign trusts, 
similar to the rules in Sec. Sec.  1.643(h)-1 and 1.679-3(c). As with 
other interpretations of terms in section 2801 (for example, U.S. 
resident), applying transfer tax principles to section 2801 is the 
better interpretation of the statute both because section 2801 is a 
transfer tax, and the intent of the transferor generally is irrelevant 
for transfer tax purposes.
    Finally, comments recommend narrowing the scope of proposed Sec.  
28.2801-2(i)(4) to include only property acquired pursuant to a non-
covered expatriate's non-general power of appointment (as opposed to 
all types of powers of appointment) granted by a covered expatriate 
over property not in trust. Such a change would ensure that the 
exercise, release, or lapse of a non-covered expatriate's general power 
of appointment over property not in trust would not be a covered gift 
or covered bequest, which the commenters contend is consistent with the 
general gift tax treatment of the holder of a general power of 
appointment as the owner of the property subject to the power. If the 
commenters' recommendation were adopted, it would allow a covered 
expatriate to avoid the section 2801 tax by granting a general power of 
appointment over non-trust property to a person who is neither a 
covered expatriate nor a U.S. citizen or resident, but who will 
exercise or release the power or allow it to lapse in favor of a U.S. 
citizen or resident. Thus, the final regulations continue to describe 
the acquisition of property pursuant to a non-covered expatriate's 
power of appointment (whether general or non-general) granted by a 
covered expatriate over property not in trust as an example of an 
indirect acquisition of property for purposes of section 2801. The 
final regulations clarify, however, that acquiring property pursuant to 
a power of appointment means as the result of an exercise, release, or 
lapse of that power, without regard to the de minimis exceptions in 
section 2041(b)(2) or 2514(e). This latter clarification is necessary 
because section 2801(c) provides the only de minimis exception to the 
imposition of section 2801 tax.
E. Other Definitions
    Several comments suggest other revisions to Sec.  28.2801-2 of the 
proposed regulations to make the regulations more user friendly, 
including using consistent terminology. Those suggestions include the 
replacement of citizen or resident of the United States with the term 
used in the statute, U.S. citizen or resident, the addition of a 
definition of the term non-electing foreign trust, and the correction 
of the reference in the definition of the term

[[Page 3380]]

general power of appointment to section 2041(b)(1) (rather than section 
2041(b)) to clarify that the exclusions for lapses and certain pre-1943 
powers under section 2041(b)(2) and (3), respectively, do not apply for 
purposes of section 2801. These suggestions have been adopted and the 
appropriate changes are reflected in the final regulations. The 
suggestion that other terms (such as gift and charitable remainder 
trust) used throughout the proposed regulations, as well as other terms 
unique to section 2801 that are defined elsewhere in the proposed 
regulations (in the particular section where each is relevant), either 
be defined in Sec.  28.2801-2 or referred to by cross-references, has 
not been adopted. Several such terms are defined elsewhere in the Code 
or in the corresponding regulations, and those that are specific to a 
particular issue under section 2801 are defined and applied in the 
discussion of that particular issue in the relevant section of the 
regulations in an effort to make the regulations more readily 
understood.

3. Exceptions to Definitions of Covered Gift and Covered Bequest

A. Transfers Otherwise Subject to Gift or Estate Tax
    Section 2801(e)(2)(A) and (B) excepts from the definitions of 
covered gift and covered bequest, respectively, any taxable gift by a 
covered expatriate and any property included in the gross estate of a 
covered expatriate, if such property is reported on a timely filed gift 
or estate tax return (timely filed requirement).
    One comment suggests that a covered expatriate be allowed to treat 
transferred property as a transfer of a U.S. situs asset, report the 
transfer on a timely filed gift or estate tax return, and thereby avoid 
the transfer being a covered gift or covered bequest. By reducing the 
effective tax rate on the transfer, the comment states that this 
approach would be consistent with the tax neutrality intended at 
enactment of section 2801.\1\ These final regulations do not adopt the 
commenter's suggestion, because it is inconsistent with section 2801. 
Additionally, if adopted, such a filing in effect would override the 
provisions of sections 2511(a) (applying the gift tax only to transfers 
by nonresident, noncitizens of property situated within the United 
States) and 2103 (including in the gross estate of nonresident, 
noncitizens only that part of property that is situated within the 
United States at the time of death) for certain transfers by covered 
expatriates, a result not contemplated by the statutory language of 
section 2801. While section 2801 allows a foreign trust to elect to be 
treated as a domestic trust, there is no indication that Congress 
intended to allow other elections that would operate in the way 
suggested by this commenter.
---------------------------------------------------------------------------

    \1\ For a discussion of the ``tax neutral'' objective stated in 
H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, 
bill, see part 1 of the Summary of Comments and Explanation of 
Revisions section of this preamble.
---------------------------------------------------------------------------

i. Timely Paid Requirement
    For property reported on the covered expatriate's gift or estate 
tax return to be excluded from the definition of a covered gift or 
covered bequest, Sec.  28.2801-3(c)(1) and (2) of the proposed 
regulations requires not only the timely filing of that return, but 
also the timely payment of the tax shown on that return (timely paid 
requirement).
    Comments state that the timely paid requirement should be 
eliminated because there is no statutory basis for imposing that 
requirement. Comments also note that the timely paid requirement would 
cause a double tax to be imposed on a single transfer if the gift or 
estate tax is not timely paid: gift or estate tax due from the covered 
expatriate or covered expatriate's estate, as well as section 2801 tax 
due from the U.S. recipient of that property. As to the latter comment, 
the Treasury Department and the IRS note that the potential for 
imposing tax on both the covered expatriate or the covered expatriate's 
estate and the U.S. citizen or resident receiving the covered gift or 
covered bequest is already created by the timely filed requirement 
under section 2801(e)(2)(A) and (B), which would deny the exception if 
the gift or estate tax return is filed late. Like the timely filed 
requirement, the timely paid requirement limits the potential for tax 
avoidance by ensuring that an excepted transfer is timely reported and 
that the tax on such excepted transfer is timely paid by the covered 
expatriate, over whom it may be difficult for the IRS to assert 
jurisdiction to enforce that tax liability.
    Providing a timely paid requirement is not beyond the Treasury 
Department and IRS's general regulatory authority to implement the 
Congressional mandate of section 2801, including addressing compliance 
concerns. However, the Treasury Department and the IRS have considered 
other existing gift and estate tax enforcement mechanisms which also 
could address compliance concerns, such as under subtitle F of the Code 
and the ability of the IRS to collect the tax liability of the covered 
expatriate or covered expatriate's estate from any transferee of the 
property. See section 6324 of the Code (establishing special estate and 
gift tax liens that are separate and distinct from the general tax 
lien) and section 6901 of the Code (providing transferee gift tax or 
estate tax liability is to be assessed, paid, and collected in the same 
manner and subject to the same provisions and limitations as the tax 
imposed on the decedent or donor). Further, a timely paid requirement 
could present administrability and finality challenges--for example, 
when the amount paid with the return differs from the amount that is 
ultimately owed due to a valuation change or other adjustment after 
examination. In view of the above, the final regulations adopt the 
commenters' suggestion to eliminate the timely paid requirement as it 
relates to this exception from the definitions of covered gift and 
covered bequest.
ii. Both Section 2801 Tax and Gift or Estate Tax on Same Transfer
    As discussed in part 3.A.i. of the Summary of Comments and 
Explanation of Revisions section of this preamble, a late filing of a 
gift or estate tax return by a covered expatriate or covered 
expatriate's estate prevents the transferred property from being 
excluded from the definition of a covered gift or covered bequest and 
may lead to the imposition of gift or estate tax as well as the 
imposition of the section 2801 tax on the same transfer of that 
property. Further, both the gift or estate tax and the section 2801 tax 
ultimately may be payable by the U.S. citizen or resident if transferee 
liability is imposed if the covered expatriate or covered expatriate's 
estate fails to pay the gift or estate tax due. See sections 6324(a)(2) 
and (b) and 6901.
    Comments suggest that the final regulations provide a remedy to 
avoid the payment, on the same transfer, of both gift or estate tax by 
the covered expatriate or covered expatriate's estate and the section 
2801 tax by the U.S. citizen or resident receiving the covered gift or 
covered bequest. The comments suggest alternative proposals to be added 
to the final regulations, including (a) providing for a refund to a 
U.S. citizen or resident who paid the section 2801 tax when gift or 
estate tax has been paid by a covered expatriate or covered 
expatriate's estate; (b) providing a credit or refund to the U.S. 
citizen or resident, or the covered expatriate or covered expatriate's 
estate, of whichever of those taxes is paid last; and (c) eliminating 
the timely filed requirement if the gift or estate tax is paid by the 
covered expatriate or the covered expatriate's estate prior to the due 
date of Form 708.

[[Page 3381]]

    Section 2801(e)(2)(A) and (B) excepts from the definitions of 
covered gift and covered bequest, and thus from liability for the 
section 2801 tax, property reported on a timely filed gift or estate 
tax return. These sections explicitly provide an exception only for 
property shown on a timely filed return, and any exception from tax for 
covered gifts or covered bequests not reported on a timely return would 
ignore and give no meaning to the timely filed language in section 
2801. Accordingly, eliminating liability for the section 2801 tax when 
the transfer of such property is not timely reported by a covered 
expatriate or covered expatriate's estate on a gift or estate tax 
return is contrary to the statute. Thus, despite the potential for the 
imposition of either estate or gift tax on the transfer of such 
property as well as the imposition of the section 2801 tax on the 
recipient's acquisition of such property, these final regulations do 
not adopt the suggestions of the comments.
    Similarly, one comment suggests that a recipient who paid the U.S. 
gift or estate tax liability of the donor or decedent due to transferee 
liability should have a credit for those taxes against the recipient's 
section 2801 tax liability. These final regulations do not adopt this 
comment for the following reasons. First, a credit given to the 
recipient for gift or estate tax paid pursuant to transferee liability 
could incentivize the transferor subject to gift or estate tax to 
resist payment and force collection from the recipient. Second, section 
2801 (unlike section 1446(d) of the Code,\2\ for example) does not 
provide for such a credit.
---------------------------------------------------------------------------

    \2\ Section 1446(d) provides a credit under section 33 of the 
Code for a foreign partner's share of the withholding tax paid by 
the partnership under section 1446.
---------------------------------------------------------------------------

    Finally, in response to a comment, Example 2 in proposed Sec.  
28.2801-3(f) is updated in the final regulations to clarify that, under 
the facts of the example, the covered expatriate's estate must file an 
estate tax return (Form 706-NA, United States Estate (and Generation-
Skipping Transfer) Tax Return, Estate of nonresident not a citizen of 
the United States), and pay the estate tax with respect to certain 
property, despite the requirement that the son of the covered 
expatriate in that example file Form 708 and pay the section 2801 tax 
with respect to the same property.
B. Property Subject to Section 2801 Tax Both as Covered Gift and as 
Covered Bequest
    Noting that a U.S. citizen or resident may receive property that 
constitutes a covered gift and, subsequently, a covered bequest, a 
comment suggests that the definition of covered bequest should exclude 
any property treated as acquired by reason of the death of a covered 
expatriate if the property previously was subject to the section 2801 
tax as a covered gift from the same covered expatriate. For instance, 
when a covered expatriate transfers a remainder interest in real 
property to a U.S. recipient and retains a life estate, the value of 
the remainder interest is a covered gift, and the value of the entire 
real property is a covered bequest at the covered expatriate's death. 
See section 2036(a)(1).
    The Treasury Department and the IRS are sympathetic to the 
commenter's concern that the same property could be subject to section 
2801 tax first as a covered gift and subsequently as a covered bequest 
acquired from the same covered expatriate, and agree there should be no 
such duplication of the liability under section 2801. However, rather 
than excluding from the definition of covered bequest any property 
previously subject to the section 2801 tax as a covered gift, it is 
appropriate and more in line with the structure of the transfer tax 
system to exclude instead the value of the covered gift that was 
previously subject to section 2801 tax from the value of the covered 
bequest of that same property. In this way, similar to the way that 
section 2001(b) does not subject to estate tax the value of a gift that 
was previously subject to gift tax, the value already subjected to 
section 2801 would not be retaxed and the computation of the section 
2801 tax would be able to properly take into account the post-gift 
appreciation in the value of the transferred property through the U.S. 
persons' receipt of the covered bequest. Accordingly, Sec.  28.2801-
3(c)(3) of the final regulations includes a rule that limits the value 
of a covered bequest to the amount that exceeds the value of the 
covered gift to which the section 2801 tax previously applied.
C. Transfers to Spouse
    Section 2801(e)(3) excepts from the definitions of covered gift and 
covered bequest a gift or bequest that would qualify for a marital 
deduction under section 2056 or 2523 if the donor or decedent were a 
U.S. person.
i. QDOT and QTIP Elections for Non-U.S. Situs Property
    Under proposed Sec.  28.2801-3(c)(4), the exception to the 
definitions of covered gift and covered bequest for transfers to a 
spouse that are dependent upon the making of a qualified terminable 
interest (QTIP) or qualified domestic trust (QDOT) election only 
applies if a valid QTIP or QDOT election in fact is made. Because these 
are elective choices with different tax consequences, the desire to 
make the election cannot be presumed in all cases.
    Many of the comments received on the proposed rule requiring the 
making of a valid QTIP or QDOT election concern non-U.S. situs 
property. The comments received generally fall into two categories: 
those comments that conclude that a covered expatriate or a covered 
expatriate's executor may make a valid QTIP or QDOT election with 
respect to only U.S. situs property; and those comments that conclude 
that a QTIP or QDOT election also may be made with respect to non-U.S. 
situs property and request guidance on how such an election might be 
made with respect to non-U.S. situs property. With respect to the 
former, the comments state that a covered expatriate or a covered 
expatriate's estate is limited to making a QTIP or QDOT election with 
respect to U.S. situs property because only the transfer of U.S. situs 
property by a covered expatriate is subject to U.S. gift and estate 
taxation under sections 2511(a) and 2103. With respect to the latter, 
different comments suggest various methods of allowing a QTIP or QDOT 
election to be made with respect to non-U.S. situs property, including 
on a Form 706-NA filed by a trust, on a Form 708 filed by a U.S. 
recipient, and by a trust that is a U.S. recipient of a foreign non-
electing trust.
    The Treasury Department and the IRS agree with the comments in the 
first category that, for the exception to the definitions of covered 
gift and covered bequest to apply under section 2801(e)(3), a covered 
expatriate or a covered expatriate's estate is limited to making a QTIP 
or QDOT election with respect to only U.S. situs property. Section 
2801(e)(3) provides no basis for allowing a QTIP or QDOT election to be 
made for property that is not subject to U.S. gift or estate tax, and, 
furthermore, it provides no mechanism for making the election and no 
indication that the IRS should create such a mechanism through 
regulations. In addition, adopting the position of the latter comments 
and providing a method to make a QTIP or QDOT election for non-U.S. 
situs property (in addition to U.S. situs property) would be 
inconsistent with the QTIP and QDOT statutory provisions that defer, 
but do not eliminate, transfer tax on property qualifying for the 
marital deduction. If such a rule were adopted so that such property 
would not be subject to section 2801 tax upon the initial gift or 
bequest

[[Page 3382]]

by the covered expatriate, such property also would not be subject to 
gift or estate tax under section 2519, 2044, or 2056A(b) upon any 
disposition or distribution or on the death of the covered expatriate's 
spouse. Consequently, covered expatriates and the estates of covered 
expatriates would be afforded more favorable transfer tax treatment 
than that available to U.S. citizens. The Treasury Department and the 
IRS also note that a covered expatriate may obtain the benefits of the 
exception in section 2801(e)(3) with respect to non-U.S. situs property 
by making an outright gift or bequest of that property to a U.S. 
citizen spouse, or a bequest to a trust described in section 2056(b)(5) 
that provides the surviving spouse with both a life estate and a 
general power of appointment. For these reasons, the final regulations 
retain the proposed rule that requires a valid QTIP and/or QDOT 
election in order for property to qualify for this exception to the 
definitions of covered gift and covered bequest, and the regulations 
further clarify that such an election can be made only with respect to 
property subject to gift or estate tax, that is, only with respect to 
U.S. situs property.
ii. Distributions From Non-Electing Foreign Trusts
    Transfers from a covered expatriate to a non-electing foreign trust 
are covered gifts or covered bequests, but are not subject to the tax 
under section 2801 until a distribution is made from that trust. 
Specifically, section 2801 imposes the tax on distributions from that 
trust to a U.S. recipient to the extent those distributions are 
attributable to the covered gifts or covered bequests contributed to 
the trust.
    A few comments suggest that, for transfers to a non-electing 
foreign trust, section 2801(e)(4)(B)(i) supports applying the marital 
exception at the time of the distribution from the non-electing foreign 
trust to the U.S. spouse, because that is when tax under section 2801 
tax is imposed. Recognizing that the marital deduction is applied at 
the time of the transfer giving rise to gift or estate tax, these 
comments contend that this approach would be consistent with transfer 
tax principles. These comments also state that this approach would be 
consistent with the goal of tax neutrality as applied to surviving 
spouses, in that the imposition of the section 2801 tax should not 
depend upon whether a non-electing foreign trust (that would qualify 
for the marital deduction) is interposed between the donor or decedent 
and the receipt by the surviving spouse. See part 1 of the Summary of 
Comments and Explanation of Revisions section of this preamble for a 
discussion of the ``tax neutral'' objective stated in H.R. Rep. No. 
110-431 with regard to an earlier, pre-HEART Act, bill. The comments 
acknowledge that, under their interpretation, a transfer of property to 
a non-electing foreign trust would be treated differently than a 
transfer of property to a domestic trust or an electing foreign trust; 
however, they posited that the difference is justified by the timing of 
the transfer taxable under section 2801. Specifically, the comments 
point out that by its express terms, the statute treats a non-electing 
trust differently with regard to the timing of the imposition of the 
tax and the payee of that tax.
    The Treasury Department and the IRS have carefully considered the 
merits and implications of the suggestion to apply the marital 
exception at the time of the distribution from the non-electing foreign 
trust. The proper interpretation of section 2801(e)(3) and (4)(B)(i), 
however, does not permit the creation of a special rule for non-
electing foreign trusts that would provide an opportunity for a marital 
exception at the time of a distribution from the trust. Unlike the 
marital deduction for estate and gift taxes, the exception for marital 
transfers under section 2801 is an exception to the definitions of 
covered gift and covered bequest. Those definitions apply to determine 
whether a contribution to a non-electing foreign trust is a covered 
gift or covered bequest, and thus the availability of that exception is 
determined as of the time of the covered expatriate's funding of the 
non-electing foreign trust. For this reason, even though the U.S. 
spouse's receipt of property attributable to the covered gift or 
covered bequest occurs and becomes taxable under section 2801 only upon 
its distribution out of the trust, the availability of the marital 
exception cannot be applied instead at the time of the distribution 
from that trust.
    Two other comments suggest that a distribution from a non-electing 
foreign trust to a U.S. citizen or resident spouse should be treated as 
an indirect gift or bequest to which the exception could be applied. 
However, to do so would imply that all trust distributions are indirect 
transfers, which would go too far. In addition, if such an indirect 
transfer would have qualified for the transfer tax marital deduction at 
all, it effectively would override section 2801(e)(4), would confer a 
tax advantage on a covered expatriate that is unavailable to a U.S. 
person, and would be (as one comment concludes) overly generous. For 
example, a transfer of non-U.S. situs property by a covered expatriate 
at death outright to the covered expatriate's U.S. citizen spouse is 
not a covered bequest, because such transfer would have qualified for 
the estate tax marital deduction if the covered expatriate were a U.S. 
person. Similarly, a transfer of non-U.S. situs property by a covered 
expatriate at death to a non-electing foreign trust that qualifies for 
the estate tax marital deduction under section 2056(b)(5) is not a 
covered bequest because such transfer would have qualified for the 
estate tax marital deduction if the covered expatriate were a U.S. 
person. In these situations, because the contributions to the trust are 
not covered bequests, not only are distributions from the non-electing 
foreign trust to the covered expatriate's U.S. citizen spouse not 
subject to the section 2801 tax pursuant to the exception in section 
2801(e)(3), but distributions to the remainder beneficiary upon such 
spouse's death also are not subject to the section 2801 tax. By 
contrast, a transfer of non-U.S. situs property from a covered 
expatriate at death to a trust for the benefit of the covered 
expatriate's U.S. citizen spouse and U.S. citizen children is a covered 
bequest because such transfer would not have qualified for the estate 
tax marital deduction if the covered expatriate were a U.S. person. If 
such trust is a non-electing foreign trust, the section 2801 tax is not 
payable until there is a distribution to a U.S. citizen or resident. 
When the trust makes a distribution to the covered expatriate's U.S. 
citizen spouse, that spouse is liable for the section 2801 tax because 
the distribution is attributable to a covered bequest and is taxed ``in 
the same manner as if such distribution were a covered gift or covered 
bequest.'' Section 2801(e)(4)(B)(i).
    These final regulations explicitly address the application of the 
section 2801(e)(3) exception to the definition of covered gift or 
covered bequest in Sec.  28.2801-3(c)(5) and in Example 2 to Sec.  
28.2801-5(e).
D. Transfers to Charity
    To the extent a gift or bequest would qualify for a charitable 
deduction under section 2055 or 2522 if the donor or decedent were a 
U.S. citizen or resident, such gift or bequest is excepted under 
section 2801(e)(3) and Sec.  28.2801-3(c)(3) of the proposed 
regulations from the definitions of covered gift and covered bequest. 
Regarding distributions to qualifying charitable organizations from a 
non-electing foreign trust, a few comments assert that section 
2801(e)(4)(B)(i) supports applying the exception at the time of 
distribution and explain that this would avoid imposing

[[Page 3383]]

the section 2801 tax on a U.S. charity. The comments explain that their 
analysis regarding the marital exception, which is set forth in part 
3.C.ii. of the Summary of Comments and Explanation of Revisions section 
of this preamble, applies equally to the charitable exception. Because 
this exception depends upon the contribution to the trust being 
eligible for a transfer tax charitable deduction, and for the reasons 
described in part 3.C.ii. of the Summary of Comments and Explanation of 
Revisions section of this preamble, these final regulations have not 
adopted the interpretation advanced by the comments.
    Section 28.2801-4(a)(2)(iii) of the proposed regulations provides 
that a domestic trust qualifying as a charitable remainder trust (as 
that term is defined in Sec.  1.664-1(a)(1)(iii)(a)) is subject to 
section 2801 when it receives a covered gift or covered bequest, and 
that the charitable remainderman's share of each transfer to the 
charitable remainder trust is not a covered gift or covered bequest. 
The proposed regulations further provide that, to compute the amount of 
covered gifts and covered bequests taxable to the charitable remainder 
trust for a calendar year, the charitable remainder trust will (A) 
calculate, in accordance with the regulations under section 664 and as 
of the date of the trust's receipt of the contribution, the value of 
the remainder interest in each contribution received in such calendar 
year that would have been a covered gift or covered bequest without 
regard to section 2801(e)(3), (B) subtract the remainder interest in 
each such contribution from the amount of that contribution to compute 
the annuity or unitrust (income) interest in that contribution, and (C) 
add the total of such income interests, each of which is the portion of 
the contribution that constitutes a covered gift or covered bequest to 
the trust.
    One comment notes that the proposed regulations do not indicate 
whether the payment of section 2801 tax by a charitable remainder trust 
is disregarded in computing the amount of annuity or unitrust 
distributions and in determining whether the 10 percent minimum 
remainder requirement in section 664(d)(1)(D) and (2)(D) and the 
probability of exhaustion test described in Rev. Rul. 70-452, 1970-2 
C.B. 199, are satisfied. The comment observes that, if the tax imposed 
by section 2801 were considered in determining whether the 10 percent 
minimum remainder requirement and probability of exhaustion tests are 
satisfied, then most trusts that owe tax under section 2801 are likely 
to be disqualified as a charitable remainder trust. The comment also 
observes, however, that, if the tax is not considered in determining 
the annuity amount, then the charitable remainder will be overvalued.
    One comment points out that the proposed regulations do not provide 
guidance on whether a charitable remainder trust's payment of section 
2801 tax should be allocated to income or principal for the purpose of 
determining the character of distributions under section 664(b) and 
Sec.  1.664-1(d)(2).
    The proposed regulations also do not contain any guidance on how a 
domestic trust or electing foreign trust that qualifies as a charitable 
lead trust under section 2055(e)(2)(B) or 2522(c)(2)(B) is to compute 
the 2801 tax. Several comments suggest that the final regulations 
provide that a charitable lead trust should compute the section 2801 
tax in a similar manner to a charitable remainder trust, such that the 
charitable lead interest could be subtracted from the total value of 
the covered gift or bequest to determine the amount that is subject to 
the section 2801 tax.
    As the comments note, the proposed regulations do not provide any 
rules on the effect of a charitable remainder trust's tax payment on 
the trust's qualification under section 664. This is a complex and 
foundational issue, such that final rules regarding charitable 
remainder trusts should not be promulgated without further 
consideration and an opportunity for notice and comment. Additionally, 
as the comments point out, the proposed regulations do not provide any 
rules on charitable lead trusts, and, therefore, final rules regarding 
charitable lead trusts should not be promulgated without further 
consideration and an opportunity for notice and comment. Accordingly, 
Sec.  28.2801-4(a)(2)(iii) of the final regulations is reserved for 
these purposes.

4. Computation of Section 2801 Tax

    Under section 2801(a) and (c), the section 2801 tax is determined 
by reducing the total value of covered gifts and covered bequests 
received by a U.S. recipient during the calendar year by the dollar 
amount of the per-donee exclusion in effect under section 2503(b) for 
that calendar year ($18,000 in 2024) (section 2801(c) amount), and then 
multiplying the net amount by the highest estate or gift tax rate in 
effect during that calendar year (40 percent in 2024). The reference in 
section 2801(c) to section 2503(b) has the sole purpose of defining the 
amount by which to reduce the aggregate value of covered gifts and 
covered bequests received by a U.S. citizen or resident during the 
calendar year, as acknowledged in the comments. Under section 2801(d), 
the resulting tax then is reduced by any estate or gift tax paid to a 
foreign country with regard to such covered gifts and covered bequests. 
Section 28.2801-4(b) (on the computation of the section 2801 tax) and 
28.2801-4(e) (on the reduction of the section 2801 tax for foreign gift 
or estate tax paid) of the proposed regulations are consistent with 
these statutory rules.
A. Effective Tax Rate
    Several comments note that the effective tax rate of the section 
2801 tax on a covered gift is much higher than the effective tax rate 
for a gift subject to gift tax because the base on which the section 
2801 tax is imposed includes the amount of the section 2801 tax payable 
by the U.S. recipient (making it ``tax inclusive'') while the base on 
which the gift tax is imposed does not include the amount of the gift 
tax payable by the donor (making it ``tax exclusive''). These comments 
contend that this result is a deviation from Congress' stated goal of 
tax neutrality, and one comment suggests that the final regulations 
allow a covered expatriate instead to elect to treat a gift as a 
transfer of U.S. situs property, to reduce the effective section 2801 
tax rate on the covered gift.
    As discussed in part 1 of the Summary of Comments and Explanation 
of Revisions section of this preamble, section 2801 imposes a tax that 
does not equal, and in some cases is not similar to, the tax that would 
have been imposed on the same transfer by a U.S. transferor. The 
effective tax rate on covered gifts under section 2801 as compared to 
the effective tax rate on taxable gifts under chapter 12 is another 
example of this. While Congress could have allowed a covered expatriate 
to elect to treat a covered gift of non-U.S. situs property as a 
transfer of U.S. situs property, it did not do so. (But see section 
2801(e)(4)(B)(iii) allowing foreign trusts to elect to be treated as a 
domestic trust for purposes of section 2801). The statute does not 
provide any reasonable regulatory interpretation that the section 2801 
tax on covered gifts should be levied on less than the entire amount of 
the covered gift, and the statute does not contemplate a regulatory 
rule allowing for a deduction or exclusion to estimate a tax exclusive 
section 2801 tax rate. Accordingly, these final regulations do not 
adopt the commenters' suggestion as it would be contrary to the 
statute.

[[Page 3384]]

B. Section 2801(c) Amount
    Section 28.2801-3(d) of the proposed regulations provides that the 
recipient of a covered gift or covered bequest made to a trust is the 
trust and not any individual who holds a general power of appointment 
or power of withdrawal over trust property. Several comments recommend 
that the final regulations treat a transfer to a trust as a transfer to 
an individual to the extent of the individual's general power or 
withdrawal right. The comments acknowledge that this would increase the 
section 2801(c) amount available to shield a covered gift or covered 
bequest from the section 2801 tax when multiple individuals have 
withdrawal rights, but state this treatment is consistent with the 
treatment of withdrawal rights under gift tax principles and thus 
furthers the statutory goal of tax neutrality. See part 1 of the 
Summary of Comments and Explanation of Revisions section of this 
preamble for a discussion of the ``tax neutral'' objective stated in 
H.R. Rep. No. 110-431 with regard to an earlier, pre-HEART Act, bill. 
One comment suggests that there is no authority to deny the status of 
recipient to the holder of a withdrawal right. For the reasons stated 
below, these final regulations do not adopt the commenters' 
recommendation.
    The holder of a withdrawal right over trust property is the holder 
of a general power of appointment. For gift tax purposes, neither the 
grant nor the receipt of a general power of appointment is treated as a 
taxable gift; rather, it is the possession of such a power at death, or 
the exercise or release of such a power that is a taxable event for 
gift and estate tax purposes. Thus, the proposed treatment of a general 
power of appointment--that is, not as the receipt of a covered gift or 
bequest--is consistent with transfer tax principles. In addition, while 
section 2801 is silent on the treatment of general powers of 
appointment, section 2801(e)(4) provides specific rules applicable to a 
covered gift or covered bequest made to a domestic or electing foreign 
trust: specifically, the section 2801 tax is imposed on the recipient 
trust. Implementing the recommendation proposed by the commenters would 
violate the provisions of section 2801(e)(4)(A)(ii) requiring that the 
tax imposed on a covered gift or covered bequest made to a domestic 
trust be paid by that trust. By, in effect, defining the donee domestic 
trust as the recipient of the covered gift or covered bequest, the 
statute imposes the filing and tax payment obligations on the domestic 
trust, regardless of the identity and rights of the trust 
beneficiaries. As a result, the receipt of property by the domestic 
trust does not have to be reported by and taxed to both the trust and 
each holder of a general power of appointment or withdrawal right over 
trust property. Treating each such power holder as an additional 
recipient at the time of the trust contribution would add 
administrative complexity and burden both to taxpayers and the IRS.
    Similarly, under section 2801(e)(4)(B), it is the recipient of a 
distribution from a non-electing foreign trust who is treated as the 
recipient of the covered gift or covered bequest to the trust. No 
section 2801 tax is imposed on covered gifts or covered bequests to a 
non-electing foreign trust until a trust distribution is made to a U.S. 
recipient. It is the property distribution pursuant to the exercise, 
release, or lapse of a general power of appointment over such a trust, 
rather than the grant of such a power, that is a distribution 
triggering the imposition of the section 2801 tax.
    As a result, in the case of a transfer to a trust, a domestic trust 
is the recipient who is entitled to reduce the value of a covered gift 
or covered bequest received during the calendar year by the section 
2801(c) amount. These rules also apply to an electing foreign trust.
    Finally, comments request guidance for trusts in the potential 
situation where a domestic trust or an electing foreign trust may be 
unable to pay the section 2801 tax upon the exercise of an individual 
withdrawal right. Such a situation, where the trustee is faced with 
balancing the obligation to satisfy tax obligations with the duty to 
make distributions as directed by the trust instrument, is not unique 
to the section 2801 tax (for example, an obligation to satisfy an 
estate tax obligation may conflict with a specific bequest, or an 
obligation to satisfy a GST tax obligation may conflict with a 
distribution provision to a trust beneficiary). Given the broader 
issues concerning a trustee's duty to administer a trust, such issues 
are better addressed in more comprehensive regulations and are 
therefore beyond the scope of these final regulations.
C. Foreign Gift or Estate Tax
    Consistent with section 2801(d), Sec.  28.2801-4(e) of the proposed 
regulations provides that the section 2801 tax is reduced by the amount 
of any gift or estate tax paid to a foreign country with respect to a 
covered gift or covered bequest. Pointing to section 2014(a), which 
allows a credit against estate tax for any estate, inheritance, legacy, 
or succession taxes paid to any foreign country, two comments suggest 
that, in the interest of tax neutrality, these final regulations also 
allow a reduction for any foreign tax imposed on a covered gift or 
covered bequest that is similar to, but imposed in lieu of, a gift or 
estate tax, such as an inheritance tax or a deemed capital gains tax. 
See part 1 of the Summary of Comments and Explanation of Revisions 
section of this preamble for a discussion of the ``tax neutral'' 
objective stated in H.R. Rep. No. 110-431 with regard to an earlier, 
pre-HEART Act, bill. These final regulations do not adopt the 
commenters' suggestion, because the plain language of section 2801(d) 
unambiguously limits the reduction to the amount of gift or estate tax 
paid to a foreign country with respect to a covered gift or covered 
bequest and does not contain the kind of statutory language that 
appears in section 2014.
    A comment also suggests that these final regulations allow a refund 
of the section 2801 tax if foreign gift or estate tax is paid after 
payment of the section 2801 tax. In such a scenario, a refund is 
available under section 6511 if the U.S. recipient files a claim for 
refund or a protective claim for refund on or before the expiration of 
the applicable period of limitations. To confirm the U.S. recipient's 
ability to file a protective claim for refund, paragraph (e)(2) is 
added to Sec.  28.2801-4 of the final regulations.

5. Value of a Covered Gift or Covered Bequest

    Section 28.2801-4(c) of the proposed regulations defines value 
using transfer tax principles, including the special valuation rules of 
chapter 14 (sections 2701 through 2704). Several comments recommend 
that the final regulations be amended to disregard chapter 14. 
Alternatively, the comments suggest that the value of a covered gift 
should be determined by subtracting from the value of the covered gift 
the total value of any interest retained by a covered expatriate donor, 
without regard to section 2701 or 2702. The comments posit that, 
because the section 2801 tax is payable by the recipient, unlike the 
gift and estate taxes that are payable by the donor or decedent's 
estate, the requested deviation from the usual gift tax valuation rules 
is necessary. However, like the gift and estate taxes, the section 2801 
tax is a transfer tax. The transfer tax valuation rules, therefore, 
including the special valuation rules of chapter 14, apply to value the 
property subject to section 2801. The section 2801 tax is imposed

[[Page 3385]]

on transfers that otherwise would have escaped gift or estate taxation 
as a consequence of the donor's or decedent's expatriation. Revising 
the section 2801 regulations in the suggested manner would decrease the 
value of a covered gift to which sections 2701 and 2702 apply below 
what otherwise would have been its gift tax value had the covered 
expatriate been a U.S. citizen. This result is inconsistent with the 
intended purpose of section 2801, and Congress did not provide an 
exception for the special valuation rules. Thus, the requested 
revisions are not adopted.
    One comment suggests that sections 2701 and 2702 should not apply 
in determining the tax liability of a covered bequest, because those 
sections have no applicability to the estate tax. While the Treasury 
Department and the IRS acknowledge that sections 2701 and 2702 
generally apply only to inter vivos transfers, section 2701(d) provides 
in certain circumstances for a potential increase in the taxable estate 
of a transferor. Accordingly, the final regulations provide that the 
special valuation rules under chapter 14 apply only to the extent those 
rules are applicable to the specific transfer.

6. Date of Receipt of a Covered Gift or a Covered Bequest

    Under Sec.  28.2801-4(d)(2) of the proposed regulations, the date 
of receipt of a covered gift, which is the date the section 2801 tax is 
imposed, generally is determined by reference to the date of the gift 
under chapter 12 principles, as if the covered expatriate had been a 
U.S. citizen at the time of the transfer. In the event of a transfer of 
assets by a covered expatriate to a domestic revocable trust, proposed 
Sec.  28.2801-4(d)(2) provides that the date of receipt of the transfer 
is the date the covered expatriate relinquishes the right to revoke the 
trust. Proposed Sec.  28.2801-4(d)(3) provides that the date of receipt 
of a covered bequest generally is the date the property is distributed 
from the covered expatriate's estate or revocable trust, unless the 
interest passes by operation of law or beneficiary designation, in 
which case the date of receipt is the date of the decedent's death. 
Comments recommend changing the rules regarding the date of receipt for 
both covered gifts and covered bequests.
    With respect to the date of receipt of a covered gift, comments 
point out that the date on which a covered expatriate makes a gift 
often is not the same date on which the property is received by the 
U.S. citizen or resident donee. A discrepancy between those dates can 
impact a recipient's ability to pay the section 2801 tax liability 
because the recipient may not yet have received the economic benefit of 
the gifted property. Comments suggest different methods of determining 
the date of receipt: (1) the date of ``actual'' receipt; (2) the date 
an interest in property becomes possessory; or (3) the date of 
distribution to the U.S. citizen or resident. The third method is 
intended to be comparable to the proposed rule for the date of receipt 
of a covered bequest. A few comments also suggest that the rule 
determining the date of receipt for purposes of the section 2801 tax 
should distinguish between receipt of a present interest in property 
and receipt of a future interest in property. Finally, a comment 
requests that the final regulations further elaborate on the date of 
receipt when a transfer of assets to a domestic revocable trust is an 
incomplete gift, pointing out that relinquishment of the right to 
revoke the trust may not be the trigger that completes the gift.
    With respect to the date of receipt of a covered bequest, some 
comments object to treating interests passing by operation of law or 
beneficiary designation as received on the date of death, rather than 
on the date property is distributed to the recipient. Comments note 
that a decedent's property devolves to heirs at death by operation of 
law in civil law jurisdictions, even though significant time may elapse 
before the heirs' interests become possessory. Again, this delay could 
impact a recipient's ability to pay the section 2801 tax. To address 
these concerns, a few comments suggest defining the date of receipt of 
a covered bequest as the date of actual receipt by the recipient, 
whether a distribution from a decedent's estate or revocable trust or 
the transfer of property by operation of law, beneficiary designation, 
or other contractual arrangement. Another comment suggests that, if the 
date of receipt of a covered bequest is not changed from that 
identified in the proposed regulations, the final regulations should 
include an election to defer payment of the section 2801 tax and 
interest until the recipient's interest becomes possessory. Still 
another comment suggests that, because a date of death valuation is 
likely to be performed on inherited assets for non-section 2801 
purposes, recipients should be able to elect to treat a covered bequest 
as received as of the date of death rather than the date of actual 
distribution to avoid the need for additional appraisals.
    Defining the date of receipt of both a covered gift and a covered 
bequest as the date on which the recipient obtains actual receipt or a 
possessory interest in the transferred property would eliminate the 
concern regarding the recipient's ability to pay the section 2801 tax, 
particularly in civil law jurisdictions where property passes by 
operation of law to heirs at death but distribution is delayed for a 
period during administration of the decedent's estate. However, such a 
definition outside of the context of a distribution from a decedent's 
estate or revocable trust would raise other issues and administrability 
concerns. For instance, in some cases it may be difficult to determine 
the date of actual receipt of a covered gift or covered bequest, such 
as the receipt of a remainder interest in property or, in the case of a 
delay in distribution of property after title has vested in a civil law 
jurisdiction during the period of administration. In cases where 
property is distributed or an interest becomes possessory long after 
the transfer by the covered expatriate, it may be difficult for the 
recipient to obtain the information needed to determine whether the 
transfer is subject to the section 2801 tax and otherwise comply with 
reporting and paying the section 2801 tax. Further, such a definition 
could open the door to possible manipulation of the date of receipt and 
potential abuse, such as planning designed to ensure a covered gift or 
covered bequest is considered non-possessory for an extended period to 
delay and possibly defeat any section 2801 tax liability.
    In most instances, the lengthy amount of time between the date of 
receipt and the due date of the return and payment of the section 2801 
tax, which generally is 17.5 months after the close of the year in 
which the covered gift or covered bequest is received, should be 
sufficient to allow a U.S. recipient to make necessary arrangements to 
timely report and pay any section 2801 tax liability. See Sec.  
28.6071-1(a). Moreover, the rules for transfers in trust satisfactorily 
resolve the potential problems for many situations of deferred 
possession.
    However, for future interests in property that are not held in a 
trust (for example, a remainder interest in real property), the 
Treasury Department and the IRS appreciate the administrative and 
valuation concerns with the proposed definitions of the date of 
receipt. In view of these concerns, Sec.  28.2801-4(d)(8)(i) of the 
final regulations includes a special rule providing that the date of 
receipt of a covered gift or covered bequest of a future interest in 
property that is not held in trust is the earlier of (1) the date the 
future interest is disposed of by the U.S. recipient or (2) the date 
that is the later of the date that the interest vests

[[Page 3386]]

in the U.S. recipient or the date that the last term interest in the 
property held by an intervening recipient terminates. Further, to 
assist recipients both in achieving finality regarding the section 2801 
tax liability and in avoiding the potential for administrative hurdles 
caused by a long delay in receipt, Sec.  28.2801-4(d)(8)(ii) of the 
final regulations provides that the U.S. recipient of a covered gift or 
covered bequest of a future interest in property not held in trust may 
elect to treat the covered gift or covered bequest as having been 
received on the date of receipt of the gift or on the covered 
expatriate's date of death, respectively. To the extent a domestic or 
electing foreign trust receives or may eventually receive a covered 
gift or covered bequest that is a future interest in property that is 
not in trust, such domestic or electing foreign trust may take 
advantage of this election.
    Finally, to provide further clarification on the date of receipt of 
a transfer to a domestic trust or an electing foreign trust that is an 
incomplete gift, a new paragraph is added in Sec.  28.2801-4(d)(4) of 
the final regulations. In the event of a transfer by a covered 
expatriate to a revocable domestic trust or electing foreign trust, the 
date of receipt by the trust is the later of (1) the date the right to 
revoke the trust is relinquished or extinguished and (2) the date of 
extinguishment of all powers over or interests in the trust that would 
prevent the transfer from being a competed transfer for gift tax 
purposes. 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 prevents the 
transfer from being complete, the trust receives the transfer on the 
date all of such powers or interests are extinguished.

7. Non-Electing Foreign Trusts

    The section 2801 tax applies to a distribution attributable to a 
covered gift or covered bequest to a U.S. citizen or resident from a 
non-electing foreign trust. See section 2801(e)(4)(B)(i).
A. Distributions
    Section 28.2801-5(b) of the proposed regulations defines the term 
distribution broadly to include any direct, indirect, or constructive 
transfer from a non-electing foreign trust, including each disbursement 
from such non-electing foreign trust pursuant to the exercise, release, 
or lapse of a power of appointment. In response to some comments, the 
final regulations clarify that a distribution includes a transfer to 
the extent made for less than full and adequate consideration in money 
or money's worth.
    Several comments request clarification as to whether the 
uncompensated use of trust property by, or a loan from a non-electing 
foreign trust to, a U.S. citizen or resident would constitute a 
distribution for section 2801 tax purposes and point out that these are 
treated as distributions for income tax purposes under section 643(i). 
The comments recommend that neither one be treated as a distribution 
for purposes of section 2801 and request that the final regulations 
explicitly state that the deemed distribution rules of section 643(i) 
do not apply for purposes of section 2801. The comments suggest that, 
because there is no specific statutory direction to vary from the 
ordinary definition of distribution, the deemed distribution rules of 
section 643(i) should not be used to interpret the term as used in 
section 2801. The Treasury Department and the IRS agree with the latter 
recommendation to clarify that the deemed distribution rules of section 
643(i) are not adopted as part of the definition of a distribution for 
purposes of section 2801(e)(4)(B)(i). However, that does not mean that 
a loan or use of property cannot be a distribution and thus a covered 
gift. To the extent that a loan from, or the use of property of, a non-
electing foreign trust constitutes a gift under chapter 12 of the Code, 
then the portion of that loan or use received by a U.S. recipient 
constitutes a distribution and thus a covered gift to the extent of the 
trust's section 2801 ratio. The final regulations include this 
clarification.
    One comment recommends that the final regulations provide that a 
loan from a foreign trust which is a qualified obligation under section 
643(i) and Notice 97-34, 1997-1 C.B. 422, should not be treated as a 
distribution for section 2801 tax purposes (even if it otherwise would 
be treated as a distribution using gift tax principles). The final 
regulations provide, as other comments suggest, that distribution 
should not be interpreted using principles from section 643(i), because 
Congress did not indicate that such standards should be used. 
Consistent with this approach of not using section 643(i) principles, 
the suggestion to exclude from the definition of a covered gift or 
bequest this particular category of loans described in section 643(i) 
is not adopted. Comments also recommend that the final regulations 
clarify that the uncompensated use of trust property that is de 
minimis, whether determined by duration or value, does not constitute a 
distribution, noting that it is costly, impractical, and time-consuming 
to value the use of property. Because foreign trusts with U.S. 
beneficiaries already must determine these values for income tax 
purposes (given that there is no de minimis exception under section 
643(i)), taxpayers are not subject to any additional administrative 
burden. Accordingly, this recommendation has not been adopted.
B. Section 2801 Ratio
    Section 28.2801-5(c) of the proposed regulations provides that the 
amount of the distribution attributable to a covered gift or covered 
bequest is determined by multiplying the distribution by a ratio 
(section 2801 ratio) that is redetermined after each contribution to 
the non-electing foreign trust. The proposed regulations explain how to 
compute the section 2801 ratio and provide that each distribution from 
the non-electing foreign trust is considered to be made proportionally, 
without any tracing to particular property.
i. Calculating the Section 2801 Ratio
    While acknowledging that the proposed method for determining the 
section 2801 ratio is based on the existing method for determining the 
inclusion ratio of a trust for GST tax purposes, several comments 
nonetheless object to this methodology, saying that its complexity, 
particularly the requirement to revalue trust property at each 
contribution, would discourage compliance. Comments offer multiple 
suggestions to avoid the complications of a section 2801 ratio of more 
than zero but less than one. Some suggestions involve recognizing 
separate accounting or separate shares within, or the severance of, a 
single trust so that separate section 2801 ratios could apply to the 
separate shares. For instance, such an approach could allow a non-
electing foreign trust to utilize separate accounting for the portion 
of the trust that consists of only covered gifts and covered bequests 
(similar to separate accounting in the GST context under section 
2654(b) and Sec.  26.2654-1(a)(2) of the Generation-Skipping Transfer 
Tax Regulations for portions of a trust attributable to transfers from 
different transferors). Another approach could allow a non-electing 
foreign trust to treat a covered gift or covered bequest earmarked for 
a particular beneficiary as a separate share with a distinct section 
2801 ratio (similar to separate share rules utilized for other tax 
purposes such as Sec.  26.2654-1(a)(1) and Sec. Sec.  1.672(f)-3(b)(3) 
and (d) and 1.663(c)-3 of the Income Tax Regulations). Another approach 
could allow the trustee to sever a trust with a mixed

[[Page 3387]]

section 2801 ratio into two separate trusts, each with a section 2801 
ratio of either zero or one, using the same method provided for 
qualified severances in section 2642(a)(3) and Sec.  26.2642-6.
    The Treasury Department and the IRS recognize that, in the absence 
of an election by the foreign trust to be treated as an electing 
foreign trust, computing and re-computing the section 2801 ratio in the 
event of additional contributions may pose challenges to U.S. 
distributees unless the non-electing foreign trust has a section 2801 
ratio of either one or zero. Nevertheless, a rule recognizing separate 
section 2801 ratios in the event of separate accounting, separate 
shares, or a severance of a single non-electing foreign trust presents 
administrability and enforcement concerns. For instance, because of the 
lack of jurisdiction over a foreign trust, it will be difficult to 
verify whether a single trust consists of substantially separate and 
independent shares with no commingling of trust assets and whether a 
qualified severance was done in a manner that complies with rules 
similar to Sec.  26.2642-6. Although certain reporting and other 
administrative requirements are imposed in order for separate 
accounting, separate shares, and qualified severances to be recognized, 
no similar reporting or other administrative requirements could be 
enforced against the trustee of a non-electing foreign trust. 
Furthermore, the proposal to allow for separate accounts that are not 
actually separated into different shares or trusts similar to section 
2654(b) would not eliminate the need for revaluation at each 
contribution, because revaluation would be necessary after each 
contribution in order to determine the portion of the trust allocable 
to each account. See Sec.  26.2654-1(a)(2)(ii) (requiring the 
computation of a fraction that utilizes fair market valuations of the 
trust as well as of the portions treated as separate trusts). 
Accordingly, the final regulations do not adopt the commenters' 
suggestions related to separate accountings similar to that provided in 
section 2654(b) and Sec.  26.2654-1(a)(2), separate shares similar in 
concept to those recognized in Sec.  26.2654-1(a)(1) and Sec. Sec.  
1.672(f)-3(b)(3) and (d) and 1.663(c)-3, or severance of a single trust 
similar to qualified severances described in section 2642(a)(3) and 
Sec.  26.2642-6.
    Another comment suggests allowing a non-electing foreign trust to 
treat as a separate share gifts and bequests received prior to the 
effective date of section 2801. As is explained in part 7.B.ii. of the 
Summary of Comments and Explanation of Revisions section of the 
preamble, such receipts are not included in the definition of a covered 
gift or covered bequest. Because the final regulations provide that 
such receipts are merely another example of noncovered receipts, this 
suggestion is not adopted for the same administrability concerns 
identified in the prior paragraph. See Sec.  28.2801-2(f) and -2(g) and 
Example 3 of Sec.  28.2801-5(e) of these final regulations.
    One comment suggests that separate accounting for the purpose of 
recognizing separate section 2801 ratios be permitted in the event a 
covered expatriate's contributions to a non-electing foreign trust can 
be traced to specific assets. Another comment recommends that the final 
regulations adopt a rule that would treat a distribution from a non-
electing foreign trust as made either first or last from a covered gift 
or covered bequest, similar to the income tax treatment of certain 
inventory under sections 471 and 472, or in a manner analogous to the 
tiers applicable to distributions from a charitable remainder trust. 
Requiring the tracing or tracking of specific trust assets has the 
potential to be more onerous to administer than the section 2801 ratio, 
especially as trust property produces income, is reinvested, or 
otherwise changes form over time, and to the extent it is commingled or 
reinvested with other assets. Additionally, because the IRS has no 
jurisdiction over the foreign trustee, it would be difficult to verify 
that the assets were being traced or tracked properly. Given these 
administrability concerns, these suggestions are not adopted.
    One comment suggests that the final regulations permit a non-
electing foreign trust to use the value of each contribution to the 
trust as of the date of its contribution to compute the section 2801 
ratio, thus eliminating the need for revaluations at the time of each 
subsequent contribution. However, as the comment acknowledges, 
computing the section 2801 ratio using contributed values is a less 
desirable alternative because, although simpler to administer, it would 
be far from accurate, so this suggestion has not been adopted.
    The Treasury Department and the IRS recognize that calculation of a 
foreign trust's section 2801 ratio may be complicated when a single 
trust receives contributions attributable to both covered gifts or 
covered bequests and non-covered gifts or non-covered bequests at 
different points in time. In some circumstances, the complexity can be 
eliminated by establishing separate trusts and making covered gifts or 
covered bequests to one trust and non-covered gifts and non-covered 
bequests to the other trust. The Treasury Department and the IRS 
recognize that this might not always be possible or practical, 
particularly in the event of one or more transfers to a non-electing 
foreign trust as a result of the death of a covered expatriate. 
However, for the reasons previously stated, the final regulations 
retain the section 2801 ratio concepts enumerated in the proposed 
regulations.
ii. Inadequate Information To Calculate Section 2801 Ratio
    Section 28.2801-5(c)(3) of the proposed regulations provides that, 
if the trustee of the foreign trust does not have sufficient books and 
records to calculate the section 2801 ratio, or if the U.S. recipient 
is unable to obtain the necessary information with regard to the 
foreign trust, the U.S. recipient must proceed upon the assumption that 
the entire distribution for purposes of section 2801 is attributable to 
a covered gift or covered bequest. Some comments object to this 
assumption, contending that it is unduly harsh in that U.S. recipients 
of foreign trust distributions may be unable to determine the section 
2801 ratio despite their best efforts. Comments also suggest applying a 
presumption under which property acquired by a non-electing foreign 
trust prior to June 17, 2008, would be presumed not to be a covered 
gift or covered bequest, and property acquired on or after that date 
would be presumed to be a covered gift or covered bequest.
    The Treasury Department and the IRS are persuaded that the entire 
trust should not be assumed to have a section 2801 ratio of one merely 
because the U.S. recipient cannot determine whether certain transfers 
are attributable to covered gifts and covered bequests. Accordingly, 
the final regulations retain the rule in the proposed regulations, but 
clarify that the assumption applies only to the extent the section 2801 
ratio cannot be substantiated. See Sec.  28.2801-5(c)(3) of these final 
regulations. For instance, even if the U.S. recipient lacks adequate 
information to determine whether certain transfers to a non-electing 
foreign trust are covered gifts or covered bequests, the U.S. recipient 
can still treat other transfers to the non-electing foreign trust as 
not being covered gifts or covered bequests if the U.S. recipient has 
adequate information to show that those transfers are not covered gifts 
or covered bequests. Additionally, the final regulations clarify that 
the assumption that a distribution is attributable to a covered gift or 
covered bequest can be rebutted

[[Page 3388]]

to the extent the taxpayer can supply information sufficient to 
persuade the Commissioner that the assumption is not correct.
    As to the suggestion to apply a presumption about property acquired 
by a non-electing foreign trust prior to the effective date of section 
2801, the Treasury Department and the IRS agree that the final 
regulations should clarify the status of pre-enactment contributions to 
non-electing foreign trusts. However, rather than a presumption, the 
final regulations update the definitions of covered gift and covered 
bequest to clarify that such terms include only gifts and bequests made 
to the non-electing foreign trust after the effective date of section 
2801. Thus, property attributable to a covered gift or covered bequest 
does not include pre-section 2801 contributions to the non-electing 
foreign trust. See Sec.  28.2801-2(f) and -2(g) and Example 3 of Sec.  
28.2801-5(e) of these final regulations.
    Other comments propose that a U.S. recipient of a distribution from 
a non-electing foreign trust may use any reasonable method to estimate 
the section 2801 ratio based on the information available, such as 
affidavits from persons with relevant knowledge and reasonable 
assumptions regarding growth rates, contributions, and other pertinent 
information. The adequacy of the method and information used to compute 
the section 2801 ratio to avoid application of the assumption is most 
appropriately determined on a case-by-case basis. Accordingly, these 
final regulations do not contain a detailed list of the types of 
information, and the combinations thereof, that may be used to 
calculate the section 2801 ratio and rebut the presumption in Sec.  
28.2801-5(c)(3) of the final regulations.
    One comment suggests that the burden to establish the section 2801 
ratio should shift to the IRS if the U.S. recipient (i) affirms under 
penalties of perjury that best attempts were made to obtain necessary 
information, (ii) discloses all relevant information that the U.S. 
recipient has to the IRS, and (iii) identifies parties believed to have 
the necessary information. The Treasury Department and the IRS 
acknowledge that U.S. recipients of distributions from non-electing 
foreign trusts whose trustees do not keep proper records, or who do not 
cooperate with the U.S. recipients, may end up computing their section 
2801 tax using an overstated section 2801 ratio. However, because all 
the information is in the hands of the trustees of the foreign trust 
(over which the IRS is unlikely to have any jurisdiction) and the IRS 
has limited ability to independently determine the section 2801 ratio 
of a non-electing foreign trust, leaving the burden of proof with the 
U.S. recipient more likely ensures that section 2801 tax is levied on 
all covered gifts and covered bequests. Accordingly, the final 
regulations do not adopt the suggestion to shift the burden in 
establishing the section 2801 ratio to the IRS.
iii. Impact of Section 2801(c) Amount on Section 2801 Ratio
    One comment requests clarification on when a section 2801 tax is 
deemed to have been paid and suggests that an example be added to the 
final regulations. Section 28.2801-5(c)(2) of the proposed regulations 
provides that, once a section 2801 tax has been timely paid on property 
that thereafter remains in a foreign trust, that property is no longer 
considered to be, or to be attributable to, a covered gift or covered 
bequest to the foreign trust for purposes of determining the trust's 
section 2801 ratio. Section 28.2801-5(c)(2) of the proposed regulations 
further provides that a section 2801 tax is deemed to have been timely 
paid on amounts for which no section 2801 tax was due as long as those 
amounts were reported as a covered gift or covered bequest on a timely 
filed Form 708. The final regulations clarify in Sec.  28.2801-5(c)(1) 
that, because a non-electing foreign trust itself is not taxed on its 
receipt of covered gifts and covered bequests, the trust is not 
entitled to the exclusion under section 2801(c); instead, the section 
2801(c) exclusion is allowed to the U.S. recipient with regard to 
distributions from the non-electing foreign trust. In addition, the 
final regulations expand an example to illustrate this situation. See 
Example 4 of Sec.  28.2801-5(e) of the final regulations. In addition, 
section 28.2801-5(c)(2) of the final regulations also is modified to 
provide that section 2801 tax is deemed to have been timely paid on 
amounts for which no section 2801 tax was due as a result of the 
section 2801(c) amount, whether or not those amounts were reported as a 
covered gift or covered bequest on a timely filed Form 708.
C. Income Tax Deduction for Section 2801 Tax on Certain Distributions
    Section 2801(e)(4)(B)(ii) allows a U.S. recipient of a distribution 
from a non-electing foreign trust to deduct under section 164 the 
section 2801 tax imposed on the portion of the distribution included in 
the U.S. recipient's gross income for the year. Section 28.2801-
4(a)(3)(ii) of the proposed regulations provides instructions for 
calculating the amount of this deduction. That income tax deduction is 
available for the year in which the section 2801 tax is paid. 
Commenters questioned whether an accumulation distribution, taxable to 
a U.S. person in a given year, is to be included in this reference to 
``gross income'' when computing this deduction.
    Section 662(a), in effect, determines how to determine the portion 
of a trust's distributable net income (DNI) that is taxable to each 
beneficiary of the trust in a given year. That section provides that 
the gross income of a beneficiary of a complex trust includes both 
amounts required to be distributed to the beneficiary and amounts 
properly distributed to the beneficiary. That section and Sec.  
1.662(a)-3(c) provide that a beneficiary receiving such a distribution 
in a given year will recognize the distribution as gross income only to 
the extent the distribution is made out of the trust's DNI for the 
year.
    Under section 665, a foreign trust's distribution to a beneficiary 
of income that exceeds that trust's DNI for the year is a distribution 
of income earned by the trust in a prior year, which is an accumulation 
distribution that is comprised of undistributed net income (UNI). That 
amount, therefore, would not be included in the reference to gross 
income as used in section 662(a).
    Section 667(a) provides that a beneficiary receiving such an 
accumulation distribution must include that distribution as income in 
the year the distribution is received but must compute the tax on that 
distribution (to the extent it would have been included in the 
beneficiary's income under section 662) as though it had been received 
in a preceding taxable year. Section 667 provides the mechanism to 
compute the applicable income tax and interest charge on the 
distribution (throwback tax).
    One comment suggests that the final regulations permit a deduction 
under section 164 of the full amount of the section 2801 tax paid on an 
accumulation distribution. The comments observe that, if any portion of 
a distribution from a non-electing foreign trust is attributable to a 
covered gift or covered bequest and is an accumulation distribution, 
the aggregate amount of the section 2801 tax and the throwback tax 
might exceed the amount of the distribution.
    Other comments suggest limiting the total tax liability under 
section 2801 and the throwback tax on a specific distribution to the 
amount of the distribution. One comment suggests this

[[Page 3389]]

might be achieved by reducing the amount of the distribution that is 
treated as an accumulation distribution. The final regulations do not 
adopt the commenters' suggestions that involve limiting the total tax 
liability, other than through a deduction under section 164 as provided 
in section 2801(e)(4)(B)(ii) and described above. There is no mechanism 
under the income tax rules to re-classify an accumulation distribution 
as DNI because an accumulation distribution is, by definition, income 
in excess of DNI. Section 2801 does not limit the total tax liability 
under that section or the throwback tax.
    Although section 2801(e)(4)(B)(ii) uses the term gross income, that 
section merely limits the available tax deduction to tax paid on income 
that was subjected to income tax. The reference to gross income does 
not reference any particular definition of that term and thus does not 
appear to create a distinction between different types of taxable 
income. For that reason, the final regulations provide that the 
reference to gross income in this section includes all forms of income 
subject to income tax in that year, including an accumulation 
distribution.
    Section 28.2801-4(a)(3)(ii) of the proposed regulations provides 
that the deduction under section 164 provided in section 
2801(e)(4)(B)(ii) is available in the year in which the tax is paid or 
accrued. As a result, a cash method taxpayer will be entitled to the 
deduction only in the tax year in which the section 2801 tax is paid. 
Several comments suggest that the deduction instead should be available 
to a cash method taxpayer in the year the distribution is received and 
subject to income tax. The final regulations do not adopt this 
suggestion for the following reasons. Both section 2801(e)(4)(B)(ii) 
and section 164(a) allow the deduction only in the year in which the 
tax is paid or accrued, and references in the Code to items accrued 
generally do not apply to cash basis taxpayers. Congress has not 
provided a special rule (such as section 164(b)(4)(B) or 691(c), for 
example) allowing the deduction in the year of the distribution. 
Additionally, allowing the deduction in the year of the distribution 
for cash method taxpayers would be administratively difficult because 
the section 2801 tax for a distribution from a non-electing foreign 
trust attributable to a covered gift or covered bequest generally is 
due in the calendar year after the income tax attributable to that 
distribution is due (17.5 months after the close of the calendar year 
of receipt versus 3.5 months after the close of the calendar year). 
Although the deduction for section 2801 tax paid cannot be taken 
against the income carried out from the distribution attributable to 
the covered gift or bequest, the deduction can be taken against income 
in the year the section 2801 tax is paid (including against 
distributions of accumulated income). Accordingly, the final 
regulations retain the rule in the proposed regulations that the 
deduction under section 164 is available only in the year the section 
2801 tax is paid or accrued.

8. Election by Foreign Trust To Be Treated as Domestic Trust

    Section 2801(e)(4)(B)(iii) allows a foreign trust to elect to be 
treated as a domestic trust solely for purposes of section 2801. That 
election may be revoked with the consent of the Secretary of the 
Treasury or her delegate, but also may be terminated by the trust's 
failure to comply with the requirements for maintaining a valid 
election. An election to be treated as a domestic trust causes the 
electing foreign trust to become liable for the section 2801 tax 
liability on covered gifts and covered bequests received by the trust, 
thus relieving each U.S. citizen or resident receiving a trust 
distribution attributable to such covered gifts or bequests from that 
tax liability.
A. Reporting Requirements
    Section 28.2801-5(d)(4) of the proposed regulations provides that 
the trustee of an electing foreign trust must file a timely Form 708 
annually either to report and pay the section 2801 tax on all covered 
gifts and covered bequests received by the trust during the calendar 
year, or to certify that the electing foreign trust did not receive any 
covered gifts or covered bequests during the calendar year. One comment 
requests that the final regulations eliminate the requirement to file a 
Form 708 for years in which no covered gift or covered bequest was 
received. The Treasury Department and the IRS agree that the trustee's 
requirement to certify annually that the electing foreign trust did not 
receive any covered gifts or bequests creates a burden that outweighs 
the benefit to the enforcement and administration of the section 2801 
tax. Accordingly, the final regulations do not require annual reporting 
for electing foreign trusts. Instead, reporting will be required only 
by an electing foreign trust for years in which the total value of the 
covered gifts and covered bequests received by the electing foreign 
trust in that year exceeds the section 2801(c) amount for that year.
    Section 28.2801-5(d)(3)(ii) of the proposed regulations details the 
requirements for a valid election. Among these is the requirement to 
notify and provide to the IRS information on each U.S. citizen or 
resident who is a permissible distributee of the trust. For this 
purpose, a permissible distributee is a U.S. citizen or resident who 
either may or must receive trust distributions, has a right (whether 
current or future) to withdraw income or principal from the trust, or 
would have been so described if either the trust or the interest of all 
persons so described had just terminated. Comments observe that this 
requirement is burdensome, infringes upon disclosure and privacy 
standards, and requests information that is not required to ensure that 
the tax is adequately administered. One comment suggests revising the 
requirements for making the election to be treated as a domestic trust 
so that only beneficiaries that have received distributions during the 
relevant period must be identified on Form 708. Another comment 
suggests adopting the standards devised for the Foreign Account Tax 
Compliance Act (FATCA) information reporting under sections 1471 and 
1472, so that only beneficiaries who actually receive a distribution or 
who have a mandatory payment right during the relevant period must be 
identified on Form 708.
    It is necessary for the trustee to provide information to the IRS 
on all U.S. citizens or residents who may receive distributions from 
the trust, because those persons may have to pay tax under section 2801 
if the election terminates. Although the Treasury Department and the 
IRS are sensitive to the policy concerns of the commenters, this 
concern is outweighed by the IRS's need to obtain information from the 
trustee that would be necessary to assure the collection of tax should 
the election terminate. Additionally, because the final regulations do 
not require annual filings in the absence of the receipt of a covered 
gift or covered bequest by the electing foreign trust, as the proposed 
regulations did, an electing foreign trust's most recent return may be 
filed many years before the termination of the election (for example, 
if the election terminates for failure to pay 2801 tax or to file a 
return in a year that a contribution is made to the trust). In that 
event, the commenter's request would deprive the IRS of needed 
information about the actual distributees in the year of the 
termination of the election. Accordingly, the final regulations retain

[[Page 3390]]

the definition of permissible distributee under the proposed 
regulations.
    Section 28.2801-5(d)(3)(iv) of the final regulations confirms that 
the appointment of the required U.S. agent is made by filing Form 2848, 
Power of Attorney and Declaration of Representative, or as may be 
directed otherwise in IRS forms or publications. Merely confirming the 
name and identifying information of that agent on the electing trust's 
Form 708 is not sufficient for this purpose.
B. Termination of Electing Foreign Trust Status
    Under Sec.  28.2801-5(d)(5)(ii) of the proposed regulations, an 
election to be treated as a domestic trust is terminated by the failure 
of the foreign trust to timely file Form 708 or timely pay any required 
section 2801 tax. The termination is effective as of the first day of 
the calendar year for which the failure occurs.
    A comment suggests that the trustee of an electing foreign trust 
should be permitted to cure the late filing of Form 708 and/or late 
payment of the section 2801 tax to avoid the retroactive termination of 
the foreign trust's election to be treated as a domestic trust for 
purposes of the section 2801 tax. The comment contends that an 
opportunity to cure is needed to avoid placing a reporting burden on a 
U.S. citizen or resident who received a distribution during the year 
for which the election is being terminated.
    As provided in paragraph 8.A. of the Summary of Comments and 
Explanation of Revisions section of this preamble, the final 
regulations do not require annual filings for electing foreign trusts 
for years in which the electing foreign trust receives no covered gifts 
or covered bequests. Accordingly, under the final regulations, an 
electing foreign trust's election will not terminate for the failure to 
file a Form 708 for such a year. The final regulations, however, 
require that, unless the total value of the covered gifts and covered 
bequests received by the electing foreign trust in a calendar year does 
not exceed the section 2801(c) amount, the trustee of an electing 
foreign trust must report all covered gifts and covered bequests 
received during that calendar year on a timely filed Form 708 and 
timely pay the section 2801 tax in full. Because the IRS may lack 
jurisdiction to assess tax on a foreign trustee, voluntary payment by 
the foreign trustee is the only way to ensure collection of section 
2801 tax on an electing foreign trust. If the foreign trustee fails to 
pay the section 2801 tax, then the section 2801 tax must be collected 
from the U.S. recipient to ensure collection. Providing a grace period 
to file a return and make a payment of tax beyond the original due date 
of the required return to provide the suggested opportunity to cure is 
not tenable because the identity of the taxpayer during this period 
would be uncertain, creating confusion and delaying finality as to 
whether the U.S. beneficiaries of the trust or the trustee of the trust 
is responsible for the payment of the section 2801 tax. In addition, 
providing such a grace period could encourage trustees to delay payment 
to the end of the grace period, notwithstanding that the original due 
date for such payment already is more than 17.5 months after the close 
of the year in which the covered gift or covered bequest was received. 
For these reasons, the regulations provide that, unless the total value 
of the covered gifts and covered bequests received by the electing 
foreign trust in a calendar year does not exceed the section 2801(c) 
amount, the failure to report all covered gifts and covered bequests 
received on a timely filed Form 708 or to timely pay the section 2801 
tax in full will result in the termination of the foreign trust's 
election. The final regulations in Sec.  28.2801-5(d)(5)(ii)(A)(3) 
further provide a method for the trust to affirmatively terminate its 
election to be treated as a domestic trust for purposes of section 
2801.
C. Dispute as to Amount of Section 2801 Tax Owed
    Section 28.2801-5(d)(6)(i) of the proposed regulations describes 
the process for resolving or otherwise accounting for proposed 
adjustments to the amount of the section 2801 tax owed by an electing 
foreign trust. The proposed procedure entails the IRS notifying the 
trustee of the foreign trust of the additional tax due, including any 
penalties and interest, and the due date of payment. If the trustee of 
the electing foreign trust and the IRS are unable to come to an 
agreement and the trustee fails to timely pay the additional tax and 
other asserted amounts by the stated due date, then the election is 
terminated retroactively, effective as of January 1 of the year for 
which the Form 708 was filed and is converted as of that same date to 
an imperfect election. Any additional value determined by the IRS on 
which the foreign trust did not timely pay the section 2801 tax then is 
treated as a covered gift or covered bequest to the trust and should be 
taken into account as a covered gift or covered bequest by a U.S. 
recipient in computing the section 2801 ratio applicable to any 
distribution from the trust, although that valuation adjustment is an 
issue that may be challenged or otherwise resolved on examination of 
that U.S. recipient's Form 708 reporting a distribution.
    Comments suggest that the final regulations provide the same 
opportunity, procedures, and rights to the electing foreign trust as 
are applicable to any other U.S. taxpayer, with regard to any challenge 
to the IRS's determination of value. One comment recommends that the 
IRS issue a statutory notice of deficiency to make possible these 
administrative and judicial review processes. Another comment suggests 
that allowing the electing foreign trust to resolve these valuation 
issues with the IRS would avoid the possibility that different trust 
beneficiaries might reach different resolutions of the same issue as 
their individual Forms 708 are separately examined by the IRS.
    Establishing a statutory notice of deficiency process for resolving 
or otherwise addressing proposed adjustments to the amount of the 
section 2801 tax owed by an electing foreign trust would have a harmful 
effect on the IRS's ability to collect any unpaid deficiency, even a 
deficiency that has been reduced to judgment, given the IRS's lack of 
jurisdiction over the trustees and assets of a foreign trust. 
Additionally, if the foreign trust in such a situation refuses to pay 
the deficiency, it is not clear that the IRS would have the ability to 
assert transferee liability against a U.S. citizen or resident 
receiving distributions from the trust under section 6901 or 31 U.S.C. 
3713. Therefore, allowing the continued validity of the election 
despite an unresolved dispute or unpaid tax and issuing a statutory 
notice of deficiency would jeopardize the IRS's ability to collect the 
unpaid deficiency from either the foreign trust or the U.S. recipient 
of a trust distribution.
    Given the jurisdictional limitations and because the statute 
contemplates that the section 2801 tax will be paid by the electing 
foreign trust, the proposed procedures for handling disputes involving 
electing foreign trusts are the practical approach and strike the 
appropriate balance of fairness, administrability, and enforcement of 
the section 2801 tax. However, the final regulations improve 
administrability by clarifying in Sec.  28.2801-5(d)(6)(i) that the 
payment of any additional amount of section 2801 tax must be made 
either by the due date specified in the letter or the due date 
otherwise agreed to by the Commissioner. Note that the procedures as 
finalized also include the availability of a reasonable cause defense 
to the

[[Page 3391]]

imposition of failure to file and failure to pay penalties under 
section 6651 on the U.S. recipient's obligations with regard to 
distributions made from the trust. See, for example, Sec.  28.2801-
5(d)(6)(iii)(C) of the final regulations. Thus, the request of the 
commenters is not adopted.

9. Income Tax Effects of Section 2801 Tax

A. Income Tax Basis
    Section 28.2801-6(a) of the proposed regulations provides that the 
recipient's basis in property received as a covered gift is determined 
under section 1015. The proposed regulations further provide that 
section 1015(d) does not apply to increase the basis in a covered gift 
by the amount of the section 2801 tax paid with respect to that covered 
gift. Several comments state that a basis increase should be allowed 
for the section 2801 tax paid with respect to a covered gift based on 
simple fairness and to serve the statutory goal of tax neutrality. One 
comment acknowledges that section 1015(d) is inapplicable to section 
2801 because section 1015(d) applies only to gift taxes paid under 
chapter 12 of the Code, not to the taxes on covered gifts defined in 
chapter 15. However, this comment states that section 164 does apply to 
increase basis in property received as a covered gift by the amount of 
the section 2801 tax paid because section 164(a) treats taxes that have 
been paid but are not deductible under section 164 as part of the 
acquisition cost of the property. As such, the comment concludes that 
payment of the section 2801 tax does increase the recipient's basis in 
the property.
    The comment is correct that the basis adjustment available under 
section 1015(d) is applicable only to gift tax paid under chapter 12. 
Section 2801 does not apply the rule of section 1015(d) to the section 
2801 tax, which is in chapter 15 of subtitle B of the Code. However, 
neither does section 164 provide for an increase in the basis of 
property received as a covered gift by the amount of the section 2801 
tax paid. The flush language in section 164(a) clarifies the treatment 
of certain taxes (other than those enumerated in section 164(a)) that 
are incurred in a trade or business or in an income-producing activity 
and are connected with the acquisition or disposition of property. 
Specifically, such taxes are treated as part of the cost of the 
acquired property or, in the case of a disposition, as a reduction in 
the amount realized on the disposition. See H. Conf. Rept. 99-841 (Vol. 
2), at II-20 (1986), 1986-3 C.B. 20 (Vol. 4); Sleiman v. Commissioner, 
T.C. Memo. 1997-530 at 10. The section 2801 tax paid on the receipt of 
a covered gift or covered bequest does not come within this description 
because, by its nature, it is not a tax that is incurred in a trade or 
business or an income-producing activity.
    The Treasury Department and the IRS understand the general 
proposition of the commenters that allowing a basis increase for the 
section 2801 tax paid with respect to a covered gift would be 
consistent with the rule in section 1015(d) that takes gift tax paid 
into account and thus would further serve the goal of tax neutrality 
and that such a rule might more fairly represent the acquisition cost 
of property received in a covered bequest. However, in order to create 
a special rule for an adjustment to the basis in property subject to 
the section 2801 tax, a statutory amendment to section 1015, 2801, or 
other statutory authority would be needed.
B. Deduction for Portion of Section 2801 Tax Paid Attributable to 
Income in Respect of a Decedent
    Section 691(c)(1) provides that a person who includes an amount of 
income in respect of a decedent (IRD) in gross income under section 
691(a) is allowed as an income tax deduction, for the same taxable 
year, a portion of the estate tax paid by reason of the inclusion of 
that IRD in the decedent's gross estate. A comment likens the estate 
tax paid to the section 2801 tax paid and suggests that, in the 
interest of tax neutrality, the final regulations should allow a U.S. 
recipient to deduct from gross income the portion of the section 2801 
tax paid with respect to an item of IRD, when the amount of IRD is 
included in the U.S. recipient's gross income for the same taxable 
year.
    Although estate tax may be similar to section 2801 tax on the 
receipt of a covered bequest, in section 691(c)(2)(A), Congress 
explicitly defined the term estate tax for purposes of that section as 
the tax imposed on the estate of a decedent under section 2001 or 2101, 
and did not include analogous taxes imposed under other sections of the 
Code such as section 2801. Furthermore, where Congress believed that a 
deduction for section 2801 taxes paid is appropriate, it provided for 
that deduction explicitly. While section 2801(e)(4)(B)(ii) provides for 
an income tax deduction under section 164 for a certain amount of 
section 2801 tax imposed on a distribution from a non-electing foreign 
trust included in gross income that is attributable to a covered gift 
or covered bequest, Congress did not provide an income tax deduction 
under section 691(c) for section 2801 tax that is attributable to IRD.
    Additionally, the method for computing the deduction under section 
691(c)(2) for estate taxes paid uses variables that are not applicable 
to the tax under section 2801. For instance, section 691(c)(1)(A) 
provides a deduction based on the ``net value'' for estate tax purposes 
of all items of IRD described in section 691(a). Section 691(c)(2)(C) 
provides that the net value shall be an amount equal to the excess of 
the estate tax over the estate tax computed without including in the 
gross estate such net value. Therefore, there would be no way to 
calculate the amount of an IRD deduction for section 2801 tax paid 
using the rules provided under section 691. Accordingly, in order to 
establish a similar regime for section 2801, the final regulations 
would need to contain a new set of comprehensive rules for determining 
the amount of a deduction against items of IRD for section 2801 tax 
paid.
    For these reasons, adopting the commenter's suggestion would be 
both impractical and beyond what is provided by statute.

10. Information Reporting Under Sections 6039F and 6048(c)

    Generally, sections 6039F and 6048(c), respectively, require each 
U.S. person (as defined for income tax purposes) who receives a gift or 
bequest from a foreign person or a distribution from a foreign trust to 
report such receipt or transaction by filing Form 3520, Annual Return 
to Report Transactions With Foreign Trusts and Receipt of Certain 
Foreign Gifts. However, Sec.  28.2801-6(c)(1) and (2) of the proposed 
regulations provides that, for purposes of the information reporting 
provisions of sections 6039F and 6048(c), U.S. person is defined to 
include a U.S. citizen or resident, as that term is defined in proposed 
Sec.  28.2801-2(b), which adopts the gift and estate tax meaning of the 
term resident under subtitle B, based on domicile.
    Several comments request that the final regulations revise the rule 
in Sec.  28.2801-6(c) of the proposed regulations to reflect that the 
reporting requirements under sections 6039F and 6048(c) apply to U.S. 
residents as the term U.S. person is defined for income tax purposes. 
See section 7701(a)(30) and (b)(1)(A). Under this suggestion, the scope 
of the reporting requirements on Form 3520 would not be expanded to 
individuals who are U.S. residents for transfer tax purposes but not 
for income tax purposes. The comments point out that these taxpayers 
who are U.S. residents only for transfer tax purposes

[[Page 3392]]

are the same persons (other than an electing foreign trust) who will be 
required to file a Form 708 to report the receipt of a covered gift or 
covered bequest and thus that the proposed expanded scope of the 
reporting requirements would be duplicative and would serve no tax 
enforcement purpose. Consequently, the comments contend that the 
expanded scope of the reporting requirements would serve only to add 
complexity and burden to information reporting and to increase the risk 
of the imposition of penalties.
    The Treasury Department and the IRS agree that the definition of 
U.S. person under section 7701(b)(1)(A) is the appropriate definition 
for purposes of the information reporting requirements under sections 
6039F and 6048. Accordingly, the final regulations provide that the 
information reporting requirements in sections 6039F and 6048(c) apply 
only to U.S. persons within the meaning of section 7701(a)(30), and 
thus only apply to recipients of a covered gift or covered bequest who 
are U.S. persons for income tax purposes. See Sec.  28.2801-6(c)(1) and 
(2) of the final regulations. This will include all U.S. citizens and 
domestic trusts receiving covered gifts and covered bequests, as well 
as U.S. residents as defined for income tax purposes.

11. Determining Responsibility Under Section 2801

    The proposed regulations confirm, in Sec.  28.2801-7(a), that it is 
the responsibility of the U.S. recipient of a gift or bequest from an 
expatriate, or a distribution from a trust funded at least in part by 
an expatriate, to determine whether the expatriate is a covered 
expatriate and whether the gift or bequest is a covered gift or covered 
bequest. Proposed Sec.  28.2801-7(b)(1) further provides that, in some 
circumstances to be described in IRB guidance, the IRS may be permitted 
to disclose return or return information of the donor or decedent 
expatriate upon the request of a U.S. citizen or resident in receipt of 
a gift or bequest from such expatriate. In the event of a living donor 
expatriate, Sec.  28.2801-7(b)(2) of the proposed regulations creates a 
rebuttable presumption that the donor is a covered expatriate and that 
the gift is a covered gift if donor does not authorize the disclosure 
of the donor's relevant return information.
    The proposed rule further provides that a recipient may file a 
protective Form 708 in accordance with procedures set forth in proposed 
Sec.  28.6011-1(b), to start the running of the period of limitations 
for the assessment of any section 2801 tax in the event the recipient 
reasonably concludes that a gift or bequest is not subject to section 
2801.
    Several comments request guidance and suggest additional rules as 
to how a U.S. citizen or resident receiving a gift or bequest may avoid 
penalties and interest for nonpayment or underpayment of the section 
2801 tax if the U.S. recipient incorrectly concludes that section 2801 
does not apply. The comments ask how a recipient can satisfy its 
responsibility to ascertain whether the donor or decedent is a covered 
expatriate, and how to determine whether the gift or bequest is a 
covered gift or covered bequest. These comments note that the ability 
to comply is based on access to a donor's private information that the 
IRS may not be able to provide. These comments predict that the U.S. 
recipient of a gift or bequest may encounter significant impediments to 
gathering the necessary information about the donor or decedent. Thus, 
the comments request that the rebuttable presumption be eliminated, and 
that the final regulations provide a safe harbor for making covered 
expatriate determinations based on facts reasonably available to the 
recipient.
    Comments also request that the final regulations elaborate on the 
acceptable criteria necessary to satisfy the due diligence requirement 
for filing a protective Form 708 as set forth in Sec.  28.6011-1(b) of 
the proposed regulations, to start the running of the period of 
limitations for the assessment of any section 2801 tax, and to avoid 
penalties. For instance, some comments suggest that reliance on a 
certification as to covered expatriate status provided by the living 
donor or the decedent's estate should be sufficient, unless the U.S. 
recipient has reason to believe the certification is false. 
Alternatively, the comment suggests that the expatriate be required, on 
the Form 8854, Initial and Annual Expatriation Statement, filed at the 
time of expatriating, to authorize the IRS to disclose the relevant 
return information to each U.S. recipient of a gift from that 
expatriate. Another comment suggests that requesting certain 
information from the IRS and carrying out a background check on the 
donor or decedent should be sufficient for these purposes. Comments 
also suggest the creation of a searchable database of Forms 8854 that 
would allow the identification of covered expatriates. One comment 
suggests requiring the IRS to have a good faith basis for alleging that 
a donor or decedent is a covered expatriate before assessing a section 
2801 tax because, otherwise, the IRS would be forcing recipients to 
prove a negative even where the IRS may have actual evidence to the 
contrary. Finally, another comment suggests creating a presumption in 
the final regulations that a donor is not a covered expatriate if the 
donor files a Form 709, United States Gift (and Generation-Skipping 
Transfer) Tax Return and provides a copy to the U.S. recipient.
    The Treasury Department and the IRS carefully considered during the 
development and drafting of the proposed regulations the potential 
difficulty a U.S. recipient may face in obtaining the information 
necessary to determine whether it has a tax obligation under section 
2801. For the reasons stated below, the final regulations do not adopt 
the commenters' suggestions.
    Regarding a certification as to covered expatriate status or a 
background check to establish that a gift or bequest is not a covered 
gift or covered bequest from a covered expatriate, requesting 
information from the donor or decedent's estate and the IRS is the most 
tenable option because of the factual nature of the determination and 
jurisdictional limitations with respect to the expatriate. For 
instance, although a certification from the donor or the decedent's 
estate provides some evidence of covered expatriate status, the 
particular facts in a given situation may cause the IRS to require 
corroborating information (for example, in the event of conflicting 
information discovered during examination or otherwise). As to the 
relevance of the filing of a Form 709 by an expatriate, the filing of a 
Form 709 does not suggest a determination as to covered expatriate 
status, although a timely filing supports a determination that a gift 
or bequest is excepted from the definition of a covered gift or covered 
bequest.
    A comment suggests eliminating the rebuttable presumption in 
proposed Sec.  28.2801-7(b)(2) based on the contention that neither 
section 2801 nor the general rule-making authority provided in section 
7805(a) authorize creating a rule that requires U.S. recipients of 
gifts and bequests to demand proof of a living donor's status. The 
Treasury Department and the IRS do not agree that providing a 
rebuttable presumption that, in certain circumstances, a living donor 
is a covered expatriate is beyond its regulatory authority for 
implementing the Congressional mandate of section 2801. A rebuttable 
presumption is not a mandate or final determination. Rather, a 
rebuttable presumption provides an opportunity and an incentive for the

[[Page 3393]]

recipient to overcome the presumption through the exercise of due 
diligence. It is the recipient's responsibility to determine whether 
section 2801 tax liability applies to a transfer received from a donor 
or decedent's estate. In the absence of evidence sufficient to allow 
the recipient to determine whether the donor is a covered expatriate, 
if the living donor refuses to cooperate or otherwise fails to 
authorize the disclosure of relevant return information, the 
presumption is reasonable.
    Finally, additional comments suggest that the IRS take action 
beyond issuing final regulations to make the information about the 
covered expatriate status of the donor or decedent more readily 
accessible. Specifically, comments suggest creating and administering a 
searchable and secure registry or database of expatriates and covered 
expatriates; modifying certain IRS forms (for example, Forms 8821, Tax 
Information Authorization, or Form W-8 BEN, Certificate of Foreign 
Status of Beneficial Owner for United States Tax Withholding and 
Reporting (Individuals)), or creating new ones, to ensure only limited 
information relevant to the covered expatriate status of the donor or 
decedent is provided to the recipient. This would require the 
reconsideration of the retention policies and procedures of certain tax 
forms because section 2801 could require access to decades-old tax 
information.
    The Treasury Department and the IRS understand the potential 
difficulties underlying the commenters' concerns. However, the 
resolution of these concerns also must take into account both the IRS's 
resource constraints and disclosure and privacy concerns. Additional 
procedures, as requested by the commenters, may be forthcoming in 
guidance published in the Internal Revenue Bulletin.

12. Recordkeeping Requirements

    Section 28.6001-1 of the proposed regulations provides that all 
documents and vouchers used in preparing the Form 708 must be retained 
by the person required to file the return so as to be available for 
inspection whenever required. A comment suggests that this retention 
standard be clarified, because it is open-ended and appears not to bear 
any relation to the three-to-six-year period of limitations for 
assessment for such return prescribed in section 6501.
    The retention standard in Sec.  28.6001-1(a) of the proposed 
regulations is the same as the retention standard for both the estate 
and gift taxes under Sec. Sec.  20.6001-1(a) and 25.6001-1(a), 
respectively. This expansive standard is appropriate for estate and 
gift tax, because the records associated with estate and gift tax 
returns can be relevant many years later in the context of a GST tax 
return, a surviving spouse's gift and/or estate tax return, and income 
tax basis, well after the period of limitations for assessment under 
section 6501 has expired for such returns. Additionally, because the 
gift tax and estate tax computations are cumulative in nature, the 
records associated with gift tax returns filed during life may be 
relevant many years later in the preparation and filing of the estate 
tax return.
    The section 2801 tax is less likely than the estate and gift taxes 
to have application for as long a period of time after the period of 
limitations for assessment has expired. Therefore, upon consideration 
of the comments, the Treasury Department and the IRS agree that a less 
expansive retention standard is appropriate for the section 2801 tax. 
Accordingly, the final regulations adopt the more limited income tax 
retention standard under Sec.  1.6001-1(e), which requires 
documentation be retained so long as the contents thereof may become 
material in the administration of any internal revenue law.

13. Miscellaneous

A. Power of Appointment Over Property Not in Trust
    Various sections of the proposed regulations refer to a power of 
appointment over property that is not in trust. Multiple comments 
request an example, explaining that a power of appointment typically is 
over trust property. For purposes of the Code, the classification of an 
arrangement as a trust is determined under Sec.  301.7701-4 rather than 
under local law. Consequently, an arrangement that is classified as a 
trust under local law may not be a trust under the Code. Such an 
arrangement may include a grant of a power to an individual that is in 
substance a power of appointment but, because the arrangement does not 
constitute a trust under the Code, the power of appointment is over 
property that is not in trust. This is merely one example but, given 
the variety of arrangements worldwide that are available to a covered 
expatriate seeking to transfer property by gift or by reason of death, 
there may be several others. Because the determination of whether a 
certain arrangement is a power of appointment not in trust is fact 
specific, the final regulations do not include specific examples of a 
power of appointment over property that is not in trust.
B. Estate and Gift Tax Treaties
    The proposed regulations do not address the effect of estate and 
gift tax treaties on the section 2801 tax, except to explicitly state 
in several examples that the covered expatriate in the example resides 
in a non-treaty country. Several comments request guidance on the 
application of estate and gift tax treaties to section 2801 when a gift 
or bequest is made by a covered expatriate domiciled in a treaty 
country. One comment requests that the final regulations provide that 
section 2801 does not apply to property transfers by covered 
expatriates domiciled in a treaty country.
    Neither the statutory language nor the legislative history of 
section 2801 provides any indication of Congressional intent concerning 
the effect of existing estate and gift treaties on the application of 
section 2801. In the absence of specific language overriding treaties, 
statutes generally are to work in harmony with existing treaties but, 
with the exception of certain treaty obligations in effect on August 
16, 1954, neither the treaty nor the statute has preferential status. 
See section 7852(d). The U.S. currently has estate and gift tax 
treaties with Australia, Austria, Denmark, France, Germany, Japan, and 
the United Kingdom and estate tax-only treaties with Finland, Greece, 
Ireland, Italy, the Netherlands, South Africa, and Switzerland. There 
are also estate tax provisions in the U.S.-Canada income tax treaty. 
The effect of a particular treaty on the application of section 2801 to 
a gift or bequest by a covered expatriate in a treaty country must be 
evaluated on a case-by-case basis when a particular transfer falls 
within the reach of both section 2801 and an estate or gift tax treaty. 
Any unresolved issue at that time as to the effect of a particular 
treaty may be elevated under the competent authority procedures. In 
view of the above, the final regulations do not include guidance on the 
effect of existing gift and estate tax treaties on the application of 
section 2801.
C. Correction in Sec.  28.2801-6(b)
    Section 28.2801-6(b) of the proposed regulations clarifies the 
applicability of the GST tax to certain section 2801 transfers. A 
comment points out that the last sentence of Sec.  28.2801-6(b) of the 
proposed regulations mistakenly refers to the failure to timely file 
and pay the section 2801 tax and suggests this language be replaced 
with a reference to the failure to timely file and pay the estate or 
gift tax under chapters 11 and 12, respectively. In the final 
regulations,

[[Page 3394]]

the last sentence of Sec.  28.2801-6(b) is revised to refer to the 
failure to timely file an estate or gift tax return. See Sec.  28.2801-
3(c)(1) and (2) of the final regulations and part 3.A.i. of the Summary 
of Comments and Explanation of Revisions section of this preamble 
(discussing the accepted recommendation of commenters to remove the 
timely paid requirement from these final regulations).

Effect on Other Documents

    Announcement 2009-57, 2009-29 I.R.B. 158, is obsolete as of January 
14, 2025.

Special Analyses

1. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

2. Paperwork Reduction Act

    The collection of information contained in these final regulations 
under section 2801 is reported on Form 708, United States Return of Tax 
for Gifts and Bequests Received from Covered Expatriates, and has been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control number 1545-2309. The collection of information in these 
final regulations is in Sec. Sec.  28.2801-4(e), 28.2801-5(d), 28.6001-
1, and 28.6011-1.
    The collection of information in Sec.  28.2801-4(e) is required to 
enable the IRS to verify that the U.S. citizens or residents who 
receive covered gifts and covered bequests are entitled to reduce the 
section 2801 tax by certain foreign taxes paid with respect to such 
gifts and bequests and, if so, the amount of the reduction. The 
collection of information is required to obtain a benefit. The likely 
respondents are individuals, domestic trusts, and electing foreign 
trusts.
    The collection of information in Sec.  28.2801-5(d) is required to 
notify the IRS and certain U.S. citizen or resident beneficiaries of a 
foreign trust that the foreign trust is electing to be treated as a 
domestic trust for purposes of section 2801. It also is required for 
the IRS to verify the proper amount of the section 2801 tax due. This 
alerts the IRS and the U.S. citizen or resident beneficiaries that the 
foreign trust will be liable for payment of the section 2801 tax while 
the election is in effect. This collection of information is necessary 
for the proper performance of IRS functions in the collection of the 
section 2801 tax. This collection of information is required to obtain 
a benefit. The likely respondents are foreign trusts.
    The collection of information in Sec.  28.6001-1 is required for 
the IRS to verify the books and records pertaining to covered gifts and 
covered bequests and for the proper performance of IRS functions in the 
collection of the section 2801 tax. It also is required to verify the 
receipt of covered gifts and covered bequests by U.S. citizens or 
residents and the value of such gifts and bequests. This collection of 
information is mandatory. The likely respondents are individuals and 
trusts.
    The collection of information in Sec.  28.6011-1 is required for 
the IRS to verify the receipt of covered gifts and covered bequests and 
other information relevant to the tax imposed under section 2801. This 
collection of information is necessary for the proper performance of 
IRS functions in the collection of the section 2801 tax. This 
collection of information is mandatory. The likely respondents are 
individuals and trusts.
    Estimated total annual reporting burden: 6,000 hours.
    Estimated average annual burden hours per respondent: 1 hour to 
prepare and attach documentation to Form 708 for the reduction of the 
section 2801 tax for foreign taxes paid; 2 hours to elect to treat a 
foreign trust as a domestic trust and notify the U.S. citizen or 
resident beneficiaries; 1 hour to notify the U.S. citizen or resident 
beneficiaries that the election is terminated; and 2 hours to prepare 
taxpayer records and the Form 708 to report the section 2801 tax.
    Estimated number of respondents: 1,000.
    Estimated annual frequency of responses: Annually or less.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books and records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

3. Regulatory Flexibility Act

    It is hereby certified that the collection of information contained 
in these regulations will not have a significant economic impact on a 
substantial number of small entities. These regulations do not affect 
small entities because they apply to individuals and certain trusts. 
Thus, the number of affected small entities is not substantial.

4. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The final regulations do not include any Federal mandate 
that may result in expenditures by State, local, or Tribal governments, 
or by the private sector in excess of that threshold.

5. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive Order.

6. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a major rule, as defined by 5 U.S.C. 804(2).

Availability of Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these regulations are Mayer R. Samuels, 
Daniel J. Gespass, and S. Eva Wolf of the Office of the Associate Chief 
Counsel (Passthroughs and Special Industries).

[[Page 3395]]

However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 28

    Taxes, Expatriate gifts and bequests, Reporting and recordkeeping 
requirements.

Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS amend 26 CFR 
subchapter B as follows:

0
Paragraph 1. Part 28 is added to read as follows:

PART 28--IMPOSITION OF TAX ON GIFTS AND BEQUESTS FROM COVERED 
EXPATRIATES

    Authority:  26 U.S.C. 7805.
    Section 28.2801-0 through 28.2801-7 also issued under 26 U.S.C. 
2801.
    Section 28.6001-1 also issued under 26 U.S.C. 6001.
    Section 28.6011(a)-1 also issued under 26 U.S.C. 6011 and 
6011(a).
    Section 28.6060-1 also issued under 26 U.S.C. 6060 and 6060(a).
    Section 28.6071(a)-1 also issued under 26 U.S.C. 6071 and 
6071(a).
    Section 28.6081-1 also issued under 26 U.S.C. 6081 and 6081(a).
    Section 28.6091-1 also issued under 26 U.S.C. 6091 and 6091(a).
    Section 28.6101-1 also issued under 26 U.S.C. 6101.
    Section 28.6107-1 also issued under 26 U.S.C. 6107 and 6107(c).
    Section 28.6109-1 also issued under 26 U.S.C. 6109 and 6109(a).
    Section 28.6151-1 also issued under 26 U.S.C. 6151.
    Section 28.6694-1 through 28.6694-4 also issued under 26 U.S.C. 
6694.
    Section 28.6695-1 also issued under 26 U.S.C. 6695.
    Section 28.6696-1 also issued under 26 U.S.C. 6696 and 6696(c).
    Section 28.7701-1 also issued under 26 U.S.C. 7701.
Sec.
28.2801-0 Table of contents.
28.2801-1 Tax on certain gifts and bequests from covered 
expatriates.
28.2801-2 Definitions.
28.2801-3 Rules and exceptions applicable to covered gifts and 
covered bequests.
28.2801-4 Liability for and payment of tax on covered gifts and 
covered bequests; computation of tax.
28.2801-5 Foreign trusts.
28.2801-6 Special rules and cross-references.
28.2801-7 Determining responsibility under section 2801.
28.6001-1 Records required to be kept.
28.6011-1 Returns.
28.6060-1 Reporting requirements for tax return preparers.
28.6071-1 Time for filing returns.
28.6081-1 Extension of time for filing returns reporting gifts and 
bequests from covered expatriates.
28.6091-1 Place for filing returns.
28.6101-1 Period covered by returns.
28.6107-1 Tax return preparer must furnish copy of return or claim 
for refund to taxpayer and must retain a copy or record.
28.6109-1 Tax return preparers furnishing identifying numbers for 
returns or claims for refund.
28.6151-1 Time and place for paying tax shown on returns.
28.6694-1 Section 6694 penalties applicable to return preparer.
28.6694-2 Penalties for understatement due to an unreasonable 
position.
28.6694-3 Penalty for understatement due to willful, reckless, or 
intentional conduct.
28.6694-4 Extension of period of collection when tax return preparer 
pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.
28.6695-1 Other assessable penalties with respect to the preparation 
of tax returns for other persons.
28.6696-1 Claims for credit or refund by tax return preparers and 
appraisers.
28.7701-1 Tax return preparer.

PART 28--IMPOSITION OF TAX ON GIFTS AND BEQUESTS FROM COVERED 
EXPATRIATES


Sec.  28.2801-0  Table of contents.

    This section lists the headings in Sec. Sec.  28.2801-1 through 
28.2801-7.

Sec.  28.2801-1 Tax on certain gifts and bequests from covered 
expatriates.

    (a) In general.
    (b) Applicability date.

Sec.  28.2801-2 Definitions.

    (a) Overview.
    (b) U.S. citizen or resident.
    (c) Domestic trust.
    (d) Foreign trust.
    (1) In general.
    (2) Electing foreign trust.
    (3) Non-electing foreign trust.
    (e) U.S. recipient.
    (f) Covered bequest.
    (g) Covered gift.
    (h) Expatriate and covered expatriate.
    (i) Indirect acquisition of property.
    (j) Power of appointment.
    (k) Section 2801 tax.
    (l) Section 2801(c) amount.
    (m) Statutory references.
    (1) Code.
    (2) Subtitle B.
    (n) Applicability date.

Sec.  28.2801-3 Rules and exceptions applicable to covered gifts and 
covered bequests.

    (a) Covered gift.
    (b) Covered bequest.
    (c) Exceptions to covered gift and covered bequest.
    (1) Reported taxable gifts.
    (2) Property reported as subject to estate tax.
    (3) Covered bequest previously subject to section 2801 tax as a 
covered gift.
    (4) Transfers to charity.
    (5) Transfers to spouse.
    (6) Qualified disclaimers.
    (d) Covered gifts and covered bequests made in trust.
    (e) Powers of appointment.
    (1) Covered expatriate as holder of power.
    (2) Covered expatriate as grantor of power.
    (f) Examples.
    (g) Applicability date.

Sec.  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.
    (2) Domestic trust.
    (i) In general.
    (ii) Generation-skipping transfer tax.
    (iii) [Reserved].
    (iv) Migrated foreign trust.
    (3) Foreign trust.
    (i) In general.
    (ii) Income tax deduction.
    (b) Computation of tax.
    (1) In general.
    (2) Net covered gifts and covered bequests.
    (c) Value of covered gift or covered bequest.
    (d) Date of receipt.
    (1) In general.
    (2) Covered gift.
    (3) Covered bequest.
    (4) Domestic trusts and electing foreign trusts.
    (5) Non-electing foreign trusts.
    (6) Powers of appointment.
    (i) Covered expatriate as holder of power.
    (ii) Covered expatriate as grantor of power.
    (7) Indirect receipts.
    (8) Future interest in property not in trust.
    (i) Date of receipt.
    (ii) Date-of-receipt election for future interest in property 
not in trust.
    (e) Reduction of tax for foreign gift or estate tax paid.
    (1) In general.
    (2) Protective claim for refund.
    (f) Examples.
    (g) Applicability date.

Sec.  28.2801-5 Foreign trusts.

    (a) In general.
    (b) Distribution defined.
    (c) Amount of distribution attributable to covered gift or 
covered bequest.
    (1) Section 2801 ratio.
    (i) In general.
    (ii) Computation.
    (2) Effect of reported transfer and tax payment.
    (3) Inadequate information to calculate section 2801 ratio.
    (d) Foreign trust treated as domestic trust.
    (1) Election required.
    (2) Effect of election.
    (3) Time and manner of making the election.
    (i) When to make the election.
    (ii) Requirements for a valid election.
    (iii) Section 2801 tax payable with the election.
    (iv) Designation of U.S. agent.
    (A) In general.
    (B) Role of designated agent.
    (C) Effect of appointment of agent.
    (4) Filing requirement.
    (5) Duration of status as electing foreign trust.

[[Page 3396]]

    (i) In general.
    (ii) Termination.
    (A) Manner of termination.
    (B) Effective date of termination.
    (C) Notice requirements upon termination.
    (iii) Subsequent elections.
    (6) Dispute as to amount of section 2801 tax owed by electing 
foreign trust.
    (i) Procedure.
    (ii) Effect of compliance.
    (iii) Effect of failing to comply (imperfect election).
    (A) In general.
    (B) Notice to permissible distributees.
    (C) Reasonable cause.
    (D) Interim period.
    (7) No overpayment caused solely by virtue of defect in 
election.
    (e) Examples.
    (f) Applicability date.

Sec.  28.2801-6 Special rules and cross-references.

    (a) Determination of basis.
    (b) Generation-skipping transfer tax.
    (c) Information returns.
    (1) Gifts and bequests.
    (2) Foreign trust distributions.
    (3) Penalties and use of information.
    (d) Application of penalties.
    (1) Accuracy-related penalties on underpayments.
    (2) Penalty for substantial and gross valuation misstatements 
attributable to incorrect appraisals.
    (3) Penalty for failure to file a return and to pay tax.
    (e) Applicability date.

Sec.  28.2801-7 Determining responsibility under section 2801.

    (a) Responsibility of U.S. citizens or residents receiving gifts 
or bequests from expatriates.
    (b) Disclosure of return and return information.
    (1) In general.
    (2) Rebuttable presumption.
    (c) Protective return.
    (d) Applicability date.


Sec.  28.2801-1  Tax on certain gifts and bequests from covered 
expatriates.

    (a) In general. Section 2801 of the Internal Revenue Code (Code) 
imposes a tax (section 2801 tax) on covered gifts and covered bequests, 
including distributions attributable to covered gifts and covered 
bequests from non-electing foreign trusts, received by a U.S. citizen 
or resident from a covered expatriate during a calendar year. Domestic 
trusts, as well as electing foreign trusts, are subject to tax under 
section 2801 in the same manner as if the trusts were U.S. citizens. 
See section 2801(e)(4)(A)(i) and (B)(iii). Accordingly, the section 
2801 tax is paid by the U.S. citizen or resident, domestic trust, or 
electing foreign trust that receives the covered gift or covered 
bequest, including distributions attributable to covered gifts and 
covered bequests from non-electing foreign trusts. For purposes of the 
regulations in this part 28 (26 CFR part 28), references to U.S. 
citizens are considered to include domestic trusts and electing foreign 
trusts.
    (b) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  28.2801-2   Definitions.

    (a) Overview. This section provides definitions of terms applicable 
solely for purposes of section 2801 of the Code and the regulations in 
this part 28.
    (b) U.S. citizen or resident. A U.S. citizen or resident is an 
individual who is a citizen or resident of the United States for 
purposes of chapter 11 or 12 of subtitle B, as the case may be, at the 
time of receipt of the covered gift or covered bequest. Furthermore, 
references to a U.S. citizen also include a domestic trust, as well as 
an electing foreign trust. See Sec.  28.2801-1(a).
    (c) Domestic trust. The term domestic trust means a trust defined 
in section 7701(a)(30)(E) of the Code. References to a domestic trust 
include an electing foreign trust.
    (d) Foreign trust--(1) In general. The term foreign trust means a 
trust defined in section 7701(a)(31)(B).
    (2) Electing foreign trust. The term electing foreign trust means a 
foreign trust that has in effect a valid election to be treated as a 
domestic trust for purposes of section 2801. See Sec.  28.2801-5(d).
    (3) Non-electing foreign trust. The term non-electing foreign trust 
means any foreign trust other than an electing foreign trust described 
in paragraph (d)(2) of this section.
    (e) U.S. recipient. The term U.S. recipient means a U.S. citizen or 
resident, a domestic trust, or an electing foreign trust that receives 
a covered gift or covered bequest, whether directly or indirectly, 
during the calendar year. The term U.S. recipient includes a U.S. 
citizen or resident receiving a distribution from a non-electing 
foreign trust if the distribution is attributable (in whole or in part) 
to one or more covered gifts or covered bequests received by the non-
electing foreign trust. See Sec.  28.2801-5(c) to determine the amount 
of a distribution attributable to covered gifts and covered bequests. 
This term also includes the U.S. citizen or resident shareholders, 
partners, or other interest-holders, as the case may be (if any), of a 
business entity that receives a covered gift or covered bequest.
    (f) Covered bequest. The term covered bequest means any property 
acquired by a recipient on or after June 17, 2008, directly or 
indirectly by reason of the death of a covered expatriate, regardless 
of the situs of the property and of whether such property was acquired 
by the covered expatriate before or after expatriation from the United 
States, but only to the extent the property would have been included in 
the covered expatriate's gross estate for Federal estate tax purposes 
if the covered expatriate had been a U.S. citizen immediately before 
death. See paragraph (i) of this section for guidance in determining 
when property is acquired indirectly for purposes of this paragraph 
(f). The term covered bequest also includes any other property that 
would have been included in the covered expatriate's gross estate for 
Federal estate tax purposes (for example, under section 2035 of the 
Code) if the covered expatriate had been a U.S. citizen immediately 
before death, as well as distributions made by reason of the death of a 
covered expatriate from a non-electing foreign trust to the extent the 
distributions are attributable to covered gifts and covered bequests 
made to the non-electing foreign trust on or after June 17, 2008. See 
Sec.  28.2801-3 for additional rules and exceptions applicable to the 
term covered bequest.
    (g) Covered gift. The term covered gift means any property acquired 
by a recipient on or after June 17, 2008, by gift directly or 
indirectly from an individual who is a covered expatriate at the time 
the property is received by the recipient, regardless of the situs of 
such property and of whether such property was acquired by the covered 
expatriate before or after expatriation from the United States. See 
paragraph (i) of this section for guidance in determining when property 
is acquired indirectly for purposes of this paragraph (g). The term 
covered gift also includes distributions made, other than by reason of 
the death of a covered expatriate, from a non-electing foreign trust to 
the extent the distributions are attributable to covered gifts and 
covered bequests made to the non-electing foreign trust on or after 
June 17, 2008. See Sec.  28.2801-3 for additional rules and exceptions 
applicable to the term covered gift.
    (h) Expatriate and covered expatriate. The term expatriate has the 
same meaning for purposes of section 2801 as that term has in section 
877A(g)(2) of the Code. The term covered expatriate has the same 
meaning for purposes of section 2801 as that term has in section 
877A(g)(1). The determination of whether an individual is a covered 
expatriate is made as of the expatriation date as defined in section 
877A(g)(3), and if an expatriate meets the definition of a covered 
expatriate, the expatriate is a covered expatriate for purposes of 
section 2801 at all times after the

[[Page 3397]]

expatriation date. However, an expatriate is not treated as a covered 
expatriate for purposes of section 2801 during any period beginning 
after the expatriation date during which such individual is subject to 
United States estate or gift tax (chapter 11 or chapter 12 of subtitle 
B) as a U.S. citizen or resident. See section 877A(g)(1)(C). An 
individual's status as a covered expatriate will be determined as of 
the date of the most recent expatriation, if there has been more than 
one.
    (i) Indirect acquisition of property. For purposes of paragraphs 
(f) and (g) of this section, an indirect acquisition of property means 
the receipt of an interest in property, gratuitously passed from or 
conferred by the covered expatriate, by or on behalf of the recipient 
through another person, or by a trust or entity in which the recipient 
has an interest, regardless of the means or device employed. Such an 
indirect acquisition includes but is not limited to--
    (1) Property acquired by a recipient through a transfer to a 
corporation or other entity other than a trust or estate, to the extent 
of the ownership interest of the recipient in that corporation or other 
entity;
    (2) Money paid or property distributed by a covered expatriate, or 
distributed from a non-electing foreign trust that received a covered 
gift or covered bequest, in satisfaction of a debt or liability of the 
recipient, regardless of the payee of that payment or distribution;
    (3) Property acquired by or on behalf of a recipient pursuant to 
the exercise, release, or lapse (without regard to the exception in 
section 2041(b)(2) or 2514(e) of the Code) of a non-covered 
expatriate's power of appointment granted by a covered expatriate over 
property not in trust, unless the property previously was subjected to 
section 2801 tax upon the grant of the power or the covered expatriate 
had no more than a non-general power of appointment over that property; 
and
    (4) Property acquired through or from any person not subject to the 
section 2801 tax that is, in substance, a covered gift or covered 
bequest from a covered expatriate.
    (j) Power of appointment. The term power of appointment refers to 
both a general and non-general power of appointment, except as 
expressly limited to one or the other in a particular provision of the 
regulations in this part 28. The term general power of appointment has 
the same meaning as in sections 2041(b)(1) and 2514(c). The term non-
general power of appointment means any power of appointment that is not 
a general power of appointment. For purposes of section 2801, the term 
power of appointment is defined without regard to the exception in 
section 2041(b)(2) or 2514(e).
    (k) Section 2801 tax. The term section 2801 tax has the meaning 
provided in Sec.  28.2801-1(a).
    (l) Section 2801(c) amount. The term section 2801(c) amount is the 
dollar amount of the per-donee gift tax exclusion in effect under 
section 2503(b) for that calendar year.
    (m) Statutory references--(1) Code. The term Code means the 
Internal Revenue Code.
    (2) Subtitle B. The term subtitle B means subtitle B of the Code.
    (n) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  28.2801-3  Rules and exceptions applicable to covered gifts and 
covered bequests.

    (a) Covered gift. Subject to the provisions of paragraphs (c) 
through (e) of this section, the term gift as used in the definition of 
covered gift in Sec.  28.2801-2(g) has the same meaning as in chapter 
12 of subtitle B, but without regard to the exceptions in section 
2501(a)(2), (4), and (5) of the Code, the per-donee exclusion under 
section 2503(b) of the Code for certain transfers of a present 
interest, the exclusion under section 2503(e) for certain educational 
or medical expenses, and the waiver of certain pension rights under 
section 2503(f).
    (b) Covered bequest. Subject to the provisions of paragraphs (c) 
through (e) of this section, property acquired by reason of the death 
of a covered expatriate (one of the types of transfers defined as a 
covered bequest in Sec.  28.2801-2(f)) includes any property that would 
have been includible in the gross estate of the covered expatriate 
under chapter 11 of subtitle B if the covered expatriate had been a 
U.S. citizen at the time of death. Therefore, property acquired by 
reason of a covered expatriate's death includes, without limitation, 
property or an interest in property acquired by reason of a covered 
expatriate's death--
    (1) By bequest, devise, trust provision, beneficiary designation, 
or other contractual arrangement, or by operation of law, to the extent 
the property would have been includible in the covered expatriate's 
gross estate if the covered expatriate had been a U.S. citizen at 
death;
    (2) That was transferred by the covered expatriate during life, 
either before or after expatriation, and that would have been 
includible in the covered expatriate's gross estate under section 2036, 
2037, or 2038 of the Code had the covered expatriate been a U.S. 
citizen at death;
    (3) That was received for the benefit of a covered expatriate from 
such covered expatriate's spouse, or predeceased spouse, for which a 
valid qualified terminable interest property (QTIP) election was made 
on such spouse's, or predeceased spouse's, Form 709, United States Gift 
(and Generation-Skipping Transfer) Tax Return, Form 709-NA, United 
States Gift (and Generation-Skipping Transfer) Tax Return of 
Nonresident Not a Citizen of the United States, Form 706, United States 
Estate (and Generation-Skipping Transfer) Tax Return, or Form 706-NA, 
United States Estate (and Generation-Skipping Transfer) Tax Return, 
Estate of nonresident not a citizen of the United States, which would 
have been includible in the covered expatriate's gross estate under 
section 2044 of the Code if the covered expatriate had been a U.S. 
citizen at death; or
    (4) That otherwise passed from the covered expatriate by reason of 
his or her death, such as--
    (i) Property held by the covered expatriate and another person as 
joint tenants with right of survivorship or as tenants by the entirety, 
but only to the extent such property would have been includible in the 
covered expatriate's gross estate under section 2040 of the Code if the 
covered expatriate had been a U.S. citizen at death;
    (ii) Any annuity or other payment that would have been includible 
in the covered expatriate's gross estate if the covered expatriate had 
been a U.S. citizen at death;
    (iii) Property subject to a general power of appointment held by 
the covered expatriate at death that would have been includible in the 
covered expatriate's gross estate under section 2041 if the covered 
expatriate had been a U.S. citizen at death; or
    (iv) 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 of the Code if the covered expatriate had 
been a U.S. citizen at death.
    (c) Exceptions to covered gift and covered bequest. Notwithstanding 
the definitions of covered gift and covered bequest in Sec.  28.2801-
2(f) and (g), respectively, as further described in paragraphs (a) and 
(b) of this section, the terms covered gift and covered bequest do not 
include property described in paragraphs (c)(1) through (6) of this 
section.

[[Page 3398]]

    (1) Reported taxable gifts. Property transferred as a taxable gift 
under section 2503(a) that is reported on the donor's timely filed Form 
709 or Form 709-NA is not a covered gift. However, property excluded 
from the definition of a taxable gift, such as a present interest not 
in excess of the annual exclusion amount under section 2503(b), is not 
excluded from the definition of a covered gift under this paragraph 
(c)(1) even if reported on the donor's Form 709 or Form 709-NA.
    (2) Property reported as subject to estate tax. Property that is 
includible in the gross estate of the covered expatriate and is 
reported on a timely filed Form 706, Form 706-NA, or Form 706-QDT, U.S. 
Estate Tax Return for Qualified Domestic Trusts, or any successor form, 
is not a covered bequest. Thus, if the covered expatriate's gross 
estate is not of sufficient value to require the filing of a Form 706-
NA, for example, and no Form 706-NA is timely filed, the property 
passing from that covered expatriate is not excluded from the 
definition of a covered bequest under the rule of this paragraph 
(c)(2). Further, this exclusion does not apply to the property not 
reported on such a form, whether or not subject to United States estate 
tax (that is, non-U.S. situs property that passes to U.S. citizens or 
residents).
    (3) Covered bequest previously subject to section 2801 tax as a 
covered gift. If a covered bequest from a covered expatriate previously 
constituted a covered gift from that covered expatriate (for example, 
because of a retained power or right described in section 2036), the 
property is a covered bequest only to the extent that the value of the 
covered bequest exceeds the value of the covered gift that was subject 
to section 2801.
    (4) Transfers to charity. A gift to a donee described in section 
2522(b) of the Code or a bequest to a beneficiary described in section 
2055(a) of the Code is not a covered gift or covered bequest to the 
extent a charitable deduction under section 2522 or 2055 would have 
been allowed if the covered expatriate had been a U.S. citizen at the 
time of the transfer.
    (5) Transfers to spouse. Property transferred from a covered 
expatriate to the covered expatriate's spouse generally is not a 
covered gift or covered bequest to the extent a marital deduction under 
section 2523 or 2056 of the Code would have been allowed if the covered 
expatriate had been a U.S. citizen at the time of the transfer. To the 
extent that a gift or bequest of property to a trust (or to a separate 
share of the trust) would qualify for the marital deduction, the 
property transferred in the gift or bequest is not a covered gift or 
covered bequest. To the extent the gift or bequest of property to the 
trust (or to a separate share of the trust) would not qualify for the 
marital deduction, the property transferred in the gift or bequest is a 
covered gift or covered bequest to the trust, and in the case of a non-
electing foreign trust, distributions attributable to such gift or 
bequest will subject the U.S. citizen or resident spouse receiving such 
distributions to the section 2801 tax. See Sec. Sec.  28.2801-4(a)(3) 
and 28.2801-5(a). For qualified terminable interest property (QTIP) 
described in section 2056(b)(7) and for property in a qualified 
domestic trust (QDOT) described in section 2056A of the Code, a valid 
QTIP and/or QDOT election must be made by the covered expatriate or 
covered expatriate's estate in order for the gift or bequest of such 
property to qualify for the marital exclusion under section 2801(e)(3), 
and, thus not be a covered gift or covered bequest under this paragraph 
(c)(5). Such an election can be made only with respect to the transfer 
of property subject to gift or estate tax under section 2511(a) or 2103 
of the Code. Furthermore, to exclude from covered bequests property in 
a QDOT for the benefit of a covered expatriate, funded pursuant to a 
bequest by the covered expatriate's predeceased spouse who also was a 
covered expatriate, a valid QDOT election must have been made in the 
predeceased covered expatriate's estate.
    (6) Qualified disclaimers. Property transferred pursuant to a 
covered expatriate's qualified disclaimer, as defined in section 
2518(b) of the Code, is not a covered gift or covered bequest from that 
covered expatriate.
    (d) Covered gifts and covered bequests made in trust. For transfers 
of property to a trust that are covered gifts or covered bequests as 
described in Sec. Sec.  28.2801-2 and 28.2801-3, the property is 
treated as a covered gift or covered bequest to the trust without 
regard to the beneficial interests in the trust or whether any person 
has a general power of appointment or a power of withdrawal over trust 
property. Accordingly, the rules in section 2801(e)(4) and Sec.  
28.2801-4(a) apply to determine liability for payment of the section 
2801 tax. The U.S. recipient of a covered gift or a covered bequest 
made to a domestic trust or to an electing foreign trust is the 
domestic or electing foreign trust, and the U.S. recipient of a covered 
gift or a covered bequest made to a non-electing foreign trust is each 
U.S. citizen or resident receiving a distribution from the non-electing 
foreign trust (without regard to whether that distribution is or is not 
pursuant to the exercise or release of a general power of appointment). 
See Sec.  28.2801-2(e) for the definition of a U.S. recipient.
    (e) Powers of appointment--(1) Covered expatriate as holder of 
power. The exercise or release of a general power of appointment held 
by a covered expatriate over property, whether or not in trust (even if 
that covered expatriate was a U.S. citizen or resident when the general 
power of appointment was granted), for the benefit of a U.S. citizen or 
resident is a covered gift or covered bequest. For this purpose, the 
lapse of a general power of appointment held by a covered expatriate is 
treated as a release to the extent provided in sections 2041(b)(2) and 
2514(e) of the Code. Furthermore, the exercise of a power of 
appointment by a covered expatriate that creates another power of 
appointment as described in section 2041(a)(3) or 2514(d) for the 
benefit of a U.S. citizen or resident is a covered gift or a covered 
bequest.
    (2) Covered expatriate as grantor of power. The grant by a covered 
expatriate to an individual who is a U.S. citizen or resident of a 
general power of appointment over property not held in trust is a 
covered gift or covered bequest to the powerholder. For the rule 
applying to the grant by a covered expatriate of a general power of 
appointment over property in trust, see paragraph (d) of this section.
    (f) Examples. The provisions of this section are illustrated by the 
following examples:
    (1) Example 1: Transfer to spouse. In Year 1, CE, a covered 
expatriate domiciled in Country F, a foreign country with which the 
United States does not have a gift tax treaty, gives $300,000 cash to 
his wife, W, a U.S. resident and citizen of Country F. Under paragraph 
(c)(5) of this section, the $100,000 exclusion for a noncitizen spouse, 
as indexed for inflation in Year 1, is excluded from the definition of 
a covered gift under section 2801 because only that amount of the 
transfer would have qualified for the gift tax marital deduction if CE 
had been a U.S. citizen at the time of the gift. See sections 
2801(e)(3), 2523(i), and 2503(b). The remaining amount ($300,000, less 
the $100,000 exclusion for a noncitizen spouse, as indexed for 
inflation) is a covered gift from CE to W. W must timely file Form 708, 
United States Return of Tax for Gifts and Bequests Received from 
Covered Expatriates, and timely pay the tax. See Sec. Sec.  28.6011-
1(a), 28.6071-1(a), and 28.6151-1(a). W also must report the transfer 
on Form 3520,

[[Page 3399]]

Annual Return to Report Transactions With Foreign Trusts and Receipt of 
Certain Foreign Gifts, and any other required form. See Sec.  28.2801-
6(c)(1).
    (2) Example 2: Reporting property as subject to estate tax--(i) 
Year 1. CE, a covered expatriate domiciled in Country F, a foreign 
country with which the United States does not have an estate tax 
treaty, owns a condominium in the United States with son, S, a U.S. 
citizen. CE and S each contributed their actuarial share of the 
purchase price when purchasing the condominium and own it as joint 
tenants with rights of survivorship. On December 14, Year 1, CE dies. 
At the time of CE's death, the fair market value of CE's share of the 
condominium, $250,000, is included in CE's gross estate under sections 
2040 and 2103.
    (ii) Year 2. On September 14 of the following calendar year, Year 
2, the executor of CE's estate timely files a Form 4768, Application 
for Extension of Time to File a Return and/or Pay U.S. Estate (and 
Generation-Skipping Transfer) Taxes, requesting a 6-month extension of 
time to file Form 706-NA, and a 1-year extension of time to pay the 
estate tax. The Internal Revenue Service grants both extensions, but 
CE's executor fails to file the Form 706-NA until after March 14 of 
Year 3.
    (iii) Analysis. S learns that the executor of CE's estate did not 
timely file Form 706-NA. CE's estate remains liable for estate tax on 
CE's interest in the condominium. In addition, because CE is a covered 
expatriate and CE's estate failed to timely file the tax return 
reporting the transaction, S received a covered bequest as defined in 
Sec.  28.2801-2(f) and paragraph (b) of this section and must timely 
file Form 708 and pay the section 2801 tax. See Sec. Sec.  28.6011-
1(a), 28.6071-1(a), and 28.6151-1(a). S also must file Form 3520 to 
report a large gift or bequest from a foreign person and any other 
required form. See Sec.  28.2801-6(c)(1).
    (3) Example 3: Covered gift in trust with grant of general power of 
appointment over trust property--(i) Facts. On October 20, Year 1, CE, 
a covered expatriate domiciled in Country F, a foreign country with 
which the United States does not have a gift tax treaty, transfers 
$500,000 in cash from an account in Country F to an irrevocable foreign 
trust created on that same date. The foreign trust does not elect to be 
treated as a domestic trust for purposes of section 2801. Under section 
2511(a), no gift tax is imposed on the transfer and thus, CE is not 
required to file a U.S. gift tax return. Under the terms of the foreign 
trust, A, CE's child and a U.S. resident, and Q, A's child and a U.S. 
citizen, may receive discretionary distributions of income and 
principal during life. At A's death, the assets remaining in the 
foreign trust will be distributed to B, CE's other U.S. resident child, 
or if B is not living at the time of A's death, then to CE's then-
living issue, per stirpes. The terms of the foreign trust also allow A 
to appoint trust principal and/or income to A, A's estate, A's 
creditors, the creditors of A's estate, or A's issue at any time. On 
March 5, Year 2, A exercises this power to appoint and causes the 
trustee to distribute $100,000 to Q.
    (ii) Effects on Q. On October 20, Year 1, the irrevocable, non-
electing foreign trust receives a covered gift for purposes of section 
2801, but no section 2801 tax is imposed at that time. On March 5, Year 
2, when Q receives $100,000 from the irrevocable foreign trust pursuant 
to the exercise of A's power of appointment, Q receives a distribution 
attributable to a covered gift and section 2801 tax is imposed on Q. 
See Sec.  28.2801-4(d)(5). Q must timely file Form 708 to report the 
covered gift from a foreign person (specifically, from CE). See section 
6039F(a) and Sec. Sec.  28.6011-1(a), 28.6071-1(a), and 28.6151-1(a). 
Furthermore, because the $100,000 is being distributed from a foreign 
trust, Q must report the gift on a Form 3520 as a distribution from a 
foreign trust. See Sec.  28.2801-6(c)(2).
    (iii) Effects on A. Although A has no section 2801 reporting 
requirement, under section 2501, A makes a taxable gift to Q of 
$100,000 when A exercises the general power of appointment for Q's 
benefit. See section 2514(b). Accordingly, A must report A's $100,000 
gift to Q on a timely filed Form 709. See section 6019. Because A is 
considered the transferor of the $100,000 for gift and GST tax 
purposes, the distribution to Q is not a generation-skipping transfer 
under chapter 13. See Sec.  26.2652-1(a)(1) of this chapter.
    (4) Example 4: Lapse of power of appointment held by covered 
expatriate. A, a U.S. citizen, creates an irrevocable domestic trust 
for the benefit of A's issue, CE, and CE's children. CE is a covered 
expatriate, but CE's children are U.S. citizens. CE has the right to 
withdraw $5,000 in each year in which A makes a contribution to the 
trust, but the withdrawal right lapses 30 days after the date of the 
contribution. In Year 1, A funds the trust, but CE fails to exercise 
CE's right to withdraw $5,000 within 30 days of the contribution. The 
$5,000 lapse is not considered to be a release of the power by CE, so 
it is neither a gift for U.S. gift tax purposes, nor a covered gift for 
purposes of section 2801 under paragraph (e)(1) of this section.
    (5) Example 5: Property subject to section 2801 tax as a covered 
gift and as a covered bequest. F, a CE, transfers an income interest in 
property to A, a U.S. citizen, while retaining the remainder interest. 
F was not required to, and did not, file a gift tax return. Upon F's 
death, A receives full title to the property. The initial transfer of 
the income interest was a covered gift valued at $1,000,000, upon which 
A paid the section 2801 tax. The value of the property at F's death is 
$4,500,000. Because the full value of the property would have been 
included in F's gross estate if F had died as a U.S. citizen, there is 
a covered bequest at F's death. The covered bequest is subject to 
section 2801 tax on the excess of the value of the covered bequest over 
the value of the covered gift ($4,500,000 minus $1,000,000), or 
$3,500,000.
    (g) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  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 2801 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 2801 tax. See section 
2801(e)(4)(A)(i) and Sec.  28.2801-2(b).
    (ii) Generation-skipping transfer tax. A trust's payment of the 
section 2801 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 2801 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 2801 tax, if any, must be paid by 
the due date of that Form 708. On that Form 708, the section 2801 tax 
is calculated in the same manner as if such trust were

[[Page 3400]]

making an election under Sec.  28.2801-5(d) to be treated as a domestic 
trust solely for purposes of the section 2801 tax. Accordingly, the 
trustee must report and pay the section 2801 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 2801 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 2801.
    (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 2801 tax unless the trust makes an election to be treated as a 
domestic trust solely for purposes of section 2801 as provided in Sec.  
28.2801-5(d). Absent such an election, each U.S. recipient is liable 
for payment of the section 2801 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 Sec.  28.2801-5(b) and 
(c) 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 164 in the calendar year in which the U.S. recipient 
paid or accrued the section 2801 tax. Thus, for cash method taxpayers, 
the calendar year in which the payment of the section 2801 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 2801 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 665(b)). The amount 
of the deduction allowed under section 164 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 2801 tax payment relates.
    (B) Second, of the amount determined in paragraph (a)(3)(ii)(A) 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 paragraph (a)(3)(ii)(B), 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 2801 tax paid for that calendar year that is attributable to 
the amount determined in paragraph (a)(3)(ii)(B) 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 2801 
tax paid during the calendar year by the ratio of the amount determined 
in paragraph (a)(3)(ii)(B) 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 2801 tax is 
computed by multiplying the net covered gifts and covered bequests (as 
defined in paragraph (b)(2) of this section) received by a U.S. 
recipient during the calendar year by the highest rate of estate tax 
under section 2001(c) in effect for that calendar year. See paragraph 
(f)(1) 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 2801(c) amount, which is the dollar amount of the per-donee 
exclusion in effect under section 2503(b) 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 
paragraph (d) 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 2512 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 2031 and chapter 14, to the extent 
applicable, and the corresponding regulations, but without regard to 
sections 2032 and 2032A.
    (d) Date of receipt--(1) In general. The section 2801 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 paragraph (d)). 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

[[Page 3401]]

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 Sec.  28.2801-3(e)(1), 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 Sec.  28.2801-3(e)(1), 
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 
Sec.  28.2801-3(e)(2) 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 paragraphs (d)(2) through (4) of this section, and over 
property in a non-electing foreign trust is determined in accordance 
with paragraph (d)(5) of this section. See Sec.  28.2801-3(d) 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 
paragraph (d), by the U.S. citizen or resident who is the first 
recipient of that property from the covered expatriate to be subject to 
section 2801 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 2801 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 2801 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 2801 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 2801 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

[[Page 3402]]

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 6511(a) 
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 2801(c) amount is 
$16,000. A's section 2801 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 2801(c) 
amount of $16,000. A's section 2801 tax liability then is reduced by 
any foreign gift or estate tax paid under paragraph (e) of this 
section. Assuming A, B, and C paid no foreign gift or estate tax on the 
transfers, A's section 2801 tax liability for Year 1 is $45,600 
($114,000 x 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 2801(c) 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 paragraph (a)(3)(ii) of this section, B 
(a cash basis taxpayer) is entitled to an income tax deduction under 
section 164 for the calendar year in which the section 2801 tax is 
paid. In Year 2, B timely reports the distributions from the non-
electing foreign trust and pays $43,600 in section 2801 tax (($125,000-
$16,000) x 0.4). In Year 2, B is entitled to an income tax deduction 
because B paid the section 2801 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 paragraph 
(a)(3)(ii)(A) 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 2801 tax ($100,000). Thus, the 
entire amount included in B's gross income ($50,000) also is subject to 
the section 2801 tax, and is used in the numerator to determine the 
income tax deduction available to B. See paragraph (a)(3)(ii)(B) of 
this section.
    (iii) The portion of B's section 2801 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 x ($50,000/$125,000)). Therefore, B's deduction under 
section 164 is $17,440. See paragraph (a)(3)(ii)(C) 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 
paragraph (d)(3) 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.


Sec.  28.2801-5  Foreign trusts.

    (a) In general. The section 2801 tax is imposed on a U.S. recipient 
who receives distributions, whether of income or principal, from a non-
electing foreign trust to the extent the distributions are attributable 
to one or more covered gifts or covered bequests made to that foreign 
trust. See paragraph (d) of this section regarding a foreign trust's 
election to be treated as a domestic trust for purposes of section 
2801.
    (b) Distribution defined. For purposes of determining whether a 
U.S. recipient has received a distribution from a non-electing foreign 
trust, the term distribution means any direct, indirect, or 
constructive transfer from a non-electing foreign trust, including a 
transfer to the extent made for less than full and adequate 
consideration in money or money's worth. Although section 643(i) of the 
Code does not apply for the purpose of defining a distribution under 
this section, certain loans from or uncompensated use of property held 
by a non-electing foreign trust nevertheless may satisfy the definition 
of a distribution under this paragraph if the loan or use of trust 
property would be a gift as defined for purposes of chapter 12 of 
subtitle B. For purposes of determining whether a U.S. recipient has 
received a distribution from a non-electing foreign trust, the term 
distribution also includes each distribution from a non-electing 
foreign trust pursuant to the exercise, release, or lapse (without 
regard to the exception in section 2041(b)(2) or 2514(e) of the Code) 
of a power of appointment, whether or not such power is a general power 
of appointment. In addition, the term distribution also includes the 
domestication of a foreign trust, and any sale, encumbering, 
monetization, or other disposition by the U.S. recipient of the 
recipient's interest in the trust to the extent of that disposition. 
See Sec.  28.2801-4(a)(2)(iv). The determination of whether a U.S. 
recipient has received a distribution is made without regard to whether 
any portion of the non-electing foreign trust is treated as owned by 
the U.S. recipient or any other person under subpart E of part I, 
subchapter J, chapter 1 of the Code (pertaining to grantors and others 
treated as substantial owners), and without regard to whether the U.S. 
recipient of the transfer is designated as a beneficiary by the terms 
of the trust. A U.S. recipient receiving a distribution for purposes of 
this section must determine whether the information reporting 
requirements of section 6048(c) apply. See Sec.  28.2801-6(c)(2).

[[Page 3403]]

    (c) Amount of distribution attributable to covered gift or covered 
bequest--(1) Section 2801 ratio--(i) In general. A foreign trust may 
have received covered gifts and covered bequests as well as 
contributions that were not covered gifts or covered bequests. Under 
such circumstances, the fair market value of the foreign trust at any 
time consists, in part, of a portion of the trust attributable to the 
covered gifts and covered bequests it has received (covered portion) 
and in part of a portion of the trust attributable to other 
contributions (non-covered portion). The covered portion of the trust 
includes the ratable portion of appreciation and income that has 
accrued on the foreign trust's assets from the date of the contribution 
of the covered gifts and covered bequests to the foreign trust. For 
purposes of section 2801, the amount of each distribution from the 
foreign trust, whether made from the income or principal of the trust, 
that is considered attributable to the foreign trust's covered gifts 
and covered bequests is determined on a proportional basis, by 
reference to the section 2801 ratio (as described in paragraph 
(c)(1)(ii) of this section), and not by the identification or tracing 
of particular trust assets. Specifically, this portion of each 
distribution is determined by multiplying the distributed amount by the 
percentage of the trust that consists of its covered portion 
immediately prior to that distribution (section 2801 ratio). Thus, for 
example, the section 2801 ratio of a foreign trust whose assets are 
comprised exclusively of covered gifts or covered bequests and the 
income and appreciation thereon, would be one and the full amount of 
each distribution from that foreign trust to a U.S. citizen or resident 
would be attributable to the foreign trust's covered gifts and covered 
bequests and subject to the imposition of section 2801 tax. Because the 
non-electing foreign trust itself is not taxed on its receipt of 
covered gifts and covered bequests, the trust is not entitled to an 
annual exclusion pursuant to section 2801(c); that exclusion is 
available only in computing the section 2801 tax payable by the U.S. 
recipient filing a Form 708, United States Return of Tax for Gifts and 
Bequests Received from Covered Expatriates.
    (ii) Computation. The section 2801 ratio, which must be 
redetermined after each contribution to the foreign trust, is computed 
by using the following fraction:
[GRAPHIC] [TIFF OMITTED] TR14JA25.001

Where,

X = The value of the trust attributable to covered gifts and covered 
bequests, if any, immediately before the contribution (pre-
contribution value); this value is determined by multiplying the 
fair market value of the trust assets immediately prior to the 
contribution by the section 2801 ratio in effect immediately prior 
to the current contribution. This amount will be zero for all years 
prior to the year in which the foreign trust receives its first 
covered gift or covered bequest;
Y = The portion, if any, of the fair market value of the current 
contribution that constitutes a covered gift or covered bequest; and
Z = The fair market value of the trust immediately after the current 
contribution. See paragraph (e)(1) of this section (Example 1), for 
an illustration of this computation.

    (2) Effect of reported transfer and tax payment. With regard to the 
value of property on which a section 2801 tax has been timely paid, 
even though that property thereafter remains in a non-electing foreign 
trust, that value no longer is considered to be, or to be attributable 
to, a covered gift or covered bequest to that foreign trust for 
purposes of the computation described in paragraph (c)(1)(ii) of this 
section. For purposes of the prior sentence, a section 2801 tax is 
deemed to have been timely paid on amounts for which no section 2801 
tax was due, provided those amounts were reported as a covered gift or 
covered bequest on a timely filed Form 708 or the total covered gifts 
and covered bequests received in a calendar year do not exceed the 
section 2801(c) amount. An amount for which no section 2801 tax was due 
refers to the amount of a covered gift or covered bequest received by 
an electing foreign trust not in excess of the section 2801(c) amount. 
See Sec.  28.2801-5(e) (Example 4).
    (3) Inadequate information to calculate section 2801 ratio. A U.S. 
citizen or resident receiving a distribution from a non-electing 
foreign trust must proceed upon the assumption that the distribution is 
attributable to a covered gift or covered bequest to the extent the 
trustee of the foreign trust does not have sufficient books and records 
to calculate the section 2801 ratio or the taxpayer is unable to obtain 
the necessary information regarding the foreign trust to calculate the 
section 2801 ratio. The assumption is rebuttable to the extent the 
taxpayer can supply information sufficient to persuade the Internal 
Revenue Service (IRS) that the distribution is not entirely 
attributable to covered gifts and covered bequests.
    (d) Foreign trust treated as domestic trust--(1) Election required. 
To be considered an electing foreign trust, so that the foreign trust 
is treated as a domestic trust solely for purposes of the section 2801 
tax, a valid election is required.
    (2) Effect of election--(i) A valid election subjects the electing 
foreign trust to the section 2801 tax on all covered gifts and covered 
bequests received by the foreign trust during that calendar year, the 
portion of the trust attributable to covered gifts and covered bequests 
received by the trust in prior years, as determined in paragraph 
(d)(3)(iii) of this section, and all covered gifts and covered bequests 
received by the foreign trust during calendar years subsequent to the 
first year in which the election is effective, unless and until the 
election is terminated. To the extent that covered gifts and covered 
bequests are subject to the section 2801 tax under the prior sentence, 
those trust receipts are no longer treated as a covered gift or covered 
bequest for purposes of determining the portion of the trust 
attributable to covered gifts and covered bequests. Therefore, upon 
making a valid election, the foreign trust's section 2801 ratio 
described in paragraph (c)(1)(ii) of this section will be zero until 
the effective date of any termination of the election and the 
subsequent receipt of any covered gift or covered bequest, and a 
distribution made from the foreign trust while this election is in 
effect is not taxable under section 2801 to the U.S. recipient.
    (ii) This election has no effect on any distribution from the 
foreign trust that was made to a U.S. recipient in a calendar year 
prior to the calendar year for which the election is made. Thus, even 
after a valid election is made, a distribution to a U.S. recipient in a 
calendar year prior to the calendar year for which the election is made 
that was attributable to one or more covered gifts or covered bequests 
continues to be a distribution attributable to one or more covered 
gifts or covered bequests and the section 2801 ratio in place at the 
time of the distribution continues to apply to that distribution. 
Furthermore, an election under this section does not relieve the U.S. 
recipient from the information reporting requirements of section 
6048(c). See Sec.  28.2801-6(c)(2).
    (3) Time and manner of making the election--(i) When to make the 
election. The election is made on a timely filed Form 708 for the 
calendar year for which the foreign trust seeks to subject itself to 
the section 2801 tax as described in paragraph (d)(2)(i) of this 
section. The election may be made for a calendar year whether or not 
the foreign trust received a covered gift or covered bequest during 
that calendar year. See Sec.  28.6071-1.

[[Page 3404]]

    (ii) Requirements for a valid election. To make a valid election to 
be treated as a domestic trust for purposes of section 2801, the 
foreign trust must timely file a Form 708 and must, on such form--
    (A) Make the election, timely pay the section 2801 tax, if any, as 
determined under paragraph (d)(3)(iii) of this section, and include a 
computation illustrating how the trustee of the foreign trust 
calculated both the section 2801 ratio described in paragraph 
(c)(1)(ii) of this section and the section 2801 tax;
    (B) Designate and authorize a U.S. agent as provided in paragraph 
(d)(3)(iv) of this section;
    (C) Agree to timely file Form 708 to report each covered gift and 
bequest made to the trust in accordance with Sec.  28.2801-5(d)(4);
    (D) Identify the amount and year of all prior distributions 
attributable to covered gifts and covered bequests made to a U.S. 
recipient, and provide the name, address, and taxpayer identification 
number of each U.S. recipient;
    (E) Provide a copy of the governing instrument of the trust and 
provide the name, address, and taxpayer identification number of each 
permissible distributee described in paragraph (d)(3)(ii)(F) of this 
section; and
    (F) Affirm under penalties of perjury that each permissible 
distributee was notified that the trustee is making (or has made) the 
election, effective as of January 1 of the calendar year for which the 
Form 708 on which the election is made is filed. For this purpose, a 
permissible distributee is any U.S. citizen or resident who:
    (1) Currently may or must receive distributions from the trust, 
whether of income or principal;
    (2) May withdraw income or principal from the trust during that 
year or in a future year, regardless of whether the right arises or 
lapses upon the occurrence of a future event; and
    (3) Would be described in either or both of paragraphs 
(d)(3)(ii)(F)(1) and (2) of this section upon an immediate termination 
of either the trust or the interest of any person described in either 
or both of paragraphs (d)(3)(ii)(F)(1) and (2) of this section.
    (iii) Section 2801 tax payable with the election. To make a valid 
election to be treated as a domestic trust for purposes of section 
2801, the electing foreign trust must timely pay the section 2801 tax 
on all covered gifts and covered bequests received by the electing 
foreign trust in the calendar year for which the Form 708 is being 
filed. In some cases, an electing foreign trust may have received 
covered gifts or covered bequests in prior calendar years during which 
no such election was in effect. In those cases, the trustee must also, 
at the same time, report and pay the tax on the fair market value, 
determined as of the last day of the calendar year immediately 
preceding the year for which the Form 708 is being filed, of the 
portion of the trust attributable to covered gifts and covered bequests 
received by such trust in prior calendar years (except as provided in 
paragraph (d)(6)(iii) of this section with regard to an imperfect 
election). That portion is determined by multiplying the fair market 
value of the trust, as of the December 31 immediately preceding the 
year for which the election is made, by the section 2801 ratio in 
effect on that date, as calculated under paragraph (c)(1)(ii) of this 
section. The trustee must proceed upon the assumption that the corpus 
and undistributed income are attributable to covered gifts and covered 
bequests to the extent the trustee does not have sufficient books and 
records to determine what amount of the corpus and undistributed income 
is attributable to prior covered gifts and covered bequests. The 
assumption is rebuttable by the taxpayer's furnishing information 
sufficient to persuade the IRS that corpus and undistributed income is 
not attributable to prior covered gifts or covered bequests. See 
paragraph (c)(3) of this section.
    (iv) Designation of U.S. agent--(A) In general. The trustee of an 
electing foreign trust must designate and authorize a U.S. person, as 
defined in section 7701(a)(30) of the Code, to act as an agent for the 
trust for purposes of section 2801. The designation and authorization 
are made on a duly filed Form 2848, Power of Attorney and Declaration 
of Representative, or as may be directed otherwise in IRS forms or 
publications. By designating a U.S. agent, the trustee of the trust 
agrees to provide the agent with all information necessary to comply 
with any information request or summons issued by the Secretary of the 
Treasury or her delegate (Secretary) that is relevant to the collection 
or determination of tax under section 2801. Such information may 
include, without limitation, copies of the books and records of the 
trust, financial statements, and appraisals of trust property.
    (B) Role of designated agent. Acting as an agent for an electing 
foreign trust for purposes of section 2801 includes serving as the 
trust's agent for purposes of section 7602 of the Code (Examination of 
books and witnesses), section 7603 of the Code (Service of summons), 
and section 7604 of the Code (Enforcement of summons) with respect to--
    (1) Any request by the Secretary to examine records or produce 
testimony related to the proper identification or treatment of covered 
gifts or covered bequests contributed to the foreign trust and 
distributions of such contributions and the income therefrom; and
    (2) Any summons by the Secretary for records or testimony related 
to the proper identification or treatment of covered gifts or covered 
bequests contributed to the foreign trust and distributions of such 
contributions and the income therefrom.
    (C) Effect of appointment of agent. An electing foreign trust that 
appoints such an agent is not considered to have an office or a 
permanent establishment in the United States, or to be engaged in a 
trade or business in the United States, solely because of the agent's 
activities as an agent pursuant to this section.
    (4) Filing requirement. The trustee of an electing foreign trust 
must timely file a Form 708 to report and pay the section 2801 tax on 
all covered gifts and covered bequests received by the trust during the 
calendar year. See Sec.  28.6071-1. Nevertheless, the trustee of an 
electing foreign trust is not required to file Form 708 for a calendar 
year in which either the trust received no covered gifts or covered 
bequests, or the total fair market value of all covered gifts and 
covered bequests received by the electing foreign trust during that 
calendar year is less than or equal to the section 2801(c) amount.
    (5) Duration of status as electing foreign trust--(i) In general. A 
valid election (one that meets all of the requirements of paragraph 
(d)(3) of this section) is effective as of January 1 of the calendar 
year for which the Form 708 on which the election is made is filed. The 
election, once made, applies for all calendar years until the election 
is terminated as described in paragraph (d)(5)(ii) of this section.
    (ii) Termination--(A) Manner of termination. An election to be 
treated as a domestic trust for purposes of section 2801 is terminated 
by--
    (1) A failure of the foreign trust to timely file a required Form 
708 and timely pay the section 2801 tax, as required by paragraph 
(d)(4) of this section;
    (2) A failure of the foreign trust to enter into a closing 
agreement and to timely pay any additional amount of section 2801 tax 
(in accordance with the requirements of paragraph (d)(6)(i) of this 
section) with respect to recalculations described in paragraph (d)(6) 
of this section (a termination that

[[Page 3405]]

also results in the conversion of the trust's election to an imperfect 
election); or
    (3) An affirmative revocation of the election made in accordance 
with the instructions for Form 708.
    (B) Effective date of termination. The effective date of the 
termination of an election to be treated as a domestic trust for 
purposes of section 2801 is as follows:
    (1) For a termination described in paragraph (d)(5)(ii)(A)(1) of 
this section, the termination is effective as of the first day of the 
calendar year for which the Form 708 was required under paragraph 
(d)(4) of this section.
    (2) For a termination described in paragraph (d)(5)(ii)(A)(2) of 
this section, the termination is effective as of the first day of the 
calendar year for which the Form 708 was filed with respect to which 
the additional amount of section 2801 tax is claimed to be due by the 
IRS.
    (3) For a termination described in paragraph (d)(5)(ii)(A)(3) of 
this section, the termination is effective as of the first day of the 
calendar year for which a Form 708 was filed to affirmatively revoke 
the election.
    (C) Notice requirements upon termination. In the case of a 
termination of the election, the trustee should notify promptly each 
permissible distributee of the trust, as defined in paragraph 
(d)(3)(ii)(F) of this section and determined as of the effective date 
of the termination of the election, that the foreign trust's election 
was terminated (or terminated and converted to an imperfect election) 
and the effective date of the termination, and that each U.S. recipient 
of a distribution made from the foreign trust on or after the effective 
date of that termination is subject to the section 2801 tax on the 
portion of each such distribution that is attributable to covered gifts 
and covered bequests. See paragraph (d)(6)(iii)(B) of this section for 
an additional notification requirement in the case of an imperfect 
election.
    (iii) Subsequent elections. If a foreign trust's election is 
terminated under paragraph (d)(5)(ii) of this section, the foreign 
trust is not prohibited from making another election in a future year, 
subject to the requirements of paragraph (d)(3) of this section.
    (6) Dispute as to amount of section 2801 tax owed by electing 
foreign trust--(i) Procedure. If the IRS disputes the value of a 
covered gift or covered bequest, or otherwise challenges the 
computation of the section 2801 tax, that is reported on the electing 
foreign trust's timely filed Form 708 for any calendar year, the IRS 
will issue a letter (but not a notice of deficiency as defined in 
section 6212 of the Code) to the trustee of the trust and the appointed 
U.S. agent that details the disputed information and the proper amount 
of section 2801 tax as recalculated. The trustee of the foreign trust 
must pay the additional amount of section 2801 tax including interest 
and penalties, if any, on or before the due date specified in the 
letter (or other date agreed to by the IRS) and enter into a closing 
agreement with the IRS as described in section 7121 to maintain its 
election.
    (ii) Effect of compliance. If the trustee of the foreign trust 
complies with the requirements of paragraph (d)(6)(i) of this section, 
then the foreign trust's election to be treated as a domestic trust 
under paragraph (d) of this section remains in effect. In the absence 
of fraud, malfeasance, or misrepresentation of a material fact, any 
value determined in the closing agreement will be deemed to be final 
and binding on both the IRS and the foreign trust. Subsequently, the 
IRS will not challenge the amount of section 2801 tax due from either 
the foreign trust or any of its distributees who are U.S. citizens or 
residents for the year for which that Form 708 was filed by the foreign 
trust, except with respect to any covered gifts or covered bequests not 
reported on that return. In addition, neither the foreign trust nor any 
of its distributees will be able to file a claim for refund with 
respect to section 2801 tax paid by the foreign trust on the covered 
gifts and covered bequests reported on that Form 708.
    (iii) Effect of failing to comply (imperfect election)--(A) In 
general. If the foreign trust fails to enter into the closing agreement 
and to timely pay any of the additional amount of section 2801 tax 
(with interest and penalties, if any) determined to be due by the IRS 
in accordance with the procedure in paragraph (d)(6)(i) of this 
section, then the foreign trust's valid election is terminated and is 
converted to an imperfect election. The conversion to an imperfect 
election is retroactive to the first day of the calendar year (subject 
year) for which the Form 708 was filed with respect to which the 
additional amount of section 2801 tax is claimed to be due by the IRS. 
The trust will be a non-electing foreign trust for the subject year and 
for each subsequent year until another valid election (if any) is made 
by the trust. However, the value the foreign trust reported on the Form 
708 for the subject year and each other year during the interim period 
described in paragraph (d)(6)(iii)(D) of this section, and on which the 
trust paid the section 2801 tax, is no longer considered to be 
attributable to covered gifts or covered bequests when computing the 
section 2801 ratio (described in paragraph (c)(1)(ii) of this section) 
that will be applicable to distributions made by the foreign trust to 
U.S. recipients during the subject year and thereafter until the 
effective date of any subsequent election meeting the requirements of 
paragraph (d)(3) of this section. The U.S. recipients of distributions 
from the foreign trust, however, should take into consideration the 
additional value determined by the IRS, on which the foreign trust did 
not timely pay the section 2801 tax, when computing the section 2801 
ratio to be applied to a distribution from the trust. See paragraph (c) 
of this section. Any disagreement with regard to that additional value 
will be an issue to be resolved as part of the review of that U.S. 
recipient's own Form 708 reporting a distribution.
    (B) Notice to permissible distributees. If the trustee of the 
foreign trust fails to enter into the closing agreement and to remit, 
by the due date specified or otherwise agreed to by the IRS, the 
additional section 2801 tax, including all interest and penalties, in 
accordance with the procedure in paragraph (d)(6)(i) of this section, 
the trustee should notify promptly each permissible distributee, as 
defined in paragraph (d)(3)(ii)(F) of this section:
    (1) That the foreign trust's election was terminated and the 
effective date of the termination (see paragraph (d)(5)(ii)(B)(2) of 
this section);
    (2) Of the amount of additional value on which the foreign trust 
did not timely pay the section 2801 tax as determined or otherwise 
agreed to by the IRS, which value the IRS thus deems to be attributable 
to covered gifts and covered bequests; and
    (3) That each U.S. recipient of a distribution made from the 
foreign trust on or after that termination date is subject to the 
section 2801 tax on the portion of each such distribution attributable 
to covered gifts and covered bequests.
    (C) Reasonable cause. If a U.S. recipient received a distribution 
from the foreign trust on or after January 1 of the year for which the 
election was terminated and the election became an imperfect election, 
provided the U.S. recipient files a Form 708 and pays the section 2801 
tax within a reasonable period of time after being notified by the 
trustee of the foreign trust or otherwise becoming aware that a valid 
election was not in effect when the distribution was made, the U.S. 
recipient's failure to timely file and pay are due to reasonable cause 
and not willful neglect for purposes of section 6651. For this purpose, 
a reasonable period of time is

[[Page 3406]]

not more than six months after the U.S. recipient is notified by the 
trustee or otherwise becomes aware that a valid election is not in 
effect.
    (D) Interim period. If a foreign trust's valid election is 
terminated and becomes an imperfect election, there is a period of time 
(interim period) that begins on the effective date of the termination 
of the election (see paragraph (d)(5)(ii)(B) of this section) during 
which both the foreign trust and its U.S. beneficiaries are likely to 
continue to comply with section 2801 as it applies to an electing 
foreign trust with a valid election in place. The interim period ends 
on the earlier of December 31 of the calendar year during which the 
additional amount of section 2801 tax was due to be paid, as described 
in paragraph (d)(6)(i) of this section, or the effective date of a 
subsequent valid election to be treated as a domestic trust for 
purposes of section 2801. As described in paragraph (d)(6)(iii)(A) of 
this section regarding imperfect elections, the value of the covered 
gifts and covered bequests received by the foreign trust during this 
interim period, which the foreign trust has reported on one or more 
filed Forms 708 and on which the foreign trust has paid the section 
2801 tax, is no longer considered to be attributable to covered gifts 
and covered bequests for purposes of computing the section 2801 ratio 
described in paragraph (c)(1)(ii) of this section as it applies to 
distributions made by non-electing foreign trusts to their U.S. 
beneficiaries. In addition, each distribution made by the foreign trust 
to a U.S. citizen or resident during this interim period must be 
reported on that U.S. recipient's Form 708 by applying the section 2801 
ratio to that distribution. If, once the interim period has ended, the 
foreign trust has no election in place, the rules of section 
2801(e)(4)(B)(i) will apply until the foreign trust subsequently (if 
ever) makes another valid election to be treated as a domestic trust 
for purposes of section 2801.
    (7) No overpayment caused solely by virtue of defect in election. 
Any remittance of section 2801 tax made by an electing foreign trust 
does not become an overpayment solely by virtue of a defect in the 
election. Instead, if at some subsequent time the IRS determines that 
the election was not in fact a valid election, then the election shall 
be considered valid only with respect to the value of the covered gifts 
or covered bequests on which the section 2801 tax was paid by the 
foreign trust and such value on which the section 2801 tax has been 
paid is no longer treated as attributable to a covered gift or covered 
bequest for purposes of determining the portion of the foreign trust 
attributable to covered gifts and covered bequests. See paragraphs 
(d)(2)(i) and (6)(iii) of this section.
    (e) Examples. The provisions of this section are illustrated by the 
following examples.
    (1) Example 1: Computation of section 2801 ratio. A and B each 
contribute $100,000 to a new foreign trust. A (but not B) is a covered 
expatriate and A's contribution is a covered gift. The trustee of the 
trust does not make a valid election to have the trust treated as a 
domestic trust for purposes of section 2801. The section 2801 ratio 
immediately after these two contributions is 0.50, computed as follows: 
the pre-contribution value of the trust ($0) multiplied by the pre-
contribution section 2801 ratio (0), plus the current covered gift 
($100,000), divided by the post-contribution fair market value of the 
trust ($200,000). See Sec.  28.2801-5(c). Therefore, 50 percent of each 
distribution from the trust to a U.S. recipient is subject to the 
section 2801 tax until the next contribution is made to the trust. If 
the trustee distributes $40,000 to C, a U.S. citizen, before the trust 
receives any other contributions, then $20,000 ($40,000 x 0.5) is a 
covered gift to C.
    (2) Example 2: Distribution to spouse. In Year 1, A contributes 
$300,000 to a foreign trust. A is a covered expatriate. B, A's U.S. 
citizen spouse, and A's issue may receive discretionary distributions 
of income and principal. The transfer would not have qualified for the 
gift tax marital deduction if A had been a U.S. citizen or resident at 
the time of the gift; therefore, A's contribution is a covered gift. 
See sections 2801(e)(3) and 2523. No one pays foreign gift taxes on A's 
contribution. The trustee of the trust does not make a valid election 
to have the trust treated as a domestic trust for purposes of section 
2801. The section 2801 ratio immediately after A's contribution is one. 
The highest gift tax rate is 40 percent, and the section 2801(c) amount 
is $17,000. The trustee distributes $200,000 to B in Year 1. The entire 
amount is a covered gift to B. See section 28.2801-3(c)(5). This is the 
only covered gift B receives in Year 1. B receives no covered bequests 
in Year 1. B's section 2801 tax for Year 1 is computed by multiplying 
B's net covered gift by 40 percent. B's net covered gift for Year 1 is 
$183,000, which is determined by reducing B's covered gift received 
during Year 1 by the section 2801(c) amount. B's section 2801 tax 
liability for Year 1 is $73,200 ($183,000 x 0.4).
    (3) Example 3: Computation of section 2801 ratio when multiple 
contributions are made to foreign trust. (i) In 2005, A, a U.S. 
citizen, established and funded an irrevocable foreign trust with 
$200,000. On January 1 of each of the following three years (2006 
through 2008), A contributed an additional $100,000 to the foreign 
trust. A reported A's contributions to the foreign trust as completed 
gifts on timely filed Forms 709, for calendar years 2005 through 2008. 
None of these contributions is a covered gift because the gifts 
predated the effective date of section 2801. On August 8, 2008, a date 
after the effective date of section 2801 (June 17, 2008), A expatriated 
and became a covered expatriate. On January 1 of a year after 2008 
(Year X), A makes an additional $100,000 contribution to the trust. The 
aggregate $600,000 contributed to the trust by A, both before and after 
expatriation, are the only contributions to the trust. The trustee of 
the foreign trust does not make a valid election to have the trust 
treated as a domestic trust for purposes of section 2801. Each year, 
the trustee of the foreign trust provides beneficiary B, a U.S. 
citizen, with an accounting of the trust showing each receipt and 
disbursement of the trust during that year, including the date and 
amount of each contribution by A.
    (ii) The fair market value of the trust was $610,000 immediately 
prior to A's contribution to the trust on January 1, Year X. Therefore, 
upon the Year X contribution of A's first and only covered gift, the 
portion of the trust attributable to covered gifts and covered bequests 
(covered portion) changed from zero to 0.14 ([(section 2801 ratio of 0 
x $610,000 fair market value pre-contribution) plus the $100,000 
covered gift]/$710,000 fair market value post-contribution). See 
paragraph (c) of this section.
    (iii) In February of Year X, B received a distribution of $225,000 
from the foreign trust. Although A contributed a total of $600,000 to 
the foreign trust, only $100,000 of that total was a covered gift, 
being the only contribution made by A both after the enactment of 
section 2801 and after A's expatriation. Under paragraph (c) of this 
section, the portion of the $225,000 distribution from the foreign 
trust attributable to a covered gift is $31,500 ($225,000 x 0.14 
(section 2801 ratio)) because the distribution is made proportionally 
from the covered and non-covered portions of the trust. See paragraph 
(c)(1) of this section. Accordingly, B received a covered gift of 
$31,500.
    (iv) Pursuant to the terms of the foreign trust, the trust made a 
terminating distribution on August 5,

[[Page 3407]]

Year X, when B turned 35, and B received the balance of the appreciated 
trust, $505,000. The portion of this distribution attributable to 
covered gifts and covered bequests is $70,700 ($505,000 x 0.14). 
Therefore, B has received covered gifts from the foreign trust during 
Year X in the total amount of $102,200 ($31,500 + $70,700).
    (4) Example 4: Termination of election. (i) In Year 1, A 
contributes $200,000 and B contributes $100,000 to Trust, a foreign 
trust. A and B are covered expatriates. A's and B's contributions are 
covered gifts. No one pays foreign gift taxes on A's and B's 
contributions. The trustee of Trust makes a valid election to have 
Trust treated as a domestic trust for purposes of section 2801. The 
highest gift tax rate is 40 percent, and the section 2801(c) amount is 
$17,000. The section 2801 tax for Year 1 is computed by multiplying the 
net covered gifts and covered bequests by 40 percent. The net covered 
gifts and covered bequests for Year 1 total $283,000, determined by 
reducing the covered gifts and covered bequests received by Trust 
during Year 1, $300,000, by the section 2801(c) amount, $17,000. 
Trust's 2801 tax liability for Year 1 is $113,200 ($283,000 x 0.4). Any 
distributions made to U.S. recipients before the trust receives another 
contribution have a section 2801 ratio of zero and are not subject to 
the section 2801 tax. See paragraph (d)(2)(i) of this section.
    (ii) In Year 2, A contributes $100,000 to Trust, all of which is a 
covered gift. The trustee of Trust fails to timely file a Form 708 for 
Year 2 and timely pay the section 2801 tax. The fair market value of 
Trust was $400,000 immediately prior to A's contribution. The section 
2801 ratio immediately after A's contribution is 0.20, computed as 
follows: the pre-contribution value of Trust ($400,000) multiplied by 
the section 2801 ratio in effect immediately prior to the Year 2 
contribution (0), plus the fair market value of the Year 2 contribution 
that constitutes a covered gift ($100,000), divided by the fair market 
value of Trust after the Year 2 contribution ($500,000). See paragraph 
(c)(1) and (2) of this section. If the trustee distributes $40,000 to 
C, a U.S. citizen, after the contribution in Year 2, then $8,000 
($40,000 x 0.20) is a covered gift to C. In Year 2, C also receives a 
covered gift of $50,000 directly from B. No one pays foreign gift taxes 
on B's covered gift. C receives no covered bequests in Year 2. C's 
section 2801 tax for Year 2 is computed by multiplying C's net covered 
gifts and covered bequests by 40 percent. C's net covered gifts and 
covered bequests for Year 2 total $41,000, determined by reducing the 
covered gifts and covered bequests received by C during Year 2, $58,000 
($8,000 + $50,000), by the section 2801(c) amount, $17,000. C's section 
2801 tax liability for Year 2 is $16,400 ($41,000 x 0.4).
    (5) Example 5: Imperfect election of foreign trust. (i) In Year 1, 
CE, a covered expatriate, gives a 20 percent limited partnership 
interest in a closely held business to a foreign trust created for the 
benefit of CE's child, A, who is a U.S. citizen. The limited 
partnership interest is a covered gift. The trustee of the foreign 
trust makes a valid election to have the trust treated as a domestic 
trust for purposes of section 2801, trustee timely files a Form 708, 
reports the fair market value of the covered gift as $500,000, and 
timely pays the section 2801 tax on the reported fair market value of 
the covered gift. Later in Year 1, the trust makes a $100,000 
distribution to A.
    (ii) In Year 2, CE contributes $200,000 in cash to the foreign 
trust. The cash is a covered gift. The trustee of the foreign trust 
timely files a Form 708 reporting the transfer and pays the section 
2801 tax. The trust does not make a distribution to any beneficiary 
during Year 2. In Year 3, the IRS disputes the reported value of the 
partnership interest transferred in Year 1 and determines that the 
proper valuation on the date of the gift was $800,000. In Year 3, the 
IRS issues a letter to the trustee of the foreign trust detailing its 
finding of the increased valuation and of the resulting additional 
section 2801 tax including accrued interest, if any, due on or before a 
later date in Year 3 specified in the letter. The foreign trust fails 
to pay the additional section 2801 tax liability on or before that due 
date.
    (iii) Under paragraph (d)(6)(iii) of this section, the foreign 
trust's election for Year 1 is terminated and converted into an 
imperfect election as of January 1 of Year 1. In computing the foreign 
trust's section 2801 ratio for Year 1, the $500,000 of value on which 
the section 2801 tax was timely paid is no longer considered to be 
attributable to a covered gift. See paragraph (d)(6)(iii) of this 
section. When the trustee advises A of the letter from the IRS, A must 
file a late Form 708 reporting the portion of the Year 1 distribution 
attributable to covered gifts and covered bequests. Although A may owe 
section 2801 tax and interest, A will not owe any penalties under 
section 6651 as long as A files the Form 708 and pays the tax within 
six months after A receives notice of the termination of the election 
from the trustee of the foreign trust or otherwise becomes aware of the 
termination of the election. See paragraph (d)(6)(iii)(C) of this 
section.
    (iv) When A files a Form 708 to report the Year 1 distribution, the 
IRS will verify whether A treated the $300,000 undervaluation claimed 
by the IRS as a covered gift in computing the section 2801 ratio. As 
with any other item reported on that return, A has the burden to prove 
the value of the covered gift to the foreign trust, and the IRS may 
challenge that value. If A treats the $300,000 as a covered gift to the 
trust, under paragraph (c)(1)(ii) of this section, the section 2801 
ratio after the Year 1 contribution is 0.375 ($0 + ($300,000)/
$800,000)). Thus, 37.5 percent of all distributions made to A from the 
foreign trust during Year 1 are subject to the section 2801 tax (plus 
interest from the due date of the tax as if reported on a Form 708 that 
was timely filed as to Year 1).
    (v) Although the foreign trust timely filed the Form 708 for Year 2 
and timely paid the section 2801 tax shown on that return, and although 
the foreign trust's election had not yet been terminated and converted 
into an imperfect election during Year 2, the foreign trust 
nevertheless did not have a valid election for Year 2 because the trust 
did not timely pay the section 2801 tax on all covered gifts and 
covered bequests received in prior years as required in paragraph 
(d)(3) of this section, specifically, the tax on the additional 
$300,000 of value of the Year 1 transfer. However, under paragraph 
(d)(6)(iii)(D) of this section, because the foreign trust timely filed 
the Form 708 and paid the section 2801 tax on the Year 2 covered gift 
of $200,000, the $200,000 amount is no longer considered a covered gift 
for purposes of computing the section 2801 ratio after that 
contribution.
    (6) Example 6: Subsequent election after termination of election. 
The facts are the same as in paragraph (e)(5) of this section (Example 
5). In Year 3, the foreign trust does not receive a covered gift or 
covered bequest. However, the trustee decides that making another 
election to be treated as a domestic trust would be in the best 
interests of the trust's beneficiaries. Accordingly, by the due date 
for the Form 708 for Year 3, the trustee timely files the return and 
pays the section 2801 tax on the portion of the trust attributable to 
covered gifts and covered bequests. See paragraph (d)(5)(iii) of this 
section. The trustee calculates the portion of the trust attributable 
to covered gifts and covered bequests received by the trust in prior 
calendar years by multiplying the fair market value of the trust on 
December 31, Year 2, by the section 2801 ratio in effect on that date. 
See paragraph

[[Page 3408]]

(d)(3)(iii) of this section. The foreign trust is an electing foreign 
trust in Year 3.
    (f) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  28.2801-6  Special rules and cross-references.

    (a) Determination of basis. For purposes of determining the U.S. 
recipient's basis in property received as a covered gift or covered 
bequest, see sections 1015 and 1014 of the Code, respectively. However, 
the basis adjustment provided in section 1015(d) does not apply to 
increase the basis in a covered gift to reflect the tax paid under this 
section.
    (b) Generation-skipping transfer tax. Transfers made by a 
nonresident not a citizen of the United States (NRNC transferor) are 
subject to generation-skipping transfer (GST) tax only to the extent 
those transfers are subject to Federal estate or gift tax as described 
in Sec.  26.2652-1(a)(2) of this chapter. In applying this rule, 
taxable distributions and taxable terminations are subject to the GST 
tax only to the extent the NRNC transferor's contributions to the 
trust, as defined in Sec.  26.2652-1(b)(1) of this chapter, were 
subject to Federal estate or gift tax as described in Sec.  26.2652-
1(a)(2) of this chapter. See Sec.  26.2663-2 of this chapter. A 
transfer is subject to Federal estate or gift tax, regardless of 
whether a Federal estate or gift tax return reporting the transfer is 
timely filed and regardless of whether chapter 15 of the Code applies 
because of a covered expatriate's failure to timely file an estate or 
gift tax return.
    (c) Information returns--(1) Gifts and bequests. Pursuant to 
section 6039F of the Code and any corresponding regulations and Form 
3520, Part IV, each U.S. person who treats an amount received from a 
foreign person (other than through a foreign trust) as a gift or 
bequest (whether or not a covered gift or covered bequest) must report 
such gift or bequest on Part IV of Form 3520 if the value of the total 
of such gifts and bequests exceeds a certain threshold. For purposes of 
this provision, a U.S. person is as defined in section 7701(a)(30) of 
the Code and includes a U.S. resident within the meaning of section 
7701(b)(1)(A) of the Code.
    (2) Foreign trust distributions. Pursuant to section 6048(c) of the 
Code and the corresponding regulations, and to the extent provided in 
Notice 97-34 and Part III of Form 3520 and its Instructions, a U.S. 
person must report each distribution received during the taxable year 
from a foreign trust on Part III of Form 3520. Under section 6677(a) of 
the Code, a penalty of the greater of $10,000 or 35 percent of the 
gross value of the distribution may be imposed on a U.S. person who 
fails to timely report the distribution. For purposes of this 
provision, the term U.S. person is as defined in section 7701(a)(30) 
and includes both U.S. citizens and U.S. residents within the meaning 
of section 7701(b)(1)(A).
    (3) Penalties and use of information. The filing of Form 706, Form 
706-NA, Form 706-QDT, Form 708, Form 709, or Form 709-NA, or any 
successor form, does not relieve a U.S. citizen or resident who is 
required to file Form 3520 from any penalties imposed under section 
6677(a) for failure to comply with section 6048(c), or from any 
penalties imposed under section 6039F(c) of the Code for failure to 
comply with section 6039F(a). Pursuant to section 6039F(c)(1)(A), the 
Secretary of the Treasury or her delegate may determine the tax 
consequences of the receipt of a purported foreign gift or bequest.
    (d) Application of penalties--(1) Accuracy-related penalties on 
underpayments. The section 6662 accuracy-related penalty may be imposed 
upon any underpayment of tax attributable to--
    (i) A substantial valuation understatement under section 6662(g) of 
a covered gift or covered bequest; or
    (ii) A gross valuation misstatement under section 6662(h) of a 
covered gift or covered bequest.
    (2) Penalty for substantial and gross valuation misstatements 
attributable to incorrect appraisals. The section 6695A penalty for 
substantial and gross valuation misstatements attributable to incorrect 
appraisals may be imposed upon any person who prepares an appraisal of 
the value of a covered gift or covered bequest.
    (3) Penalty for failure to file a return and to pay tax. See 
section 6651 for the application of a penalty for the failure to file 
Form 708, or the failure to pay the section 2801 tax.
    (e) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.2801-7   Determining responsibility under section 2801.

    (a) Responsibility of U.S. citizens or residents receiving gifts or 
bequests from expatriates. It is the responsibility of the taxpayer (in 
this case, the U.S. citizen or resident receiving a gift or bequest 
from an expatriate or a distribution from a foreign trust funded at 
least in part by an expatriate) to ascertain the taxpayer's obligations 
under section 2801 of the Code, which includes making the determination 
of whether the transferor is a covered expatriate and whether the 
transfer is a covered gift or covered bequest.
    (b) Disclosure of return and return information--(1) In general. In 
certain circumstances, the Internal Revenue Service (IRS) may be 
permitted, upon request of a U.S. citizen or resident in receipt of a 
gift or bequest from an expatriate, to disclose to the U.S. citizen or 
resident return or return information of the donor or decedent 
expatriate that may assist the U.S. citizen or resident in determining 
whether the donor or decedent was a covered expatriate and whether the 
transfer was a covered gift or covered bequest. See section 6103 of the 
Code. The U.S. citizen or resident may not rely upon this information, 
however, if the U.S. citizen or resident knows, or has reason to know, 
that the information received from the IRS is incorrect or incomplete. 
The circumstances under which such information may be disclosed to a 
U.S. citizen or resident, the process for authorizing disclosures, and 
the procedures for requesting such information from the IRS, will be as 
provided by publication in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (2) Rebuttable presumption. Unless a living donor expatriate 
authorizes the disclosure of the donor expatriate's relevant return or 
return information to the U.S. citizen or resident receiving the gift, 
there is a rebuttable presumption that the donor is a covered 
expatriate and that the gift is a covered gift.
    (c) Protective return. A taxpayer who reasonably concludes that a 
gift or bequest is not subject to section 2801 may file a protective 
Form 708 to start the period of limitations for the assessment of any 
section 2801 tax. See Sec.  28.6011-1(b) that provides safe harbor 
procedures for filing a protective Form 708.
    (d) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.6001-1   Records required to be kept.

    (a) In general. Every U.S. recipient (as defined in Sec.  28.2801-
2(e)) subject to taxation under chapter 15 of subtitle B must keep, for 
the purpose of determining the total amount of covered gifts and 
covered bequests, such permanent books of account or records as are 
necessary to establish the amount of that person's aggregate covered 
gifts and covered bequests, and the other information required to be 
shown on Form 708, United States Return of Tax for Gifts and Bequests 
Received from Covered Expatriates, or any successor form. All documents 
and vouchers used

[[Page 3409]]

in preparing Form 708 must be retained by the person required to file 
the return so as to be available for inspection so long as the contents 
thereof may become material in the administration of any internal 
revenue law.
    (b) Supplemental information. The U.S. recipient, as defined in 
Sec.  28.2801-2(e), must furnish such supplemental information as may 
be deemed necessary by the Internal Revenue Service (IRS) to allow the 
IRS to determine the correct amount of tax. Therefore, the U.S. 
recipient must furnish, upon request, copies of all documents relating 
to the covered gift or covered bequest, appraisals of any items 
included in the aggregate amount of covered gifts and covered bequests, 
copies of balance sheets and other financial statements obtainable by 
that person relating to the value of stock or other property 
constituting the covered gift or covered bequest, and any other 
information obtainable by that person that may be necessary in the 
determination of the tax. See section 2801 of the Code and the 
corresponding regulations. For every policy of life insurance listed on 
the return, the U.S. recipient must procure a statement from the 
insurance company on Form 712, Life Insurance Statement, or any 
successor form, and file it with the IRS office where the return is 
filed. If specifically requested by the IRS, the insurance company must 
file this statement directly with the IRS.
    (c) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.6011-1   Returns.

    (a) Return required. The return of any section 2801 tax imposed by 
chapter 15 of subtitle B of the Internal Revenue Code (Code) must be 
made on Form 708, United States Return of Tax for Gifts and Bequests 
Received from Covered Expatriates, in accordance with the instructions 
applicable to the form (or on such other form as may be provided in 
future guidance or instructions). With respect to each covered gift and 
covered bequest received during the calendar year, the U.S. recipient 
as defined in Sec.  28.2801-2(e) must include on Form 708 the 
information set forth in Sec.  25.6019-4 of this chapter. The U.S. 
recipient must file Form 708 for each calendar year in which the U.S. 
recipient receives a covered gift or covered bequest. The U.S. 
recipient who receives the covered gift or covered bequest during the 
calendar year is the person required to file the return. A U.S. 
recipient is not required to file such form, however, for a calendar 
year in which the total fair market value of all covered gifts and 
covered bequests received by that person during that calendar year is 
less than or equal to the section 2801(c) amount (as defined in Sec.  
28.2801-2(l)).
    (b) Protective return safe harbor. A U.S. citizen or resident (as 
defined in Sec.  28.2801-2(b)) who receives a gift or bequest from an 
expatriate and reasonably concludes that the gift or bequest is not a 
covered gift or a covered bequest from a covered expatriate may file a 
protective Form 708 to start the running of the period of limitations 
for assessment of tax. Under the safe harbor procedure of this 
paragraph (b), a Form 708 will start the running of the period of 
limitations for assessment of tax if the return includes all of the 
information otherwise required on Form 708, along with an affidavit, 
signed under penalties of perjury, setting forth the information on 
which the U.S. citizen or resident has relied in concluding that the 
donor or decedent, as the case may be, was not a covered expatriate, or 
that the transfer was not a covered gift or a covered bequest, as well 
as that person's efforts to obtain other information that might be 
relevant to these determinations. For purposes of this safe harbor, if 
the U.S. citizen or resident has obtained, and is permitted to rely on, 
information from the Internal Revenue Service (IRS) (as described in 
Sec.  28.2801-7(b)(1)), the U.S. citizen or resident must attach a copy 
of such information to the protective return. For purposes of this safe 
harbor, the U.S. citizen or resident also must attach a copy of a 
completed Part III of Form 3520, Annual Return to Report Transactions 
With Foreign Trusts and Receipt of Certain Foreign Gifts, for all trust 
distributions, or Part IV of Form 3520 for all gifts and bequests, if 
applicable.
    (c) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.6060-1   Reporting requirements for tax return preparers.

    (a) In general. A person that employs one or more signing tax 
return preparers to prepare a return or claim for refund of section 
2801 tax, other than for that person, at any time during a return 
period, must satisfy the recordkeeping and inspection requirements in 
the manner stated in Sec.  1.6060-1 of this chapter.
    (b) Applicability date. This section applies with regard to returns 
and claims for refund filed on or after January 14, 2025


Sec.  28.6071-1   Time for filing returns.

    (a) In general--(1) Due Date. A U.S. recipient, as defined in Sec.  
28.2801-2(e), must file Form 708, United State.s Return of Tax for 
Gifts and Bequests Received from Covered Expatriates, or any substitute 
or successor form specified in guidance or instructions, on or before 
the fifteenth day of the eighteenth calendar month following the close 
of the calendar year in which the covered gift or covered bequest was 
received. Notwithstanding the preceding sentence, the due date for a 
Form 708 reporting a covered bequest that is not received on the 
decedent's date of death under Sec.  28.2801-4(d)(3) is the later of--
    (i) The fifteenth day of the eighteenth calendar month following 
the close of the calendar year in which the covered expatriate died; or
    (ii) The fifteenth day of the sixth month of the calendar year 
following the close of the calendar year in which the covered bequest 
was received.
    (2) If a U.S. recipient receives multiple covered gifts and covered 
bequests during the same calendar year, the rule in paragraph (a)(1) of 
this section may result in different due dates and the filing of 
multiple returns reporting the different transfers received during the 
same calendar year.
    (b) Migrated foreign trust. The due date for a Form 708 for the 
year in which a foreign trust becomes a domestic trust is the fifteenth 
day of the sixth month of the calendar year following the close of the 
calendar year in which the foreign trust becomes a domestic trust.
    (c) Certain returns by foreign trusts with election under Sec.  
28.2801-5(d) for calendar year in which no covered gift or covered 
bequest received. A foreign trust making an election to be treated as a 
domestic trust for purposes of section 2801 under Sec.  28.2801-5(d) 
(electing foreign trust) for a calendar year in which the foreign trust 
received no covered gifts or covered bequests must file a Form 708 on 
or before the fifteenth day of the sixth month of the calendar year 
following the close of the calendar year for which the election is 
made.
    (d) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  28.6081-1   Extension of time for filing returns reporting gifts 
and bequests from covered expatriates.

    (a) In general. A U.S. recipient as defined in Sec.  28.2801-2(e) 
may request an extension of time to file a Form 708, United States 
Return of Tax for Gifts and Bequests Received from Covered Expatriates, 
by filing an appropriate form for extension as specified by guidance or 
instructions. A U.S. recipient must include on the form for extension 
an estimate of the amount of

[[Page 3410]]

section 2801 tax liability and must file the form for extension with 
the Internal Revenue Service in the manner designated in the 
instructions issued with respect to such form.
    (b) Automatic extension. A U.S. recipient as defined in Sec.  
28.2801-2(e) will be allowed an automatic six-month extension of time 
beyond the date prescribed in Sec.  28.6071-1 to file Form 708 if the 
form for extension is filed on or before the due date for filing Form 
708 in accordance with the procedures under paragraph (a) of this 
section.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (b) of 
this section will not extend the time for payment of any tax due with 
such return.
    (d) Penalties. See section 6651 of the Code regarding penalties for 
failure to file the required tax return or failure to pay the amount 
shown as tax on the return.
    (e) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.6091-1   Place for filing returns.

    (a) In general. A U.S. recipient, as defined in Sec.  28.2801-2(e), 
must file Form 708, United States Return of Tax for Gifts and Bequests 
Received from Covered Expatriates, with the Internal Revenue Service in 
the manner prescribed by the instructions issued with respect to that 
form.
    (b) Applicability date. This section applies on and after January 
14, 2025.


Sec.  28.6101-1  Period covered by returns.

    See Sec.  28.6011-1 for the rules relating to the period covered by 
the return.


Sec.  28.6107-1   Tax return preparer must furnish copy of return or 
claim for refund to taxpayer and must retain a copy or record.

    (a) In general. A person who is a signing tax return preparer of 
any return or claim for refund of any section 2801 tax must furnish a 
completed copy of the return or claim for refund to the taxpayer and 
retain a completed copy or record in the manner stated in Sec.  1.6107-
1 of this chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed on or after January 14, 2025.


Sec.  28.6109-1  Tax return preparers furnishing identifying numbers 
for returns or claims for refund.

    (a) In general. Each tax return or claim for refund of the section 
2801 tax prepared by one or more signing tax return preparers must 
include the identifying number of the preparer required by Sec.  
1.6695-1(b) of this chapter to sign the return or claim for refund in 
the manner stated in Sec.  1.6109-2 of this chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed on or after January 14, 2025.


Sec.  28.6151-1   Time and place for paying tax shown on returns.

    (a) In general. The section 2801 tax shown on the return must be 
paid at the time prescribed in Sec.  28.6071-1 for filing the return, 
and in the manner prescribed in Sec.  28.6091-1 for filing the return.
    (b) Applicability date. This section applies to covered gifts or 
covered bequests received on or after January 1, 2025.


Sec.  28.6694-1   Section 6694 penalties applicable to return preparer.

    (a) In general. For general rules regarding penalties under section 
6694 of the Code applicable to preparers of returns or claims for 
refund of the section 2801 tax, see Sec.  1.6694-1 of this chapter.
    (b) Applicability date. This section applies with regard to returns 
and claims for refund filed, and advice provided, on or after January 
14, 2025.


Sec.  28.6694-2  Penalties for understatement due to an unreasonable 
position.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any section 2801 tax is subject to penalties 
under section 6694(a) of the Code in the manner stated in Sec.  1.6694-
2 of this chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed, and advice provided, on or after January 14, 2025.


Sec.  28.6694-3   Penalty for understatement due to willful, reckless, 
or intentional conduct.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any section 2801 tax is subject to penalties 
under section 6694(b) of the Code in the manner stated in Sec.  1.6694-
3 of this chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed, and advice provided, on or after January 14, 2025.


Sec.  28.6694-4   Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of taxpayer's 
liability and certain other procedural matters.

    (a) In general. For rules relating to the extension of the period 
of collection when a tax return preparer who prepared a return or claim 
for refund of the section 2801 tax pays 15 percent of a penalty for 
understatement of taxpayer's liability, and for procedural matters 
relating to the investigation, assessment, and collection of the 
penalties under section 6694(a) and (b) of the Code, the rules under 
Sec.  1.6694-4 of this chapter apply.
    (b) Applicability date. This section applies to returns and claims 
for refund filed, and advice provided, on or after January 14, 2025.


Sec.  28.6695-1   Other assessable penalties with respect to the 
preparation of tax returns for other persons.

    (a) In general. A person who is a tax return preparer of any return 
or claim for refund of any section 2801 tax is subject to penalties for 
failure to furnish a copy to the taxpayer under section 6695(a) of the 
Code, failure to sign the return under section 6695(b), failure to 
furnish an identification number under section 6695(c), failure to 
retain a copy or list under section 6695(d), failure to file a correct 
information return under section 6695(e), and negotiation of a check 
under section 6695(f), in the manner stated in Sec.  1.6695-1 of this 
chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed on or after January 14, 2025.


Sec.  28.6696-1   Claims for credit or refund by tax return preparers 
and appraisers.

    (a) In general. With respect to claims for credit or refund by a 
tax return preparer who prepared a return or clai for refund for any 
section 2801 tax, or by an appraiser that prepared an appraisal in 
connection with such a return or claim for refund under section 6695A 
of the Code, the rules under Sec.  1.6696-1 of this chapter will apply.
    (b) Applicability date. This section applies to returns and claims 
for refund filed, appraisals, and advice provided, on or after January 
14, 2025.


Sec.  28.7701-1   Tax return preparer.

    (a) In general. For the definition of the term tax return preparer, 
see Sec.  301.7701-15 of this chapter.
    (b) Applicability date. This section applies to returns and claims 
for refund filed, and advice provided, on or after January 14, 2025.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: December 23, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00284 Filed 1-10-25; 8:45 am]
BILLING CODE 4830-01-P