Daily Tax Update - September 9, 2015: Treasury, IRS Issue Proposed Regulations Regarding Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates

Treasury, IRS Issue Proposed Regulations Regarding Imposition of Tax on Certain Gifts and Bequests From Covered Expatriates:  Today, Treasury and the IRS issued proposed regulations under section 2801 regarding the imposition of tax on U.S. citizens and residents who receive gifts or bequests from certain individuals who relinquished United States citizenship or ceased to be permanent residents of the United States on or after June 17, 2008.  Section 2801 was enacted, along with section 877A, in the Heroes Earnings Assistance and Relief Tax Act of 2008.  The proposed regulations set forth general rules of liability, define various terms, provide exceptions from liability, specify who is liable for payment of the tax and how the tax is calculated, provide guidance on the treatment of foreign trusts, and address the determination of the U.S. recipient’s basis in the covered gift or bequest.  The preamble to the proposed regulations states that the IRS intends to issue Form 708 (U.S. Return of Gifts or Bequests from Covered Expatriates), on which covered gifts and bequests are to be reported, when the regulations are finalized. The final regulations will contain the due date for filing Form 708 and the payment of the section 2801 tax.  Recipients of covered gifts and bequests “will be given a reasonable period of time” after the publication of final regulations to file the Form 708 and to pay the section 2801 tax on covered gifts and bequests received on or after June 17, 2008, and before the publication of final regulations.  According to the preamble, interest will not accrue on the section 2801 tax liability for any taxable years until the due date for payment, as specified in the final regulations, has passed.

Second Circuit Disallows Foreign Tax Credits in BNY Mellon and AIG Cases:  Today, the Court of Appeals for the Second Circuit issued a decision holding that the Tax Court and District Court for the Southern District of New York properly determined the tax implications of certain cross-border transactions involving BNY Mellon and AIG, respectively.  The BNY Mellon case involved a transaction commonly referred to as a “Structured Trust Advantaged Repackaged Securities” (STARS) transaction, while the AIG case involved a cross-border sale and repurchase transaction.  The court held that the economic substance doctrine applies to the foreign tax credit regime and that foreign taxes paid, but not foreign tax credits claimed, should be considered in calculating pre-tax profit to determine whether a transaction has objective economic substance.  The court also concluded that BNY Mellon was entitled to deduct interest expense paid on a loan entered into in connection with the STARS transaction.