CCA 1020009: Counsel concluded that certain gift tax is not included in a nonresident's U.S. estate

Plain-English summary

In a Chief Counsel Advice memorandum, the IRS considered whether IRC § 2035(b) applies to the U.S. estate of a nonresident noncitizen under § 2104(b). The memorandum concludes that gift tax paid on a gift made within three years of death is not a gratuitous transfer within the meaning of §§ 2035 through 2038. Therefore, the gift tax payment is not treated as property situated in the United States under § 2104(b), and it does not increase the decedent's U.S. gross estate. The memorandum explains that the payment satisfies the donor's own tax liability and is not part of the donor's gift to the donee.

Ruling snapshot

• Question: Is gift tax paid within three years of death included in the U.S. estate of a nonresident noncitizen under IRC §§ 2035(b) and 2104(b)?
• Outcome: Advice given
• Key authorities: IRC §§ 2035(b) and 2104(b); Treas. Reg. § 20.2104-1(a)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201020009
       Release Date: 5/21/2010
       CC:INTL:BO1
       POSTU-112539-09

UILC: 2104.02-00- Revocable Transfers and Transfers within Three Years of Death

date: April 16, 2010

 to:   Supervisory Attorney
       Estate and Gift Tax
       SE:S:SP:EG:EC:1202

from: Branch Chief, Branch 1
Office of Associate Chief Counsel (International)
CC:INTL:BO1

subject: Inclusion of Gift Tax Paid within Three Years of Death in the Estate of a Nonresident
Alien

              This Chief Counsel Advice responds to your request for assistance in
       determining whether § 2035(b) of the Internal Revenue Code (the “Code”) applies to the
       U.S. estate of a nonresident not citizen decedent pursuant to § 2104(b) of the Code.
       The Office of the Associate Chief Counsel (International) has coordinated this issue with
       the Office of the Associate Chief Counsel (Passthroughs & Special Industries), and
       agrees with the analysis provided by it, as set out below. In accordance with I.R.C. §
       6110(k)(3), this Chief Counsel Advice may not be used or cited as precedent.

       ISSUE

              Does § 2035(b), which includes in the gross estate of a decedent the amount of
       any gift tax paid with respect to gifts made within three years of death, apply to a
       nonresident not citizen decedent’s U.S. estate pursuant to § 2104(b)?

       CONCLUSION

               We conclude that § 2035(b) does not apply to the payment of a gift tax made by
       a nonresident not citizen individual within three years of death, so that the amount of the
       gift tax is not includible in the U.S. estate of such a nonresident not citizen decedent.

       LAW

POSTU-112539-09 2

   Section 2001(a) imposes a tax on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States. Section 2033 provides that
the value of the gross estate includes the value of all property to the extent of the
interest therein of the decedent at the time of his death.

    Section 2035(a) provides that if (1) the decedent made a transfer (by trust or

otherwise) of an interest in any property, or relinquished a power with respect to any
property, during the 3-year period ending on the date of the decedent’s death, and (2)
the value of such property (or an interest therein) would have been included in the
decedent’s gross estate under §§ 2036, 2037, 2038, or 2042 if such transferred interest
or relinquished power had been retained by the decedent on the date of his death, the
value of the gross estate shall include the value of any property (or interest therein)
which would have been so included.

   Section 2035(b) provides that the amount of the gross estate shall be increased

by the amount of any tax paid under chapter 12 by the decedent or his estate on any gift
made by the decedent or his spouse during the 3-year period ending on the date of the
decedent’s death.

  Section 2101 imposes a tax on the transfer of the taxable estate (determined as

provided in § 2106) of every decedent nonresident not a citizen of the United States,
except as provided in § 2107.

   Section 2103 provides that, for purposes of § 2101, the value of the gross estate

of every decedent nonresident not a citizen of the United States shall be that part of his
gross estate (determined as provided in § 2031) which at the time of his death is
situated in the United States.

   Section 2104(b) provides that, for purposes of subchapter B (relating to estates

of nonresidents not citizens) any property of which the decedent has made a transfer,
by trust or otherwise, within the meaning of §§ 2035 to 2038, inclusive, shall be deemed
to be situated in the United States, if so situated either at the time of the transfer or at
the time of the decedent’s death. Treasury Regulation § 20.2104-1(a) provides rules
regarding when property is deemed situated in the United States.

ANALYSIS

   Sections 2035 through 2038 are part of the estate tax regime under chapter 11

and are applicable to “every decedent who is a citizen or resident of the United States”.
Under § 2103, the property of a decedent who was a nonresident not a citizen that is
situated in the United States is includible in his U.S. gross estate. Section 2104(b)
defines property within the United States by incorporating the rules under §§ 2035 to
2038 for purposes of determining whether property transferred by a nonresident will be

POSTU-112539-09 3

deemed to be situated in the United States (for purposes of inclusion under § 2103).
Although § 2104(b) refers to § 2035, it does not expressly refer to § 2035(b).

   We believe that the language in § 2104(b), i.e., any property of which the

decedent has made a “transfer…within the meaning of §§ 2035 to 2038”, requires that
the decedent gratuitously transfer such property before it will be deemed situated in the
United States. For the following reasons, it is our opinion that the payment of a gift tax
at issue here would not be a transfer within the meaning of §§ 2035 to 2038, for
purposes of § 2104(b).

   Historically, § 2035(a) was intended as a “contemplation of death” statute that

requires a decedent’s executor to include in the decedent’s gross estate property
transferred before death in order to deplete the estate. Sections 2036 through 2038 are
estate tax transfer sections under which a decedent’s gratuitous transfer of property is
includible in his gross estate because he retained (or otherwise held at death) economic
benefits, rights, or uses in the property. Section 2035(b) was designed to reverse the
effect of transfers made out of the estate within three years of death. Brown v. United
States, 329 F.3d 664 (9th Cir. 2003). The legislative history of that section states that
the section was enacted to eliminate the incentive to make deathbed transfers that
remove an amount equal to the gift tax from the decedent’s transfer tax base. H.R. REP.
NO. 94-1380, 94th Cong., 2d Sess. 12 (1976).

   Section 2035(a) applies to property gratuitously transferred by a decedent in the

three years preceding his death. Section 2035(b) applies to the gift tax paid on property
gratuitously transferred by a decedent in the three year period preceding his death. The
payment of gift tax is not a gratuitous transfer. Read literally, the applicability of
§ 2035(b) does not depend on a “transfer” of the gift tax payment. In contrast,
§ 2035(a) applies only if there was a transfer of economic benefits, rights or uses, and
the underlying property would have been otherwise includible in the decedent’s gross
estate under §§ 2036 through 2038. The distinction is significant because Congress, in
enacting the gift tax, intended the words “transfer by gift” to comprehend transactions
to the extent that “property or a property right is donatively passed to or conferred upon
another.” H.R. REP. NO. 708, 72nd Cong., 1st Sess. 27-28 (1932); S. REP. NO. 665, 72nd
Cong., 1st Sess. 39 (1932). Thus, for estate and gift tax purposes, a transfer requires a
gratuitous transfer in some manner from a donor to a donee. See Estate of Sanford v.
Commissioner, 308 U.S. 39 (1939) (“The gift tax [is] supplementary to the estate tax.
The two are in pari materia and must be construed together.”) Based on the legislative
purpose of the gift tax, and the language of §§ 2035(a) and 2035(b), the transfers
considered under § 2104(b) logically apply to transfers under § 2035(a).

   There is further support for the conclusion that the gift tax payment is not a

gratuitous transfer within the meaning of § 25.2511-1 of the Gift Tax Regulations. That
section states that “the gift tax is an excise tax on the [gratuitous] transfer. . . .” In
Dickman v. Commissioner, 465 U.S. 330, 340 (1984), the United States Supreme Court
opined that the gift tax is a tax on the gratuitous transfer of property. It is a payment

POSTU-112539-09 4

made to satisfy the donor’s own tax liability. In Diedrich v. Commissioner, 457 U.S. 191
(1982), the Court stated that a donor who makes a gift to a donee is considered to have
incurred a debt to the United States for the amount of the gift tax. This tax is the same
kind of debt obligation as the income tax. This rationale, i.e., that the gift tax payment is
not considered a component of the donor’s gift to the donee, is also supported by the
fact that the gift tax is calculated using a tax exclusive method (the applicable rate is
applied to the net gift, exclusive of gift taxes), whereas estate taxes are calculated on a
tax inclusive method (the applicable rate is applied to the gross estate before taxes are
deducted). Brown v. United States, 329 F.3d at 668.

    Consequently, we conclude that the payment of gift tax considered made under §

2035(b) is not a transfer within the meaning of §§ 2035 to 2038. Thus, it is not property
that is deemed situated in the United States at the time of payment of the tax under §
2104(b). Accordingly, the nonresident not citizen decedent’s gross estate is not
increased by the amount of the gift tax paid by such individual on a gift made during the
three year period ending on the date of the nonresident not citizen decedent’s death.

   The opinions in this memorandum pertaining to the federal estate tax apply only

to the extent that the relevant sections of the Code are in effect during the period at
issue.

  If you have any comments or questions please call Branch 1 of the Office of the

Associate Chief Counsel (International) at (202) 622-3880, or Branch 4 of the Office of
the Associate Chief Counsel (Passthroughs & Special Industries) at (202) 622-3090.

   This document may not be used or cited as precedent. Section 6110(j)(3) of the

Internal Revenue Code.