By Anthony Diosdi
The Small Business Job Protection Act of 1996 created reporting requirements for U.S. persons that receive large gifts after August 20, 1996 from foreign persons (including foreign corporations). Federal law requires gifts or bequests valued at more than $100,000 from a nonresident alien or foreign estate to be disclosed on an IRs Form 3520. Federal law also requires gifts valued at more than $16,076 from foreign corporations or foreign partnerships (adjusted annually for inflation) to be disclosed on an IRS Form 3520.
Besides the IRS reporting requirements of a Form 3520, anyone receiving a gift from a foreign corporation or foreign partnership should know that Internal Revenue Code Section 672(f)(4) broadly authorizes regulations to recharacterize gifts or bequests, directly or indirectly, from partnerships or foreign corporations, as income in appropriate circumstances to prevent avoidance of the payment of U.S. income taxes.
Under Treasury Regulation Section 1.672(f), as a general rule, if a U.S. donee receives a purported gift or bequest directly or indirectly from a partnership, the purported gift or bequest it must be included in the U.S. donee’s income as ordinary income. If a U.S. donee receives a purported gift or bequest directly or indirectly from a foreign corporation, the purported gift or bequest it also must generally be included in the U.S. donee’s gross income as a distribution from the foreign corporation. In the latter case, the U.S. donee will not be treated as having a basis in the foreign corporation, and will be treated as having a holding period in the foreign corporation equal to the average holding period (using a weighted average) of the actual interest holders. However, the gift or bequest will not be recharacterized if the donee can establish that a U.S. citizen or resident alien who directly or indirectly holds an interest in the partnership or foreign corporation treated the purported gift as a distribution from the partnership or foreign corporation and a subsequent gift to the donee, subject to consistent reporting.
Anyone receiving a gift from a foreign corporation or partnership in the form of stocks, units, ownership interests, or cash, should consult with a U.S. attorney well versed in international taxation.
The tax attorneys at Diosdi Ching & Liu, LLP represent clients in a wide variety of domestic and international tax planning and tax controversy cases.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi represents clients in federal tax controversy matters and federal white-collar criminal defense throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.