Discussion:Estate/Gift Tax Nonresident Alien

It appears that because the real property's situs is in the United States, it is included in the NRA's estate for estate tax purposes when she dies. BUT if the real property is transferred to a foreign corporation, then it's situs changes to outside of the United States and consequently it is not included for estate tax purpose. Is this correct?

Also, the real property is a tangible asset so if it is gifted away, then the giftor is liable for gift tax. BUT if the real property is transferred into an LLC, then the membership interests of the LLC can be gifted away and no gift tax liability will exist because the interests are intangible assets. Is this correct?

I've done a fair amount of research on this and these two strategies just seem too easy and good to be true, so my BS detector is going off and I'm doubting myself. Also, I can't find any case or revenue ruling or procedure that indicates one way or another. Thanks in advance.

An LLC gains you nothing if it's disregarded. If the LLC checks the box, then it can be a corporation and that will work; you probably would rather use a foreign corporation (including a box-checking LLC which will be disregarded in its home country).

LH2004, I'm curious why you believe a disregarded LLC will not work? It seems to me that the property interests in the LLC would still remain "intangible" for gift tax purposes regardless of the LLC's income tax treatment. Do you have any authority which suggests otherwise?

Once more, thank you for helping me out.

Also, I believe that gain may be recognized under Code § 897 on the transfer to the foreign corporation and 10% of the value of the property must be paid as a withholding tax by the foreign corporation under Code § 1445.

Thanks for the response. I too believe there might be gain upon the transfer to a foreign corp. Thank you for your response.

OK, so a possible strategy to avoid the LLC from being disregarded might be to have my client gift an interest (less than or equal to the annual exclusion) in the real property and then have both owners form and contribute the real property to a domestic LLC and then the client could gift all of her membership interests free from gift tax?

I really appreciate all of the feedback here as there is a lot of money on the line and I can't seem to find any concrete guidance.

I'm considering transferring the real estate to a domestic LLC as an alternative to transferring it to a foreign corporation. This is because it appears that "intangibles" (including domestic LLC membership intersts) can be gifted away by a NRA free from gift tax. So with this strategy I could avoid any gain that would occur upon the transfer to a foreign corporation and the new owner (a resident of California) would much rather the real estate be owned by a domestic LLC as opposed to a foreign corporation.

This, however, brings up two (perhaps related) questions. First, could the IRS argue that because the intent from the start was to gift the real estate, was there a deemed gift on the transfer into the LLC? Second, is there a valid partnership? If I were the IRS and the partnership has no activity other than owning a residence, I think I may be successful in arguing that the LLC should not be respected as an entity. Instead, the argument would go, the LLC interest in substance represented a fee simple interest directly in the real estate. Thus, the LLC interest would not be treated as intangible property.

The definition of intangible property for gift tax purposes is not clear. See for instance GCM 36860 in which a check was considered tangible property.

I really appreciate you taking the time to work through this with me.