New Tax Relief Act of 2010 Repeals Gain Recognition for Certain Transfers of Property to Nonresident Aliens and Grantor Trusts
Transfers of appreciated property to foreign estates and to non-grantor foreign trusts are subject to federal income tax to the transferor as if disposed in a taxable transaction. Gain recognized is the fair market value of the property less its adjusted basis. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), P.L. 107-16, §542(e)(1) amended the applicable provision, §684, and extended its reach to transfers of appreciated property made in 2010 that were (1) transfers made or taking effect at death, to nonresident aliens, and (2) transfers made to a foreign grantor trust, i.e., to the extent a trust is wholly or partially treated as owned by a non-U.S. person . Since EGTRRA had its own “sunset” rule, the expansion of §684 to transfers at death to non-resident aliens and to foreign grantor trusts was, by design, only effective for transfers occurring during 2010. See EGTRRA §§ 901, 542(f)(2).
The Tax Relief Act of 2010 repeals (retroactively) the amendments to §684 made by EGTRRA. However, the gain recognition requirement will still apply if the executor of a decedent dying in 2010 elects, in accordance with the Tax Relief Act of 2010, to treat the estate tax as repealed for 2010 and applies the modified carryover basis rules in §1022. Thus, the repeal of the extension of §684 in 2010 to non-resident alien beneficiaries and foreign grantor trusts contained in TRA 2010 applies where the taxpayer (estate) treats the one year phase out of the estate tax under EGTRRA as not taking effect. See TRA §301(a). This is another factor to consider, therefore, in whether the executor for a decedent dying in 2010 should elect “in” for not applying the federal estate tax. Accordingly, subject to this 2010, §684 will not apply to a transfer made to a nonresident alien or foreign grantor trust during or after 2010. Transfers of appreciated property to foreign estates and to non-grantor foreign trusts will still be subject to income tax under §684.
