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U.S. Estate and Gift Tax Treaties (Portfolio 851)

Tax Management Portfolio, U.S. Estate and Gift Tax Treaties, No. 851-2nd, describes the purpose, operation, and construction of the 17 estate and gift transfer tax treaties to which the United States is a party, as well as the income tax treaty with Canada, which bears on U.S. transfer taxes as well as Canadian income tax at death.

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DESCRIPTION

Tax Management Portfolio, U.S. Estate and Gift Tax Treaties, No. 851-2nd, describes the purpose, operation, and construction of the 17 estate and gift transfer tax treaties to which the United States is a party, as well as the income tax treaty with Canada, which bears on U.S. transfer taxes as well as Canadian income tax at death. The portfolio is divided into six parts. Part I: Introduction, explains the purpose and types of transfer tax treaties. Part II: Situs-Type Treaties, describes when situs-type transfer tax treaties apply and explains how a situs-type treaty assigns primary taxing jurisdiction to one country. It also analyzes the effect that situs-type treaties have on the deductions and credits of treaty countries. Part III: Domicile-Type Treaties, describes when domicile-type treaties apply and how these treaties assign primary taxing jurisdiction. It also analyzes the situs rules that are incorporated into domicile-type treaties, the effect that domicile-type treaties have on the deductions, exemptions, and credits of treaty countries, and the general operation of the treaties' nondiscrimination provisions. Part IV: Special, Administrative, and Enforcement Provisions, discusses the ways in which transfer tax treaties enable a treaty country to enforce the collection of death taxes and exchange information with the other country, as well as issues that a taxpayer subject to a treaty may face in reporting income. Part V: Treaty Interpretation, sets forth the principles of treaty interpretation and construction. Part VI: Particular Treaty Analysis, discusses the details of each transfer tax treaty.
The bilateral transfer tax treaties to which the United States is a party seek to prevent double taxation that could otherwise result when the United States and another country impose death or other transfer taxes with respect to the same property. Without a treaty, the two countries could tax the same property because the property has its situs in one or both countries and/or because the relevant person is affiliated with one or both of the countries. The various situs-type treaties, most of which entered into effect in the 1940s and 1950s, seek to prevent double taxation by providing rules for determining the situs of assets and by giving primary taxing jurisdiction to the country in which the assets are deemed situated. The later domicile-type treaties, on the other hand, assign taxing jurisdiction to the treaty country in which — under the treaty rules — the relevant person has or had his or her fiscal domicile. Fiscal domicile is a particular concept of personal affiliation that the domicile-type treaties have developed. Even in domicile-type treaties, however, certain types of assets are taxed according to the assets' location.
This portfolio may be cited as Schoenblum, 851-2nd T.M., U.S. Estate and Gift Tax Treaties.


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AUTHORS

JEFFREY A. SCHOENBLUM
Jeffrey A. Schoenblum, A.B., Johns Hopkins University (1970); J.D., Harvard Law School (1973); professor, Vanderbilt University Law School (1977-present); author, Multistate and Multinational Estate Planning, 2 vols. (CCH 2010); author, 2011 Multistate Estate Planning Guide (CCH 2010); author, 2011 Multistate Guide to Trusts and Trust Administration (CCH 2010); author, Page on Wills: Annual Supplement (LEXIS); author, “Governing Law Clauses for Trusts,” 44 Heckerling Institute on Estate Planning ch. 14 (2010); author, “Taxation, the State, and Community,” 23:2 Social Philosophy and Policy 210 (2006), and also published in Taxation, Economic Prosperity, and Distributive Justice (Cambridge University Press); author, “In Search of a Unifying Principle for Article V of the Uniform Trust Code: A Response to Professor Danforth,” 27 Cardozo L. Rev. 2609 (2006); author, Preface, Symposium: International Legal Dimensions of Art and Cultural Property, 38 Vand. J. Transnat'l L. 921 (2005); author, 851 T.M., Bilateral Transfer Tax Treaties (BNA 2003); author, “Trusts, Settlors, and Spouses – A Cross-Jurisdictional Analysis of Property and Marital Rights,” Trusts and Trustees (June 2003); author, “Myth of Ownership/Myth of Government,” 22 Va. Tax. Rev. 555 (2003); author, “Estate and Gift Tax Treatment of Diplomatic and Consular Officials,” 31 Tax Mgmt. Int'l J. 355 (2002); author, “Conflict of Law under the New Uniform Trust Code,” 3 Trusts E Àttavita Fiduciarie 16 (2001); author, “Fiduciary Duty and the Direct-Derivative Distinction in the Takeover/Merger Context” in L'Alambicco Del Comparatista: Amministratori: Fiduciari—Ma Di Chi? (2001); editor, A Guide to International Estate Planning (ABA 2000); author, “The Role of Legal Doctrine in the Decline of the Islamic Wakf: A Comparison with the Trust,” 32 Vand. J. Transnat'l L. 1191 (1999); author, Preface, Symposium: The Rise of the International Trust, 32 Vand. J. Transnat'l L. 519 (1999); author, “Conflict of Laws; Trusts and Civil Law; Situs Wills—The American Perspective” in International Estate Planning (1996); author, Preface, Global Estate Planning (Kluwer 1995); author, “The Use of Offshore Trusts by Residents or Nationals of Civil Law Jurisdictions” and “Property Ownership and Succession Planning for the Foreign National: Conflicts of Law; Recognition of Trusts and Testamentary Dispositions; Marital Property Rights and Forced Heirship” in International Wealth Transfer Techniques—1990s and Beyond (1995); co-editor, International Estate Planning (ABA 1991) (with D. Kozusko); author, “The Adaptation of the Asset Protection Trust for Use by the Multinational Corporation—The American Perspective” in Commercial Aspects of Trusts and Fiduciary Obligations (Clarendon 1992).

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Situs-Type Treaties

A. Overview

B. Specific Considerations as to Whether a Situs-Type Treaty Applies

1. The Relevant Taxes

a. Limit to Death Taxes

b. Nonapplication to Gift Tax

c. Nonapplication to Generation-Skipping Transfer Tax

d. Nonapplication to State, Provincial, and Local Taxes

(1) In General

(2) Special Rule with Respect to Estate and Political Subdivision Adjustments

e. Nonapplication to Income Taxes

f. The Meaning of “Estate Tax”

g. Hybrid Taxes

2. The Relevant Affiliation and its Consequences

a. In General

b. Who Determines the Existence and Meaning of the Affiliation?

c. Beneficiary

d. Deemed Citizens, Domiciliaries, and Residents

(1) The Language of the Code and Treaties

(2) Rev. Rul. 79-152 and Crow v. Comr.

(3) HIPAA and the Ambiguous Treaty Override

(4) The Special Expatriation Tax Credit

3. Situs of Estate Property

a. In General

b. No Applicable Treaty Situs Rules

(1) Situs in a Third Country

(2) Situs in Third Country, But Disagreement as to Which One

(3) Situs in Treaty Country or Third Country

(4) Situs in Other Treaty Country or Third Country

(5) Each Country Determines Asset Has a Local Situs

(6) Each Country Determines Asset Has Situs in Other Treaty Country

c. Applicable Treaty Situs Rules, But No Tax Imposed by Treaty Situs Country

d. Preliminary Issues in the Application of Specific Situs Rules

(1) Which Country Determines the Character of a Property Right or Interest

(2) The Character of Various Property Rights

(a) Immovables and Real Property

(b) The Character of an Equitable Interest of a Trust Beneficiary

(i) In General

(ii) Diverse Equitable Interests of a Trust

(A) Revocable Trusts

(B) General Power of Appointment

(C) Equitable Interests in Trust Involving No Right to Revest the Underlying Assets

(iii) The Importance of Determining Trust Situs When a Beneficial Interest Is Regarded as a Debt

(iv) The Role of State Law

(v) Transfers, Identity, and Timing Problems Involving Trusts

(vi) Mutual Funds and Retirement Plans

(vii) U.S. Characterization of Foreign Property Rights Analogous to the Trust

(viii) The Trust Distinguished from Other Relationships

(c) Other Unaddressed Intangible Interests

(i) Partnership Interests

(ii) Interests in LLCs, LLPs, and Similar Entities

(d) Bank Accounts

(e) Tort Claims

(f) Stock and Stock Options

(i) Stock

(ii) Stock Options

(iii) ADRs and ADSs

(g) Patents, Copyrights, Trademarks, Franchises, and Licenses

(h) Life Insurance

(i) Indirect Consequences of Situs Rules

C. Deductions

1. In General

2. Marital Deduction

3. Charitable Transfers

4. Specific Exemptions

D. Credits

1. The Primary Credit

a. General Operating Rules

b. Valuation

c. Interest and Penalties Ignored

d. The Special Charitable Contribution Deduction Alternative to the Treaty Credit

e. Reductions Affecting the Amount of the Creditable Tax

f. The Availability and Amount of the Unified Credit in Calculating the U.S. Estate Tax of a Nonresident Alien

(1) In General

(2) U.S. Situs Assets Exempt under the Code

(3) The Effect of Lifetime Use of the Unified Credit

(4) Availability of Unified Credit for Gift Taxes

(5) Disclosure When Claiming the Treaty Unified Credit

g. Effects of Disputed Situs on Primary Credit

h. Gross-Up with Non-Situs Assets

2. The Secondary Credit

3. Comparison of the Treaty Credits and Unilateral Credits

a. In General

b. The Interplay Between §2014 and §2013

(1) In General

(2) Schedules P and Q

(3) Balancing the Variables

c. The Proper Credit Choice When Property Has a Situs in Both Treaty Countries or Neither Treaty Country

d. Limitations on Multiple Credits for the Same Property

e. The Impact of Taxes at the Political Subdivision Level

4. Claiming the Treaty Foreign Death Tax Credit

III. Domicile-Type Treaties

A. Overview

B. Specific Considerations as to Whether a Domicile-Type Treaty Applies

1. The Relevant Taxes

a. Not Limited to Death Taxes - Gift Tax

(1) Introduction

(2) Interrelationships

(a) Unified Credit

(b) Foreign Tax Credit

(c) Tangible Movable Property

(d) Gift-Splitting

(e) Taxable Gifts Includible in the Gross Estate

(f) Marital Deduction

b. Nonapplication to State, Provincial, and Local Taxes

c. Nonapplication to Income Taxes

d. Uncertain Application to Generation-Skipping Transfer Tax

(1) In General

(2) The Special Case of the U.S.-France Treaty

2. The Relevant Affiliation and its Consequences

3. Fiscal Domicile

a. In General

b. The Personal Affiliations Relied Upon to Determine Fiscal Domicile

(1) In General

(2) Domicile of Dependency

c. The Meaning of “Permanent Home”

(1) In General

(2) Income Tax Treaty Guidance

(3) Unsettled Aspects

(4) Leading U.S. Determinations

(5) Leading Foreign Determinations

(6) The Determination of Permanent Home in Both Treaty Countries

d. Center of Vital Interests

(1) In General

(2) Leading U.S. Determinations

(3) Leading Foreign Determinations

(4) Refinements in the Application of “Closer Personal and Economic Relations”

e. Habitual Abode

(1) In General

(2) The Time Frame for Establishing Habituality

(3) Determining Habitual Abode When There Is a Permanent Home in Both Treaty Countries or Neither of the Treaty Countries

(4) Appropriateness of Domestic Law Meanings of Habitual Abode

f. The Citizenship Fallback and Override

g. The Final Fallback: Competent Authority

C. Situs Rules

1. In General

2. Real Property (Immovables)

a. In General

b. Livestock and Equipment Used in Agriculture and Forestry

c. Property Accessory to Real Property

d. Landed Property Rights

e. Usufruct, Legal Life Estate, and Trust Income Interests

f. Mortgages and Other Security Interests in Real Property

g. Interests in Entities That Own Real Property

3. Permanent Establishment

a. In General

b. The Requirement of an Enterprise

c. Fixed Place of Business

d. Place of Business

e. Carrying Out Business Through Place of Business

f. Enumerated Examples of Permanent Establishments

g. Building Sites and Construction or Installation Projects

h. Items Excluded from the Meaning of “Permanent Establishment”

i. Agents and Associated Companies

j. Related Entities

4. Fixed Base

5. Ships and Aircraft

6. Stock

7. Intangibles

D. Deductions and Exemptions

1. In General

2. Debts

a. Deductions for Administrative Expenses and Debts

b. Charitable Deductions

c. Deduction or Credit for Spousal Transfers

d. Gift Tax Marital Deduction

E. Credit Provisions

1. In General

2. Credit for Taxes of Political Subdivisions

3. The Credit and Timing Differences in Taxation

4. The Credit's Interaction with the Domestic Credit for Tax on Prior Transfers

5. The Credit and Expatriate Taxation

6. Credits in the Case of a Short-Term Fiscal Domicile in the Non-Citizenship Country

F. Nondiscrimination

1. In General

2. The Meaning of “The Same Circumstances”

3. The Persons Covered

4. The Matters Protected from Discrimination

5. Applicability of Nondiscrimination to Political Subdivisions

6. Special Case of Friendship Treaties Granting Nondiscriminatory Tax Treatment

IV. Special, Administrative, and Enforcement Provisions

A. Exchange of Information

1. Situs-Type Treaties

2. Domicile-Type Treaties

B. Collection of Taxes

C. Diplomatic and Consular Personnel; Officials of International Organizations

1. In General

2. Non-Tax Bilateral Treaties

3. Multilateral Treaties

4. Domicile-Type Treaties

5. Situs-Type Tax Treaties

6. Domestic Law

7. The Persons Covered

a. Persons in the Service of a Country

b. Diplomatic and Consular Officers of Third Countries

c. Persons in the Service of an International Organization or NGO

D. Mutual Agreement Procedure

E. Form 8833: Treaty-Based Return Position Disclosure

V. Treaty Interpretation

A. In General

B. Essential U.S. Principles of Tax Treaty Interpretation

C. The Sources of Treaty Interpretation

D. “Unless the Context Otherwise Requires”

E. Repeal by Later-Enacted Statute

VI. Particular Treaty Analysis

A. Australia

B. Austria

C. Canada

D. Denmark

E. Finland

F. France

G. Germany

H. Greece

I. Ireland

J. Italy

K. Japan

L. Netherlands

M. Norway

N. South Africa

O. Sweden

P. Switzerland

Q. United Kingdom


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 United States - Australia Estate Tax Treaty

Worksheet 2 United States - Australia Gift Tax Treaty

Worksheet 3 United States - Austria Estate and Gift Tax Treaty

Worksheet 4 Protocol Amending United States - Canada Income Tax Treaty

Worksheet 5 United States - Denmark Estate and Gift Tax Treaty

Worksheet 6 United States - Finland Estate Tax Treaty

Worksheet 7 United States - France Estate and Gift Tax Treaty

Worksheet 7A Protocol Amending the United States - France Estate and Gift Tax Treaty

Worksheet 8 United States - Germany Estate and Gift Tax Treaty

Worksheet 9 Protocol Amending United States - Germany Estate and Gift Tax Treaty

Worksheet 10 United States - Greece Estate Tax Treaty and Protocols

Worksheet 11 United States - Ireland Estate Tax Treaty

Worksheet 12 United States - Italy Estate Tax Treaty

Worksheet 13 United States - Japan Estate and Gift Tax Treaty

Worksheet 14 United States - Netherlands Estate Tax Treaty

Worksheet 15 United States - Norway Estate Tax Treaty

Worksheet 16 United States - South Africa Estate Tax Treaty and Protocol

Worksheet 17 United States - Sweden Estate and Gift Tax Treaty

Worksheet 18 United States - Switzerland Estate Tax Treaty

Worksheet 19 United States - United Kingdom Estate and Gift Tax Treaty

Worksheet 20 U.S. Model Estate and Gift Tax Treaty

Worksheet 21 Technical Explanation of U.S. Model Estate and Gift Tax Treaty

Bibliography

OFFICIAL

Constitution

Statutes:

Treasury Regulations

Other U.S. Code Provisions

Legislative History

Other IRS Materials

State Codes and Administrative Determinations

Model Tax Treaties and Commentaries

Other Treaties

Foreign Statutes and Administrative Determinations

Treasury Rulings

Cases

UNOFFICIAL

Treatises

1971

1986

1989

1991

1993

1994

1999

2001

Periodicals

1950

1964

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1981

1983

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1991

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