US Situs Assets for Non-resident Alien (Non-Citizen)
First question must be answered on whether the decedents (or donors) are US Persons or US residents (US domiciliary). If the persons are Non-resident Alien (Non-citizen), then the next question will always be whether they are US situs assets. 26U.S.C.§2104, 2105.
Estate tax will be imposed only on the property which at the time of death is situated within the U.S. Id. §2103, §2101(a). Gift tax will be imposed on the NRA donors only if the property is situated within the U.S. Id.§2511(a).
The followings are general rules to determine if the assets are US situated (US situs).
1. Corporation Stock:
Stock issued by a domestic corporation: deemed within the U.S. regardless of where the certificate is physically located.26U.S.C.§2104(a).
Stock issued by a foreign corporation: Not within the U.S. regardless of where the certificate is physically located. Id.
2. Life Insurance:
Insurance on life of the Non-Resident Alien (“NRA” = neither citizen nor resident) decedent: Not within the U.S. regardless of location of the issuing company. 26U.S.C.§2105(a).
Insurance on lives of others: Treated as contractual right and is included as the US property if issued by a domestic company. You can avoid this problem by having an off-shore trust hold the life insurance.
3. Debt Obligations:
General Rule: Debt obligations which are owned by NRA and issued by US persons (US citizens or US residents) or US governmental entity deemed situated in the U.S. regardless of where evidence of debt is held. 26U.S.C.§2104(c)(1). 26 CFR §20.2105-1(k).
1st Exception: US corporate issuer with foreign source income (less than 20% of its income from US sources for the last three years) and must be an active business. Id. §20.2105-1(l).
2nd Exception:
i. Not a US situs asset if interest would have been treated as “portfolio interest” exempt from US income tax during the decedent’s lifetime under 26U.S.C.§871(h)(1). Id.§2105(b)(3).
ii. To qualify as exempt for income tax purposes payee must have been NRA for income tax purposes. Id.§871(h)(1). If the payee is deemed resident under substantial presence test, bonds considered US situs assets.
iii. NRA and family cannot own more than 10% of issuer. Id.§871(h)(3).
iv. In order to qualify as “portfolio interest” payments cannot be contingent on business of issuer. Id.§871(h)(4).
v. OID (original issue discount) instruments may qualify as “portfolio interest” but state or local bonds with OID do not qualify. Id.§2105(b)(4).
4. Cash on Deposit:
Domestic Banks: generally excluded as not within US (unless effectively connected to US trade or business). Id.§2105(b)(1).
Foreign Banks: generally excluded as not within US. Id.
Foreign Branch of US bank: excluded as not within US, regardless of whether connected to a US trade or business. Id.§2105(b)(2).
Domestic Branch of Foreign bank: included as within US, but excluded if treated as non-taxable “portfolio interest” and not effectively connected to a trade or business. Id.§2104(c)(2).
Major Exception: The exclusionary rule does not cover (meaning included as within US) cash held by a brokerage firm (Rev. Rul. 69-596, 1969-2 C.B. 179; G.C.M. 22,419, 1940-2 C.B. 288.) or cash held in a bank safe deposit box (Rev. Rul. 55-143, 1955-1 C.B. 465.).
5. Tangible Property:
Included if located in the US.
Exception for works of art on loan for public exhibit. 26U.S.C.§2105(c).
6. Partnership Interests:
There is currently no specific code addressing the situs of the partnership interests. There is, though, a little guidance in some old authorities. According to Rev Rul 55-701, the situs is wherever the business of the partnership is carried on. It does not matter if the partnership is US partnership or foreign partnership. On the other hand, where the foreign partnership holding US assets was dissolved due to the death of the non-resident alien partner, the situs of the partnership interest is determined by the location of the assets. Sanchez, Frederico Est. v. Bowers (1934, CA2), 13 AFTR 1074, 70 F2d 715. (although this case could be viewed as the estate simply holding the underlying assets).
Accordingly, the law is still unclear so it is always better to treat them as if they are subject to US transfer tax.
7. Copyrights, Patents & Trademarks:
US situs if “it is issued by or enforceable against a U.S. resident or a domestic corporation or governmental entity.” 26 CFR §20.2104-1(a)(4).
8. Trust Interests:
US situs property, such as stocks issued by US corporation, held in the trust in which the decedent retained an interest under 26U.S.C.§2035-2038 at the time of death. Id.§2104(b).
If the trust was created by the settlor decedent, as long as the transferred asset was US situs asset at the time of transfer, US situs or non-US situs property held in the trust is deemed US situs asset. Id.
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