In a newly released Chief Counsel Advice opinion[1], the transfer of assets from a foreign entity referred to as the “Foundation” directly to a third party (the “Recipient”) at the request of the beneficiary of the Foundation (the “Beneficiary”) was deemed to be a gift from the Beneficiary to the Recipient. This is a logical result and the conclusion I think most practitioners would probably reach, but it is nevertheless helpful to get the IRS’ insight and analysis on the issue in the form of a CCA.
Facts
The Beneficiary was a resident of the United States at the time the transfer discussed herein took place. The Foundation was established in a foreign country, and is referred to as a “Stiftung” in the CCA. Stiftung foundations formed in European countries such as Liechtenstein and Switzerland are really more akin to a trust under US law, so while this is not relevant to the analysis, the CCA is likely talking about something similar to a trust arrangement when using the term “Foundation”. The CCA briefly walks through some provisions of the governing documents of the Foundation, none of which are relevant to the gifting issue other than to show that the Foundation had authority to distribute all its assets to the Beneficiary based on the Beneficiary being referred to as the “primary”, “first”, or “sole first” beneficiary in the various governing documents. Pursuant to the valid resolutions approved by the Foundation board, the Foundation resolved “to distribute the total net assets of the Foundation to the [Beneficiary] of the Foundation and to bring such assets in alignment in accordance with his wishes.”
In email correspondence from the Beneficiary to the Foundation board members, the Beneficiary directed that the assets of the Foundation be moved to a third party bank account (the “Bank Account”). The CCA does not mention who owned or had a beneficial interest in the Bank Account other than to say that the Beneficiary was not designated as an account owner of the Bank Account and did not have signature authority, control, or access to the funds in the Bank Account. A sibling of the Beneficiary also provided an affidavit to the IRS attesting to these same facts.
The primary issue addressed in the CCA is whether the transfer of the assets from the Foundation to the Bank Account at the direction of the Beneficiary constituted a gift from the Beneficiary. Presumably, the Beneficiary took the position that, since the Beneficiary never had any direct control or ownership of the assets, the transfer from the Foundation to the Bank Account would not be deemed to be a gift from the Beneficiary.
As a secondary issue, the CCA also addressed whether the transfer was a qualified disclaimer, which if valid, could eliminate the gift issue.
Gifting Analysis
A threshold issue of the CCA is whether the Taxpayer is even subject to gift tax. Presumably, the Taxpayer is not a United States citizen, but he was a resident as defined in Treas. Reg. § 25.2501-1(b) which states that, for gift tax purposes, a resident is “an individual who has his domicile in the United States at the time of the gift.” Since Beneficiary was a resident at the time of the transfer, Treas. Reg. § 25.2501-1(a)(1) provides that the transfer is subject to the United States gift tax regardless of where the assets were situated, that is to say, the assets could have remained in a foreign country such as Liechtenstein at all relevant times but the transfer is nevertheless subject to the United States gift tax since the Beneficiary was a resident of the United States at the time of the transfer.
Pursuant to §2511, the gift tax applies to both direct and indirect gifts and applies whether the gift is made in trust or otherwise. Once the donor has ” so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or the benefit of another”, then the gift is complete.[2]
The IRS also discussed Treas. Reg. § 25.2511-2(a), which provides in part that the gift tax is a personal liability of the donor and is an excise tax on making a transfer to a third party The tax is based on the value of the property which passes from the donor, and attaches and applies despite that fact that the identity of the donee may not be known or even ascertainable at the time of the transfer.
Since the Beneficiary was the designated recipient of resolutions authorizing the Foundation to distribute all the net assets to the Beneficiary, the assets were transferred to the Bank Account at the request and direction of the Beneficiary, and the Beneficiary held no signature authority or ownership of the Bank Account, all the required elements for a completed gift were met. Thus, the transfer of the assets from the Foundation to the Bank Account was deemed to be a gift by the Beneficiary. The CCA never discusses who owned the Bank Account or had a beneficial interest in it, but pursuant to Treas. Reg. § 25.2511-2(a) discussed above, a gift may nevertheless be completed even when the identity of the donee is not known.
Qualified Disclaimer
In addition to discussing whether the transfer was a gift, the CCA also addressed the applicability of § 2518 and whether the transfer could be considered a qualified disclaimer making the transfer not subject to gift tax. Under § 2518(a), if a person makes a qualified disclaimer of property, the property will be considered to have never been transferred to such person, and thus no gift has been made. A qualified disclaimer is defined as
“an irrevocable and unqualified refusal by a person to accept an interest in property but only if (1) the refusal is in writing, (2) the writing is received by the transferor of the interest, his legal representative, or the holder of the legal title to the property to which the interest relates not later than the date that is nine months after the later of (A) the date on which the transfer creating the interest in the person is made, or (B) the day on which the person attains age 21, (3) the person has not accepted the interest or any of its benefits, and (4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either (A) to the spouse of the decedent, or (B) to a person other than the person making the disclaimer.”
The CCA properly concludes that the transfer of the assets from the Foundation to the Bank Account does not meet the requirements of a qualified disclaimer since the Beneficiary directed that the transfer be made.
Conclusion
As stated in the opening paragraph, the result reached by the IRS is the correct conclusion, both from a logical standpoint and based on the legal analysis of the facts. If a person has a right to assets, and he or she directs that such assets be transferred to a third party, it is logical that such transfer be treated as a gift, and as seen in the CCA, the same result can be reached by walking through the legal analysis. In this case, the Beneficiary had dominion and control over the assets via his right to receive the distribution of the assets from the Foundation, and he parted with such dominion and control by directing the Foundation to transfer such assets to the Bank Account over which he retained no control or interest. Agreeing to this outcome is a gift to the holder of the Bank Account regardless of whether that person’s identity is known.
[1] CCA 202045011, found here.
[2] Treas. Reg. § 25.2511-2(b).
