Touge question

[NotEasy]

Taxpayer's brother is a foreign national. He wanted to buy a property in the US. So in 2011, he remitted $250,000 to the taxpayer. Taxpayer then used the money to buy a property. Currently, the property is still under the taxpayer's name. His brother planned to immigrate to the US in 2013. Once he became a US resident, taxpayer will transfer the property back to him.

How would you handle the tax situation?

I am thinking that taxpayer has to file a year 2011 gift tax return now since he has received the $250,000 gift from his brother and it is a gift from oversea.

And then when he transfers the property back to his brother in 2013 once he brother has immigrated to the US, he will have to file another gift tax return for year 2013 as the donor to gift the property to his brother.

Opinion?

[Lion]

Your client

Your client did not give a gift.

[NotEasy]

Your client did not give a gift.

Do you have advice on how to handle the situation then?

[Bees Knees]

Lion's point is the person giving the gift is the one that files the gift tax return, not the one receiving the gift. Your client doesn't have to do anything right now, other than keep all documentation proving he received the money from his brother for the purpose of buying him property. Keep all correspondence, bank deposits, title to the property, etc. so that if IRS audits your client, he can prove where the money came from and for what purpose he got it.

[NotEasy]

Lion's point is the person giving the gift is the one that files the gift tax return, not the one receiving the gift. Your client doesn't have to do anything right now, other than keep all documentation proving he received the money from his brother for the purpose of buying him property. Keep all correspondence, bank deposits, title to the property, etc. so that if IRS audits your client, he can prove where the money came from and for what purpose he got it.

I understand the person giving the gift is the one that files the gift tax return, not the one receiving the gift.

The way I see the situation is that it is a two-way gift. When the taxpayer received the $250,000 from his foreign national brother, he has to file a gift tax return (Form 3520) for it because he is the recipient of a gift from oversea.

But then when he gives the property to his brother in 2013 after his brother has immigrated to the US, he has to file another gift tax return (Form 709) because at that time he will be giving a gift to a US resident.

I am thinking this is the safest way to handle the situation. What I really worry is that somehow the IRS will argue those are gift transactions in the future. If no gift tax return is filed now, there will be very heavy penalty for not filing a tax return for gift from oversea.

[JG EA]

This may help.

http://www.irs.gov/businesses/article/0,,id=200722,00.html

As to whether this is a gift at all..... I am not sure. Your client is acting as an agent for his brother. Maybe reading over form 3520 and instructions will get you started. Which I have not done.

[NotEasy]

This may help.

http://www.irs.gov/businesses/article/0,,id=200722,00.html

As to whether this is a gift at all..... I am not sure. Your client is acting as an agent for his brother. Maybe reading over form 3520 and instructions will get you started. Which I have not done.

I agree the situation is not obvious at all whether it is a gift or not. I am thinking to file the gift tax returns in order to take the safe route to handle the situation. The 25% penalty for failing to report a gift from oversea is really scary.

[Koss]

Not a gift

Your client should not file a gift tax return, because he did not receive a gift. The brother should not file a gift tax return, because he did not give a gift, and even if he did, if he is not a US citizen or resident alien at the time he gave the gift, he has no obligation to file a gift tax return.

Characterizing this thing as a gift is, in my humble opinion, utter insanity. It's not a gift if he's planning to transfer it back to the guy who gave it to him.

I agree with another post that said that your client is acting as an agent, or nominee, for his brother.

It sounds like a really bad joke, but it's like a high school kid who gets caught with drugs in his locker, and says, "It's not mine. I'm just holding it for someone else."

This thing is a constructive trust. Your client is the trustee; his brother is both the grantor and the beneficiary.

The property should have been titled this way, or in some other way, to reflect the underlying reality.

For example, it would have been relatively easy to establish a single member LLC, in which the brother is the sole member, but your client is the LLC manager. The brother would not need an SSN in order to do this. He might need an ITIN when it comes time to file US tax return. But that's not all that complicated, either.

They should get a lawyer involved, and change the legal ownership of the property.

I hope your client didn't take a mortgage loan on the property. That would complicate things horribly...

BMK

[NotEasy]

For example, it would have been relatively easy to establish a single member LLC, in which the brother is the sole member, but your client is the LLC manager. The brother would not need an SSN in order to do this. He might need an ITIN when it comes time to file US tax return. But that's not all that complicated, either.

Thank you BMK for your input.

The taxpayer has already bought the property under his name. If they form a LLC now, the taxpayer would be the LLC manager and also the one who is holding the title of the property. Is it ok?

As for the complication of having a mortgage loan involved, luckily, they did not get a mortgage loan.

[Koss]

Llc

Your client should probably talk to an attorney before doing anything else.

But here's how I would do it.

Depending on the state law, your client can probably set up the LLC, by filing the paperwork with the secretary of state, once again acting as an agent for his brother. The LLC will have only one member--the brother who is not a US resident. Your client can nevertheless establish the LLC. He can file the right form with the state, and he can be the registered agent.

The LLC should have an operating declaration. (It sounds silly to call it an operating agreement when there is only one member.) This is something that should be written by an attorney. If you do it, you may be practicing law without a license. If your client does it, he may screw it up.

The operating declaration should state explicitly that the sole member of the LLC is the brother, and that the LLC manager is your client.

After the LLC is established, your client can execute a deed, which should also be done by an attorney, to transfer title to the property to the LLC.

If the property is generating income, then the LLC would have to file a tax return. But since it's a single-member LLC, it will be treated as a sole prop. So the brother, who is the sole member, will need to file a 1040, or maybe a 1040NR, with a Schedule C or a Schedule E. If he can't get an SSN, he can get an ITIN. You can cross that bridge when you get there.

The LLC is not the only way to do this. It is one way that I think would work well. They should really talk to a lawyer. The fact that the sale already took place doesn't mean they shouldn't do anything to fix it.

BMK

[Koss]

Question...

Is there some reason that the property can't be titled directly to the brother, in his name alone, as an individual?

BMK

[Gretel]

I am not really having an opinion on the gift tax return issue but learned of all kinds of new filing requirements for transfer of funds from a foreign country with high penalties. You want to find out if and what filing is required besides the gift tax issue.

[MAJ]

Bravo...

Sounds Brilliant!! 8-)
Sounds well conceived..

[Bees Knees]

I am thinking this is the safest way to handle the situation. What I really worry is that somehow the IRS will argue those are gift transactions in the future. If no gift tax return is filed now, there will be very heavy penalty for not filing a tax return for gift from oversea.

Even if the IRS were to try to argue that both transactions are gifts (and I tend to agree with Koss that they are not), the future 2013 gift is not a gift until 2013 with a gift tax return due date of April, 2014. There is no such thing as filing a gift tax return now for something that is intended to be done in the future. It can't be a gift until the gift is given.

[Nashville]

Unnecessarily Difficult

Sometimes we are so close to a situation that we fail to see it for what it really is.

This is a loan, or, at worst a deposit, if your client is telling you the whole situation. It is not a gift, and even if construed to be so, gift tax return is not triggered until the gift is completed.

This is the simple view, but what is making it appear complicated is probably the lack of documentation, the foreign factor, and suspicion that the legalities have not been covered because of differences in law.

I don't think the tax implications in the USA would be any different had he simply outright purchased what he wanted prior to becoming a national (other than what comes with NRA status). Of course, few of us could comment on what his tax implications are in his own country.