Touge question

[Koss]

Reporting Requirements

Most of the complex reporting requirements that carry stiff penalties involve transactions that do not look anything like this.

I invite anyone to correct me, and provide a concrete citation. But I don't think there is any requirement for a US citizen to report that he received a gift from a foreign source.

I stand by my opinion that the transaction in question is not a gift, to or from the client.

But I also agree with Bees' observation that even if it IS a gift, the US citizen isn't going to give the gift until 2013.

US citizens have to report foreign assets--particularly funds that are on deposit in foreign bank accounts. They also have to report transactions, or assets, if they are a grantor or a beneficiary of a foreign trust.

That's not what I see here.

I suggested in an my original post that this transaction might be a constructive trust, meaning that the brother, who is not a US citizen, has given the taxpayer, who IS a US citizen, a chunk of money, or a piece of real estate, and has said to his brother, "Here, Bro, do me a favor and hold this thing for me for a couple years. Take good care of it until I can immigrate to the US." And his brother agreed to do so.

That agreement arguably creates a common-law trust, in which the foreign guy is the grantor and the beneficiary, and the US citizen is the trustee. But it's not a foreign trust. The trustee, and the assets, are here in the USA. It's a domestic trust.

With all the new laws and regs, there might be something I have overlooked. And I can understand why some clients and tax pros might get nervous about any transaction of this size that involves a transfer of funds to or from another country. But the fact that the funds came from another country doesn't automatically trigger all those reporting requirements. You still have to look at the fact pattern.

The client is a US citizen. He has not transferred any money out of the US, and he has not acquired an interest in any assets, or bank accounts, or trusts that are outside the US.

I don't think he received a gift, either. But even if he did, he wouldn't be required to file a gift tax return.

The guy who gave the gift isn't required to file a gift tax return, because he's not a US person.

Can someone enlighten me as to what reporting requirements are applicable to this scenario?

BMK

[Koss]

Form 3520

Okay, I stand corrected...

I am correcting myself.

Form 3520 must be filed by a US citizen who receives a gift valued at more than $100,000.00 from a nonresident alien.

Form 3520 is not a gift tax return. It is something else.

Because I don't think this transaction was a gift, I don't think Form 3520 should be filed.

BMK

[MilTaxEA]

Is anyone else slightly annoyed whenever they read the title of this thread? I don't understand how togue (illegal street racing) has anything to do with the question posed.

It's probably my engineer particularity (i.e., OCD) coming out...

[Bees Knees]

Because I don't think this transaction was a gift, I don't think Form 3520 should be filed.

I don't think it is a gift either, but I might file the form anyway to play it safe.

From Form 3520 instructions:

Complete the identifying information on page 1 of the
form and Part III. See the instructions for Part III.
4. You are a U.S. person who, during the current tax
year, received either:
a. More than $100,000 from a nonresident alien
individual or a foreign estate (including foreign persons
related to that nonresident alien individual or foreign estate)
that you treated as gifts or bequests; or

I have never paid attention to this form before, although I vaguely remember hearing about it at a tax seminar.

There doesn’t appear to be any tax liability connected with the reporting of a gift. It appears to be for information purposes only. So maybe it would be wise to play it safe and report the transaction on the form.

[Koss]

Title of Original Post

MilTaxEA wrote:

Is anyone else slightly annoyed whenever they read the title of this thread? I don't understand how togue (illegal street racing) has anything to do with the question posed.

That's a typo.

It was meant to be Tough Question.



BMK

[Roberts]

Seems to me the property should have been purchased under a corporate shell with the owner listed as a foreigner. That way the IRS would share the data with the true owners taxing authority at home. As it is, I'd be very careful the IRS doesn't come back on you. The IRS could look at this as your client is laundering money for his brother to avoid taxation back home.

I agree with everyone else, labeling it a gift is the wrong course of action.

[Koss]

Ownership

I still don't understand why the property wasn't originally titled to the name of the brother.

If the real reason is in fact to conceal the ownership, or to allow the brother to avoid taxation on any income flowing from the property, then I agree that this is a serious problem. But I didn't see anything in the original post that suggested that this was the motivation.

Unlike many other countries, the USA generally does not prohibit foreign ownership of real estate. Many states have certain registration requirements, but it is not illegal for a nonresident alien to buy real estate.

The decision to title it to the buyer's brother may have arisen out of a miscommunication, a misunderstanding, or from some boneheaded clerk at the title company who may have declared that the brother from another country can't buy the property because he doesn't have an SSN.

I don't think this is the case. If someone knows otherwise, please educate me.

BMK

[Koss]

Further thoughts

Is there some reason that the client cannot simply go to a local real estate attorney, and have her draw up a deed, and transfer ownership of the property to his brother?

I'm not an attorney, but I know a thing or two about real property law.

The buyer, or transferee, does not have to sign the deed. The deed is signed by the transferor.

Any competent local real estate lawyer will be able to tell the client if there is a problem with transferring the property to a nonresident alien individual.

If the deed is properly drawn, the county recorder must accept it for filing.

I don't understand why the property was titled to someone other than true buyer to begin with.

BMK

[NotEasy]

Seems to me the property should have been purchased under a corporate shell with the owner listed as a foreigner. That way the IRS would share the data with the true owners taxing authority at home. As it is, I'd be very careful the IRS doesn't come back on you. The IRS could look at this as your client is laundering money for his brother to avoid taxation back home.

Wow, I hope it is really not the case.

Now, I can give advice to the client that he should do this and do that. But whether he will follow my advice, such as to transfer the title back to his brother now like Koss has suggested, to set up a corp like you have suggested, etc, is not under my control at all.

But if a Form 3520 is filed for him now, at least the transaction is reported to the IRS. It is still better than doing nothing about it.

Opinion?

[Gary2]

Seems to me the property should have been purchased under a corporate shell with the owner listed as a foreigner. That way the IRS would share the data with the true owners taxing authority at home. As it is, I'd be very careful the IRS doesn't come back on you. The IRS could look at this as your client is laundering money for his brother to avoid taxation back home.

I agree with everyone else, labeling it a gift is the wrong course of action.

See the recent thread on LLC vs S-Corp. Putting it into a corporate shell is a bad idea. An LLC (disregarded, taxed on Sch C/E) might make sense.

The IRS is concerned about avoiding taxation here. I don't know what information they report to other countries (if any), but I can't imagine "making it easier for the IRS to share data" is ever a reason for creating a corporation.

[Gretel]

?

I kept thinking about reporting requirements and finally it dawned on me that what was on my mind has nothing to do with IRS or foreign. It simply has to do with the requirements for banks to report deposits of $10,000 or more. This is an internal process, which the office of Homeland Security could have questions about.

[NotEasy]

I still don't understand why the property wasn't originally titled to the name of the brother.

I had asked the client this question today. She explained it was a bank-owned property. The price was very attractive and they had to act fast to get it. And they were advised that they wouldn't have enough time to process the deal if the buyer was a foreign national who was still in oversea.

[Koss]

Foreign Buyer

Okay, well, that kind of makes sense.

At this point, the best course of action may be for your client to deed the property to his brother. The deed has to be prepared by an attorney, who should be familiar with any restrictions or peculiar requirements that arise when the buyer is a foreign national. It may well be specific to state law.

If the transaction is properly documented, which may involve some sort of affidavit to the effect that your client was merely acting as an agent when he bought the property, and that the money came from his brother in the first place, then the transfer should be free of any federal tax consequences. There should also be only minimal cost involved at the state and county level. They will not have pay "closing costs" all over again. A local real estate lawyer should be able to prepare the deed for a couple hundred bucks. Any county transfer taxes should be minimal or zero when the transfer is between family members, or if it is properly documented as a transfer from an agent to a principal.

With all that being said, if your client is going to manage the property while his brother is living in another country, then the brother, at a bare minimum, would need to execute a power of attorney.

Or they could set up the LLC which I suggested. However they do it, they should talk to a lawyer first.

BMK