In Robert Blumenfeld's 32 year career as a senior attorney at IRS International Estate Tax, perhaps the greatest bone of contention, certainly the hardest fought issue, was over domicile, whether to file a Form 706 or a Form 706 NA. The stakes in terms of tax dollars often was in the millions of dollars. The estate of a US citizen or domiciliary is subject to FET on a world-wide basis while nonresident aliens estates are subject to tax on assets with a "situs" in the US pursuant to section 2104 of the IRC.
There is no dispute about the fact that if a decedent is a US citizen dying with an estate of over $5.4 million, a 706 needs to be filed. What about US residents? If the resident is not a citizen, it may well raise the issue of which tax return is correct. Most attorneys and accountants deal with income tax, not estate tax. There is a sharp dichotomy between the tax result for a US resident and a US domiciliary although they can be mutually exclusive. The filing threshold for a nonresident alien is $60,000, a far cry from $5.4 million.
Domicile is a matter of physical presence plus intent. Obviously the decedent cannot be queried about his intent so we need to look at extrinsic facts to determine what the decedent's state of mind was. Did he intend to be a US domiciliary (i.e. remain permanently in the US)? Here we are forced to look at a number of factors to determine the decedent's intent.
- Although the decedent had a home in the United States, did he maintain a home in his native country? Did he have a small home in the United States and extremely glamorous home in the foreign country or vise versa?
- Documents-did his last will and testament or his trust refer to him as a domiciliary of, say, Dade County, Florida?
- Did the decedent maintain connections in his foreign country like, bank accounts, religious affiliations, club memberships, drivers licenses, voting status?
- What part of each year did he physically stay in the United States?
- Can his intent to be gleaned from his foreign income tax returns?
- What type of visa did he have in the United States? Was it renewable or permanent in nature?
- Did he have a US green card?
- Did most of his family stay in his native country or did he bring the family with him to the United States?
- In Florida had he homesteaded his local residence?
- Had he closed his business in the foreign country prior to or since his arrival in the United States? Had he opened a new business enterprise in the United States?
Obviously in a short blog post, we can't review every permutation. The above list reviews some of the main factors that IRS agents look at to determine a decedent's domicile.
As mentioned above, the difference in tax liability could be huge.
For example for a decedent with an $11 million estate 2 million of which is US situs assets produces the following results:
- Decedent is a Nonresident Alien. the IRS can tax, at a 40% rate, approximately $2 million so the FET will be something in the neighborhood of $800,000.
- Decedent is a US Domiciliary, the IRS will be able to levy tax on an estate of $11 million, most of which is in a country which has no treaty with the United States. The tax will be approximately 40% of $5,600,000 or roughly $2,200,000. $1,400,000 is certainly an amount of money which the IRS feels is worthy of an examination.
Before deciding on whether to use a 706 or 706-NA, be sure to review all of the facts regarding whether the decedent is a nonresident alien or a US domiciliary. If you decide the 706-NA is the way to go, do you have enough supportive evidence to justify this conclusion?
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Robert S. Blumenfeld - Estate Tax Audit Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.
Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.
While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.