Possession resident treated as nonresident noncitizen for transfer taxes

Plain-English summary

A taxpayer was born abroad to parents who were not U.S. citizens and later moved to a U.S. possession, where he became a permanent resident and then a naturalized U.S. citizen. The IRS found that he did not acquire citizenship at birth under the Nationality Act of 1940 and that his later citizenship arose solely from residence in the possession. Under sections 2209 and 2501(c), a U.S. citizen residing in a possession who acquired citizenship solely through birth or residence there is treated as a nonresident noncitizen for transfer-tax purposes. The IRS therefore ruled that the taxpayer was presently treated as a nonresident not a citizen of the United States for federal estate, gift, and generation-skipping transfer taxes.

Ruling snapshot

• Question: Was the naturalized citizen residing in a U.S. possession treated as a nonresident noncitizen for federal transfer taxes?
• Outcome: Yes, because citizenship was acquired solely through residence in the possession.
• Key authorities: IRC §§ 2209, 2501(c), 2652, and 2663; Treas. Reg. §§ 20.2209-1, 25.2501-1(d), 26.2652-1, and 26.2663-2.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201924009 Third Party Communication: None
Release Date: 6/14/2019 Date of Communication: Not Applicable
Index Number: 2209.00-00
Person To Contact:
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------------------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B04
------------------------------------------------------------ PLR-122915-18
------------ Date:
January 29, 2019

Legend

Taxpayer -----------------------------------------------------------------------
Country A ----------------------------
Country B ---------
Date ------------------------
Year 1 -------
Year 2 --------
Year 3 -------
Year 4 -------
Year 5 ----- --
Year 6 -------
a ----
Possession -----------------

Dear ------------------:

    This letter responds to your personal representative’s letter of July 25, 2018, and

subsequent correspondence, requesting a ruling concerning your status as a
nonresident not a citizen of the United States for purposes of federal estate, gift, and
generation skipping transfer (“GST”) tax under sections 2209, 2501(c), 2652, and 2663
of the Internal Revenue Code, and § 26.2652-1(a)(2) of the Generation-Skipping
Transfer Tax Regulations.

     The facts and representations submitted are summarized as follows:

    Taxpayer was born in Country A on Date in Year 2, a year between 1940 and

1952. At the time of his birth, neither of Taxpayer’s parents were citizens, nationals, or
      residents of the United States nor any of its possessions or territories. And neither of
      Taxpayer’s parents were born in the United States nor any of its possessions or
      territories.

PLR-122915-18 2

    Taxpayer’s mother was a citizen of Country A and resided in Country A from her

birth (before Year 2) until Year 3. Taxpayer’s father was a citizen of Country B and
resided in Country A from Year 1 to Year 3.

   Taxpayer resided in Country A from Year 2 until Year 3. In Year 3, Taxpayer

relocated to Possession, a possession of the United States under § 7701(d), with a
student visa. After graduating from college in Year 4, Taxpayer began working in
Possession with a work visa. Taxpayer has continuously resided in Possession since
Year 3.

   In Year 5, Taxpayer became a permanent resident of Possession, and in Year 6,

at the age of a, Taxpayer became a citizen of the United States through naturalization
proceedings in the U.S. District Court for the district of Possession.

LAW AND ANALYSIS

Taxpayer was not a citizen of the United States by reason of his birth

   The Nationality Act of 1940 (the “1940 Act”)1 was in effect in Year 2, at the time

of Taxpayer’s birth. The law in effect at the time of birth governs whether a child obtains
derivative citizenship through his parents as of his or her birth. See Morales-Santana v.
Lynch, 804 F.3d 520, 524 (2nd Cir. 2015), aff’d in part, rev’d in part sub nom. Sessions
v. Morales-Santana, 137 S.Ct. 1678 (2017).

   Section 201 of the 1940 Act provides a list of persons who are to be considered

citizens of the United States by reason of their birth.

   Paragraphs (a) and (b) of section 201 of the 1940 Act address persons born in

the United States. Paragraph (d) of section 101 of the 1940 Act defines the United
States as the continental United States, Alaska, Hawaii, Puerto Rico, and the Virgin
Islands of the United States. The facts provide that Taxpayer was not born in any of the
aforementioned locations, therefore paragraphs (a) and (b) of section 201 of the 1940
Act do not apply to Taxpayer.

   Paragraph (e) of section 201of the 1940 Act addresses persons born in an

outlying possession of the United States. Paragraph (e) defines the outlying
possessions of the United States as all territory, other than those specified in paragraph
(d), over which the United States exercises rights of sovereignty, except the Canal
Zone. The facts provide that Taxpayer was born in Country A. Country A was not an
outlying possession of the United States. Therefore, paragraph (e) did not apply to
Taxpayer. Paragraph (f) of section 201 of the 1940 Act addressed children of unknown
parentage found in the United States, which does not apply to Taxpayer.

1
Nationality Act of 1940, Pub. L. No. 876, 54 Stat. 1137 (October 14, 1940).

PLR-122915-18 3

    Paragraphs (c), (d), and (g) of section 201 of the 1940 Act address persons born

outside the United States and its outlying possessions. Paragraph (c) applies to
persons born outside the United States and its outlying possessions of parents both of
whom were citizens of the United States. The facts provide that neither of Taxpayer’s
parents were citizens of the United States at the time of his birth, therefore paragraph
(c) did not apply to Taxpayer. Paragraphs (d) and (g) of section 201 of the 1940 Act
apply to persons born outside the United States and its outlying possessions to parents
one of whom was a citizen of the United States. The facts provide that neither of
Taxpayer’s parents were citizens of the United States at the time of his birth, therefore
paragraphs (d) or (g) did not apply to Taxpayer.

   Further, sections 202 and 203 of the 1940 Act address persons born in Puerto

Rico, the Canal Zone, or Panama in certain time periods and provide conditions under
which such persons could be declared citizens of the United States.

    In this case, Taxpayer was (1) not born in the United States or one of its

possessions, (2) not born of parents at least one of whom was a citizen of the United
States, and (3) not found in the United States with unknown parentage. Under the
statute in effect when Taxpayer was born, the 1940 Act, Taxpayer would not have
qualified as a citizen of the United States at birth. Accordingly, based on the facts
presented and representations made, we conclude that Taxpayer did not acquire his
United States citizenship on account of his birth.

Taxpayer became a citizen of the United States through naturalization based solely
upon residency in Possession

  The Immigration and Nationality Act of 1952 (the “1952 Act”)2 was in effect in

Year 6, when Taxpayer became a United States citizen.

   Sections 310 through 348 of the 1952 Act contain the rules with respect to

naturalization. Naturalization is defined by paragraph 23 of section 101 of the 1952 Act
as the conferring of nationality of a state upon a person after birth, by any means
whatsoever. Paragraph (a) of section 316 of the 1952 Act provides the residency
requirement for naturalization.

    No person, except as otherwise provided in this title, shall be naturalized
    unless such petitioner, (1) immediately preceding the date of filing this
    petition for naturalization has resided continuously, after being lawfully
    admitted for permanent residence, within the United States for at least five
    years and during the five years immediately preceding the date of filing
    this petition has been physically present therein for periods totaling at

2
Immigration and Nationality Act of 1952, Pub. L. No. 414, 66 Stat. 163 (June 27, 1952) (codified as
amended at 8 U.S.C.A. §§ 1101-1557).

PLR-122915-18 4

  least half of that time, and who has resided within the State in which the
  petitioner filed the petition for at least six months, (2) has resided
  continuously within the United States from the date of petition up to the
  time of admission of citizenship, and (3) during all periods referred to in
  this subsection has been and still is a person of good moral character,
  attached to the principles of the Constitution of the United States, and well
  disposed to the good order and happiness of the United States.
  (Emphasis added)

    Paragraph 38 of section 101 of the 1952 Act defines the term United States as

the continental United States, Alaska, Hawaii, Puerto Rico, Guam, and the Virgin
Islands of the United States. Paragraph 36 of section 101 of the 1952 Act defines the
term State as Alaska, Hawaii, the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands of the United States.

   Taxpayer became a citizen of the United States in Year 6 under the

naturalization provision of the 1952 Act based on his continuous residency in
Possession. Taxpayer did not become a citizen of the United States under the 1940 Act
based on his birth. Accordingly, based on the facts presented and representations
made, we conclude that Taxpayer acquired his United States citizenship solely by
reason of residence within a possession of the United States.

Taxpayer is presently considered a “nonresident not a citizen of the United States” for
federal estate, gift, and GST tax purposes

   Section 2101(a) imposes a tax, except as provided in § 2107, on the transfer of

the taxable estate (determined as provided in § 2106) of every decedent nonresident
not a citizen of the United States.

   Section 2208 provides that a decedent who was a citizen of the United States

and a resident of a possession thereof at the time of his death shall, for purposes of the
estate tax, be considered a “citizen” of the United States unless he acquired his United
States citizenship solely by reason of (1) his being a citizen of such possession of the
United States, or (2) his birth or residence within such possession of the United States.

    Section 2209 provides that a decedent who was a citizen of the United States

and a resident of a possession thereof at the time of his death shall, for purposes of the
estate tax, be considered a “nonresident not a citizen of the United States” but only if
such person acquired his United States citizenship solely by reason of (1) his being a
citizen of such possession of the United States, or (2) his birth or residence within such
possession of the United States.

  Section 20.2209-1 of the Estate Tax Regulations provides that the term

“nonresident not a citizen of the United States” includes a U.S. citizen domiciled in a
possession of the United States who acquired his U.S. citizenship solely by reason of

PLR-122915-18 5

(1) his being a citizen of such possession of the United States, or (2) his birth or
residence within such possession of the United States.

  Section 2501(a)(1) provides that a tax, computed as provided in § 2502, is

imposed for each calendar year on the transfer of property by gift during such calendar
year by any individual, resident or nonresident.

   Section 2501(a)(2) provides that § 2501(a)(1) shall not apply to the transfer of

intangible property by a nonresident not a citizen of the United States.

    Section 2501(b) provides that a donor who is a citizen of the United States and a

resident of a possession thereof, shall, for purposes of the gift tax, be considered a
“citizen” of the United States within the meaning of that term unless the United States
citizenship was acquired solely by reason of (1) his being a citizen of such possession
of the United States, or (2) his birth or residence within such possession of the United
States.

   Section 2501(c) provides that a donor who is a citizen of the United States and a

resident of a possession thereof shall, for purposes of the gift tax, be considered a
“nonresident not a citizen of the United States”, but only if the donor acquired his United
States citizenship solely by reason of (1) his being a citizen of such possession of the
United States, or (2) his birth or residence within such possession of the United States.

    Section 2511(a) provides that the tax imposed by § 2501 shall apply whether the

transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the
property is real or personal, tangible or intangible; but in the case of a nonresident not a
citizen of the United States, the tax shall apply to a transfer only if the property is
situated within the United States.

    Section 25.2501-1(d) of the Gift Tax Regulations provides that the term

“nonresident not a citizen of the United States” includes a U.S. citizen domiciled in a
possession of the United States who acquired his U.S. citizenship solely by reason of
(1) his being a citizen of such possession of the United States, or (2) his birth or
residence within such possession of the United States.

    Section 26.2652-1(a)(1) provides, in part, that, except as otherwise provided in

paragraph (a)(3) relating to certain qualified terminable interest property trusts, the
individual with respect to whom property was most recently subject to federal estate or
gift tax is the transferor of that property for purposes of chapter 13. An individual is
treated as transferring any property with respect to which the individual is the transferor.
Thus, an individual may be a transferor even though there is no transfer of property
under local law at the time the federal estate or gift tax applies.

PLR-122915-18 6

     Section 26.2652-1(a)(2) provides that, for purposes of chapter 13, a transfer is

subject to federal gift tax if a gift tax is imposed under § 2501(a) (without regard to
exemptions, exclusions, deductions, and credits). A transfer is subject to federal estate
tax if the value of the property is properly includible in the decedent's gross estate as
determined under § 2031 or § 2103.

   Section 2663 provides, in part, that the Secretary shall prescribe such regulations

as may be necessary or appropriate to carry out the purposes of chapter 13, including
regulations (consistent with the principles of chapters 11 and 12) providing for the
application of chapter 13 in the case of transferors who are nonresidents not citizens of
the United States.

   Section 26.2663-2(b)(1) provides that a transfer by a non-resident not a citizen of

the United States is a direct skip subject to chapter 13 only to the extent that the
transfer is subject to the federal estate or gift tax within the meaning of
§ 26.2652-1(a)(2).

   Section 26.2663-2(b)(2) provides that chapter 13 applies to a taxable distribution

or a taxable termination to the extent that the initial transfer of property to the trust by a
non-resident not a citizen of the United States transferor, whether during life or at death,
was subject to the federal estate tax or gift tax within the meaning of § 26.2652-1(a)(2).

   As mentioned above, Taxpayer acquired his United States citizenship solely by

reason of his residence within a United States possession. Accordingly, based on the
facts presented and representations made, we conclude that Taxpayer is presently
considered a “nonresident not a citizen of the United States” for federal estate, gift, and
GST tax purposes.

  In accordance with the Power of Attorney on file with this office, we have sent a

copy of this letter to your authorized representatives.

   Except as expressly provided herein, we neither express nor imply any opinion

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

PLR-122915-18 7

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                     Sincerely,


                                     Lorraine E. Gardner
                                     Lorraine E. Gardner
                                     Senior Counsel, Branch 4
                                     Office of the Associate Chief Counsel
                                     (Passthroughs and Special Industries)

Enclosures
Copy for § 6110 purposes
Copy of this letter