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U.S. Taxation of Foreign Estates Owning U.S. Stock: The Long Arm of the IRS

The American satirist, H. L. Mencken, once said “injustice is relatively easy to bear, what stings is justice.”  Perhaps no case more aptly illustrates Mencken’s view than a 2009 United States Tax Court case called Charania Estate v. Commissioner, 133 T.C. 7 (September 14, 2009).  The story involves true injustice from an evil foreign dictator, followed by painful, blind justice as meted out by the United States Internal Revenue Service. 

The case can be very enlightening, however, in its reminder to every non-resident, non-citizen of the United States (referred to in the law as a nonresident alien, or “NRA”) investor in U.S. assets; and to lawyers, accountants, and financial advisors who have NRA clients or clients who have NRA family members.  Please, bear with a few background details about the case.  You will find it entertaining—guaranteed, or your money back.

Some Background

Mr. and Mrs. Charania were born and raised in Uganda in the 1930s of Asian parents.  Uganda was at the time a British protectorate, so its people were considered U.K. citizens.  In 1962, Uganda became independent of Britain, but Mr. and Mrs. Charania remained UK citizens, living in independent Uganda.  Mr. and Mrs. Charania were married in Uganda in 1967.  In 1972, Idi Amin, then President of Uganda, evilly ordered the expulsion of all Ugandans of Asian descent—giving them 3 months to leave the country.  Mr. and Mrs. Charania left Uganda forever in October 1972, leaving all their property in Uganda.

A truly tragic injustice was done.

Eventually, the Charania family chose to make Belgium their home, because of Mr. Charania’s prior business dealings there.  They lived and prospered in Belgium for many years until Mr. Charania’s death in 2002; but Mr. and Mrs. Charania remained UK citizens their entire lives.

Because the Charania family was eventually very prosperous in their business, when Mr. Charania died on January 31, 2002, he owned 250,000 shares of Citigroup common stock.  At $47.16 per share, Mr. Charania’s estate held $11,790,000 worth of common stock of Citigroup (a U.S. corporation).  Six months later, unfortunately, the stock was only worth $33.25 per share, or $8,312,500. 

The Charania Estate, despite no evidence in the public record of the decedent ever having set foot in the United States of America, filed a U.S. Estate Tax Return (as it properly was required to do under Subchapter B of Chapter 11 of the U.S. Internal Revenue Code), and reported its interest in the Citigroup stock.  Because Belgium recognizes community property law, the Estate excluded from the federal estate tax return the surviving Mrs. Charania’s one-half, community property interest (125,000 shares) under Belgian law in the Citigroup stock from the decedent’s taxable estate.

The IRS challenged the claim by the estate that half the shares were community property, saying that since the couple was married under UK law, and the UK does not recognize community property, the entire 250,000 shares should be subject to US estate tax.  The IRS demanded in excess of $2,000,000 in estate taxes and penalties from the estate.  The estate disagreed with the assessment, and it filed suit in U.S. Tax Court.

Why Care about This Sad, Strange Story?

The actual legal issue litigated in this court case involved an analysis of the arcane conflict-of-laws rules between the Belgian law of community property and the UK common law of property.  And in the end, the IRS won the case—the Tax Court held that UK property law governed this particular couple’s rights to their marital property and so all the Citigroup stock was taxable in the decedent’s (Mr. Charania’s) estate.  But that’s not really what matters to those of us who are not UK citizens living in Belgium. 

This case teaches us (or reminds us of) some important pieces of estate tax planning advice for those who either, a) are NRAs, b) have NRA family members, or c) are professional advisors of NRAs. 

Specifically, here are some things we should learn:

  1. Nonresident aliens are subject to U.S. estate tax on their U.S. situs property—including stock holdings in U.S. corporations.  Internal Revenue Code sections 2101 and 2103, which impose the tax on NRAs are not new law, having been enacted with the 1954 code.  But for many decades, NRAs would often simply not file a U.S. estate tax return, at least in part because the chances of IRS enforcement were low.  This case, however, is a reminder that in this “information age” taxpayers cannot expect to do tax planning based on “playing the tax audit lottery.” Taxpayers must always assume the IRS will find out—and they will. 
  2. It is generally a bad idea for wealthy foreign persons to die in possession of U.S. company stock.
    1. The Charania family might have minimized or avoided $2 million (or even more) in U.S. estate taxes by taking some very simple planning steps, like:
      1. Transmuting the property to community property in a written agreement prior to death.  This could have avoided inclusion of the surviving spouse’s claimed one-half community property interest in the decedent’s U.S. stock in the taxable estate.
      2. Giving the stock away during lifetime. Section 2501(a)(2) generally exempts from U.S. gift taxes any transfer by an NRA of intangible personal property—even stock in a U.S. corporation.  So, a lifetime gift could have avoided the tax altogether.
      3. Holding any property deemed for estate tax purposes to have a U.S. situs (including U.S. corporation stock) in an entity incorporated under the laws of another country.  Internal Revenue Code section 2104 specifically states that corporate stock is only deemed situated in the United States when it is issued by a “domestic corporation.”  “Wrapping” certain assets, therefore, in a non-US corporation can have the effect of taking it outside the US estate tax regime.
      4. Devising the stock at death to a Qualified Domestic Trust (QDOT) for the lifetime benefit of the non-citizen surviving spouse of the decedent, with a U.S. bank as trustee.  A QDOT allows the estate to take a marital deduction in calculating the estate tax liability, and a QDOT for the sole benefit of the surviving spouse, therefore, could have avoided taxes on amounts passing to the QDOT—at least until the surviving spouse’s death.
    2. The Charania family could also have avoided U.S. estate tax by selling their Citigroup stock and putting the cash proceeds in a U.S. depository bank account.  Generally, as long as bank accounts are held for personal use, and are not effectively connected to a U.S. trade or business, IRC section 2105(b) treats them generally as being outside the United States, and thus, outside the U.S. estate tax regime for NRAs.
  3. Diversification is still a very important component to wealth management success.  On the date of Mr. Charania’s death, his Citigroup stock was valued at $47.16 per share.  Six months later, on the estate tax alternate valuation date, the value was $33.25 per share.  But, on the date the U.S. Tax Court handed down its decision that the tax was owed, the value of Citigroup shares was about $4.50 per share.  Hopefully the Charania Estate had sold its Citigroup shares by that time; otherwise, the taxes and penalties due would have been about four times the value of the underlying shares.
  4. The United States government is getting very aggressive (and being very successful) in pursuing opportunities for tax revenues related to assets or asset owners “located” outside the U.S.  People who “play the audit lottery” with the IRS eventually, but inevitably, lose.

Fiscal issues with the U.S. government, combined with political pressure in light of the current economic environment, have made tax compliance for offshore assets and taxpayers even more important to the IRS.  And now that the government is armed with more detailed information, available to them thanks to modern technology, legislation, and information sharing agreements with other countries, the IRS’ enforcement arm is now, in fact, very, very long.

C. David Spence is a Partner in the Estate Planning, Trust & Probate Administration department at Berliner Cohen, LLP.  He can be reached at

This article is not intended to and does not constitute legal advice or a solicitation for the formation of an attorney-client relationship. Anyone with questions about this topic should consult an attorney.