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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3855
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I ever asked you about transferring stocks to my parents

Resolved Question:

Hi I ever asked you about transferring stocks to my nonresident parents when I am nonresident alien, and the conclusion is that, there is no gift tax for such transfer. To follow up on this, assuming after several years, the stock price has gone up and my parents sell these stocks. Also, I become a residence again by then, and my parents transfer money as gift to me and part of the money is from the sales of these appreciated stocks. In this case,


 


- I guess there is no gift tax needed because the gifting is from nonresidient (my parents are always nonresident), right?


 


- do I need to report the capital gain of these stocks after this loop of gifting?


 

Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

When you gift the stocks to your parents (if they were here, don't know about the tax laws where they are) they will have what is called a carryover basis (for capital gain purposes when they sell, their gain will be sales price minus YOUR ORIGINAL, now their, basis) .... I think the risk here would be that IRS would say you did all this simply to escape the capital gains tax ... You're right about the gifting, but IRS uses a doctrine called "substance over form" .... My bet is that they would not allow this new basis (established when your parents sold, the gifted back to you) but you raise a very interesting question ... technically if they gift the proceeds of their sale, rather than the same stocks, back to you, your basis would be that NEW carryover basis the basis they re-established by selling and paying whatever capital gains they had to pay upon sale of their stock

Lane :

Make sense?

Lane :

... just don't know if they'd let that one fly ...

Lane :

Looks like you're offline here ... I'll give you few minutes, then move to the "Q&A" mode where, as you know, we can keep talking there (just not in real-time chat

Lane :

OK, still don’t see you coming into the chat here … I’ll move us to “Question and Answer” mode. … Maybe that will help … I’ll be waiting there for you.

Lane :

Let me know if you have questions

Lane :

At all

Lane :

Lane

Expert:  Lane replied 9 months ago.

Somehow the questions became locked, but it's back now

 

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.

 

Let me know if you have more questions here...

 

Lane

 

Customer: replied 9 months ago.

My parents are nonresident living outside US, so they are not subject to US capital gain tax.


 


Because when I transfer appreciated stocks this year (from non-resident to another non-resident), there is no reporting needed for this. Then later when the cash (value plus gain) is transferred back to me (when I am already a resident, so this transfer will be from non-resident to resident), assuming IRS reviews this and judges that this is not considered gifting but regular transfer actions (I did not claim this is gifting either because there was no reporting for me to do anyways, thus I did not lie at all), what tax obligation in this process for me?


 

Expert:  Lane replied 9 months ago.

As I said before ... gifting is not the issue.

And technically, neither is capital gain, because when the parents cash the stock and turn it into cash that would be the point where capital gains (if there is such a tax where they are) would happen.

However, I would no be analyzing this well, if I didn't point out that an IRS agent COULD say... MIGHT ... say ... that you only transferred the money to avoid the capital gains then brought it right back here to the US with you after someone had sold it FOR you.




So if you are non-resident, when you gift, and non-resident when you receive the proceeds back it becomes cleaner.




BUT, lets say that you are back in the US, as resident, in a year.

And the parents send the proceeds back to you.

IRS COULD say ... Well, you bought the stocks while you were here, they appreciated while you were here, you then left and gifted the stocks to someone who sold them for you ... only to give them right back to you.

They COULD make a case that you were intentionally avoiding the capital gains tax.




IF ... you gift away, while not a resident (not intending ever to be a resident) and the your parents (non-US citizens or residents) sell those appreciated stocks ... and they - for some reason - decide to give you money ... possibly from the proceeds of that sale? ... (while you are not a US resident nor intend to be) then it is not the US's business in any way.

But, if it all happens fairly quickly (within a few years) and you are us resident for any part of it ... it beings to be more POSSIBLE for IRS to make the case that your intent was to AVOID the capital gains all along.



The way you have described this, however, gifting as a true non-resident and receiving money back as a non-resident, not necessarily from the proceeds of that sale by your parents, there is not gift or capitals gains tax owed.




Lane

Positive feedback appreciated. That's the way I get credit for the work here.
Customer: replied 9 months ago.

Thanks for the reply! Assuming as you said, IRS judges this as intentionally avoid capital gains, what would happen for the worst case?

Expert:  Lane replied 9 months ago.

Please understand that this is WORST case .... In my opinion, criminal penalties.

The point where things move from civil to criminal is when there is INTENT ... where the person did something willfully and with purpose to EVADE taxes ... (rather than simply procrastinate, make a mistake, etc)

IN my opinion MUCH MORE LIKELY wold be paying the taxes and paying lat filing and late penalties ...

... and again, that would be only, IF they believed that the substance of what happened, was that the gains were effectively the gains of a resident, a US person.

Lane



Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3855
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 9 months ago.
Thanks again

Lane
Customer: replied 9 months ago.

Thanks for the reply! Then a follow-up question, how about if I sell all the appreciated stocks and pay the capital gain tax for this, then I transfer the cash to my nonresident parents. Later they may use the cash to do whatever investment they want to and may also make more gains. Then after that maybe many years later, they transfer me cash (part of it may be indirectly from the cash I gave to them before - but it is hard to define as it is just cash). In this process, is it possible that IRS also judges that they used my cash to invest and make gains, and then give it to me, thus I also need to pay capital gain tax against the gains they made?

Expert:  Lane replied 9 months ago.

Hi Bo,

You said:

" a follow-up question, how about if I sell all the appreciated stocks and pay the capital gain tax for this, then I transfer the cash to my nonresident parents. Later they may use the cash to do whatever investment they want to and may also make more gains."

Then you take ALL the risk away. THen are then doing whatever they want with THEIR money, and you will have paid the gains.



You said:

Then after that maybe many years later, they transfer me cash (part of it may be indirectly from the cash I gave to them before - but it is hard to define as it is just cash). In this process, is it possible that IRS also judges that they used my cash to invest and make gains, and then give it to me, thus I also need to pay capital gain tax against the gains they made?

No, if there is any gains tax for any gains THEY make (if they are not US citizens or residents) that would be between them and their country.

And no, you will not be responsible for any of their gains.

Again that would be a tax issue in their own country.
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3855
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 9 months ago.
We'll thank you sir!

Have a good evening!

Lane

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