Avoiding U.S. Estate Tax May Lead to Undesirable Income Tax Consequences for Non-residents

The recent Tax Court case, G.D. Parker, Inc. v. Commissioner,  shows how avoiding U.S. estate tax may lead to undesirable income tax consequences for non-residents. Non-residents who own U.S. property tried to avoid U.S. estate tax by attributing ownership of their property owned by a U.S. corporation to a foreign corporation. Then, they personally used the property rent-free. This strategy attempted to treat the U.S. residence as a foreign asset which wasn’t taxable, and is commonly used to avoid estate tax.  But, the Tax Court denied the owners beneficial income tax treatment.  As a result, non-residents using this kind of ownership structure should note that:

•  The usual income tax deductions allowed for real property interests in the U.S. may not be allowed. These deductions include, but are not limited to, repairs, maintenance, and depreciation expenses.
•  The U.S. corporation may be treated as if it made rent distributions to its shareholders.  These distributions will be treated as dividends subject to a 30% withholding tax.

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