Tax Law Blog | IRS Tax Attorneys

Here’s how the game is played (most commonly with an insurance trust). The trust provides that any time the trustee receives a gift to the trust, a notice is to be sent to the beneficiaries designated in the trust instrument. Those beneficiaries then have a limited time period from the date of the notice (frequently 30 days) in which to demand the withdrawal of the money.

If the beneficiaries do not withdraw the money, it becomes the property of the trust (i.e., usually the trustee takes the money and pays the insurance policy’s annual premium). In the absence of the withdrawal right, at least some portion of a gift to a trust usually is not eligible for the gift tax annual exclusion. However, where Crummey powers exist, the beneficiaries had the right to withdraw the money and that right converts the gift to the trust to one fully subject to the annual gift tax exclusion. So, if the gift is $10,000 or less, no gift tax is payable
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Venture capital and other securities investment funds organized as domestic partnerships (”Domestic Funds”) often have foreign persons as limited partners. In addition, domestic fund managers often establish investment partnerships outside the United States (”Offshore Funds”). In recent months, there has been substantial controversy surrounding: (i) the potential application of a 35 percent excise tax (the “Excise Tax”) under Section 1491 of the Internal Revenue Code (the “Code”) in respect of Domestic Fund distributions to certain foreign limited partners; and (ii) reporting obligations (the “Reporting Obligations”) under Section 1494 of the Code in respect of capital contributions by domestic persons to Offshore Funds as well as Domestic Fund distributions subject to the Excise Tax.

On February 24, 1997, the Internal Revenue Service released Notice 97-18, which addresses these issues as well as certain others arising under Sections 1491 and 1494 of the Code. This memorandum briefly describes the background to Notice 97-18, its impact on Domestic and Offshore Funds, and the steps that such funds should take to deal with remaining uncertainties.
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