Time May Be Ripe To Test U.S. Estate Tax Liability Of Puerto Ricans Born In The United States

The time may be ripe for testing the decades old interpretation of the U.S. Internal Revenue Code of 1986, as amended, ( U.S.-IRC ) as imposing U.S. estate tax liability for property located in Puerto Rico if the Puerto Rico resident was born in the United States.

An increasing number of persons who have lived most of their lives in Puerto Rico and who are the descendants of native-born Puerto Ricans face the prospect of significant U.S. estate tax liability due to an accident of circumstance, namely having been born in one of the fifty states of the United States, the District of Columbia or in a foreign country while their parents were studying, traveling or working abroad.

Being born outside of Puerto Rico or another U.S. possession has significant estate tax consequences for Puerto Rico residents that are U.S. citizens. While native-born Puerto Ricans residing in Puerto Rico are not subject to any local or U.S. estate tax on property within Puerto Rico , pursuant to Sections 2208 and 2209 of the U.S.- IRC, residents of Puerto Rico born in the United States are treated as all other citizens of the United States and as a result are subject to the U.S. estate tax of up to 55% on all of their property world-wide, including property located in Puerto Rico. Thus, generally, native- born Puerto Ricans may completely shield their estate from U.S. and Puerto Rico estate taxes to the extent it is invested in property within Puerto Rico, while United States born Puerto Ricans may not. Of course, native born Puerto Ricans are subject to estate taxes for property located in the United States (as any other person owning property located in the United States) or elsewhere. A review of the relevant US- IRC sections and regulations, Congressional legislative history and IRS Private Rulings indicate that this result may not have been intended by Congress and that there may be room for a more liberal interpretation of Sections 2208 and 2209 of the US-IRC. The intent of Congress was to prevent wealthy United States citizens with no connection to its possessions from changing their residence in order to avoid U.S. estate taxes, and not to penalize Puerto Ricans born outside of Puerto Rico.

Prior to the enactment of Sections 2208 and 2209 of the US-IRC, the U.S. estate tax was applicable to residents and citizens of the United States. A series of Tax Court rulings held that, given the special protection afforded Puerto Rico residents from U.S. taxes by...