Guidance Needed Regarding Federal Estate Taxation of Exchange Traded Funds Owned by Nonresident Aliens1
By Patrick W. Martin2 & A gustin Ceballos3
I. EXECUTIVE SUMMARY
Under Section 2104 of the Internal Revenue Code ("IRC" or "Code"),4 there are certain assets deemed "situated in the United States" for a nonresident who is not a citizen nor domiciled in the United States ("U.S.") for transfer tax purposes ("NRND").5 Such assets are therefore subject to estate tax upon the NRND’s death.6 Conversely, section 2105 of the Code is a companion provision that defines properties not situated in the United States and therefore not subject to estate tax upon the NRND’s death.
The Code and regulations clarify the estate tax treatment of stock of domestic and foreign corporations, by expressly including stock issued by a domestic corporation as situated in the United States, and expressly excluding stock issued by a foreign corporation. However, both the Code and the Treasury regulations fail to address whether and when an Exchange Traded Fund ("ETF") is (or is not) property situated in the United States under sections 2104 or 2105 of the Code.