[btm02sf]

I am of Eastern Europe origin. My family overseas has just won a 15 years lawsuit against a East European government owned company. The dispute was a piece of land that belonged to my grandfather.

We (my overseas family and I) are now the rightful owner of this piece of land. We will be selling it shortly.

I would like to wire to my US bank account my share that will result from the proceeds of this sale.

Will this money be subject to any federal or state (California) taxes?

Any feedback would be greatly appreciated.

Thank you.

[AtlantaTaxExpert]

As a U.S. citizen, ALL world-wide income is subject to U.S. income taxes. The same principal applies for California income taxes.

I suspect that the basis of the property will be "stepped-up" to its fair market value at the time of your grandfather's death.

From that stepped-up basis, the capital gains must be calculated, your prorated share determined, and the capital gains tax assessed at either 5% or 15%, depending on your overall income level.

[MukatA]

If you are a U.S. citizen or resident, then must report your world wide income. There is no inheritance tax in the U.S.

You will also report sale of property (your share) in foreign country. Your cost basis is the fair market value at the date of death of your grandfather.

If you paid any taxes in the foreign country, then on your tax return you will claim foreign tax credit by filing Form 1116. Read
Your U.S. Tax Return: Tax on Inheritances

[IntlTax]

I agree with the comments above. Further, leaving the cash outside the U.S. will not prevent U.S. taxation. If the cash is left outside the U.S. however, Form TD F 90-22.1 will need to be filed.

[btm02sf]

Thank you to IntlTax, MukatA, and to AtlantaTaxExpert. I appreciate the input. From your questions I am not sure that I have clearly exposed the situation. Let me do that, and if you think that it changes the outcome, please let me know.

This piece of land has been taken away by the communist government in 1958. Since 1958to just a week ago (Oct 2008), the government owned enterprise has been the legal owner of the property.

The property has been used by them and in their ownership throughout all these years. My grandfather died in 1974. We didn't inherit anything from him.

My family sued the government in 1993 to get the land back. The lawsuit took 15 years to resolve, with countless appeals and counter-appeals through all levels of the justice system.

Last week, the Supreme Court from this country in Eastern Europe has given us the final decision which made 2 of my cousins and myself the rightful owners of this piece of property.

So, we have not owned the property at all, our grandfather didn't transfer anything to us, didn't have even the slightest idea that anyone in his family will ever get anything back from the communist regime.

We were given the land back by the government a week ago, as I said above. We plan to sell it within less than a month, so the value of it a week ago, with the value of the time of the sale will be the same.

My grandfather last owned the property in 1958. As I said, he never gave it to us by any means. We surely can't consider the cost basis the value of the land in 1958. Or can we? Shouldn't we consider the cost basis the value of the land a week ago?

In this conditions, when I transfer my share of these proceeds to the US, will I still owe taxes to uncle Sam?

Again, any feedback would be greatly welcome. Thank you so much for taking your time to respond.

[IntlTax]

The advice is still the same. You say you didn't inherit anything from your grandfather -- but from a legal perspective you did. I suspect that the court said that the property was rightfully your grandfather's when it was wrongfully taken from him. Thus, he should have been treated as the owner all along. This means that when he died, you inherited the rights to the property, which you now have title to. Title to the property was previously wrongfully held by the Eastern European government. It was rightfully your grandfather's and is now yours. If the right to sue passed first to one of your parents and then to you, it is possible that you could use the date of death of your parent (if applicable).

[MukatA]

Are you required to report sale of property in your country? If yes, you will also be reporting your basis of the property.
Also, if you pay any taxes in your country, you can claim foreign tax credit by filing Form 1116.

[btm02sf]

Thank you again to you, MukatA and IntlTax, for responding once more.

Let me clarify a few additional aspects:

1. Yes, we will definitely need to report the sale of the land to the local registrar. However, according to my family members, there will be little or no tax to be paid since this is a restitution of a property taken away by the former communist regime 50 years ago. Apparently, the new governments that came to power after the communist regime fell, understood that they can not tax people again, after they were already punished by having the property being taken away for 50 - 60 years.

So, I don't have at this point a 100% correct answer.

2. In 1974 when my grandfather died, there was no personal property of this size in this East European country, so it would be virtually impossible to assess a fair price of the propertly as the cost basis for it.

Then again, how would one determine the cost basis for this property in 1993, when my father died, when there are probably no comparable sales of a similar property in size and location in my father's home town, in this Eastern Europe country?

With no data for 1974, and with no comparable sales for 1993, how can I or anyone else, including IRS, for that matter, determine the cost basis for this property for either year?

Yes, I understand that I should provide the cost basis for these years when reporting the proceeds on the tax returns. But how can I determine that cost basis with no data available on hand?

What would be the course of action in this situation? How should I fill in form 3520?

Any additional feedback would be much appreciated. The advice that you and other members of this forum provide to folks like me is invaluable, in understanding an issue or another and in choosing the right path for one's problem. Thank you again for your help.

[MukatA]

Yes, this is a unique situation. Points to consider:
1. When your father died he did not own the property. So how is this inheritance on the date of death?
2. If this is received the property as a settlement, then this is income. Whose income? Yours or your parents'?
3. Can this be treated as gift by the new government? There is no tax on gifts in the U.S. Your basis is the value of gift as reported by your government.
4. Can we treat the date of inheritance as the date on which you received the property? On this date the ownership was given back to you family (or father or grandfather).

[IntlTax]

BTM, I don't see anything fundamentally different with your additional clarifications. ATE got it right originally. You will have a U.S. tax basis in the property equal to the FMV of the property as of the date of your grandfather's death. The fact that it may be difficult to establish such a value doesn't mean that the U.S. tax rules are therefore disregarded.

[AtlantaTaxExpert]

BTM, you might try asking the East European government what THEY think the property was worth in U.S. dollars in 1993.

Given the fact that they caused this problem to begin with, they may be willing to establish a market value for the property in question.

If such a market value can be established and documented on government letterhead, the IRS would probably accept it at face value.