Prop. regs. govern 3.8% net investment income tax.

• Author: Schreiber, Sally P.

The IRS released proposed regulations governing the 3.8% net investment income tax imposed under Sec. 1411 that was added to the Code by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152 (REG-130507-11). Taxpayers can rely on the proposed regulations for purposes of complying with the tax until final regulations take effect. The IRS has also posted FAQs explaining the tax and how it operates at tinyurl. com/ae2vqhp.

Starting this year, Sec. 1411(a)(1) imposes a tax equal to 3.8% of the lesser of an individual's net investment income for the tax year or the excess (if any) of the individual's modified adjusted gross income for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. The tax also applies to estates and trusts, with different threshold amounts.

Prop. Regs. Sec. 1.1411-1 provides the general rule that, except as otherwise provided, all Code provisions that apply for chapter 1 purposes (i.e., normal income taxes and surtaxes) in determining taxable income of a taxpayer also apply in determining the tax imposed by Sec. 1411. The section also defines "adjusted gross income."

Prop. Regs. Sec. 1.1411-2 contains the rules applicable to individuals. It provides that the term "individual" for purposes of Sec. 1411 means any natural person, except for natural persons who are nonresident aliens. Nonresident aliens will be subject to the tax if they elect to file a joint return with a resident or citizen spouse under Sec. 6013(g) (Prop. Regs. Sec. 1.1411-2(a)(2)). The treatment of bona fide residents of U.S. territories is different depending on whether the individuals are residents of Guam, the Northern Mariana Islands, or the U.S. Virgin Islands, who generally are not subject to the tax, or Puerto Rico or American Samoa, who may be subject to the tax (Prop. Regs. Sec. 1.1411-2(a)(2)(iv)).

Prop. Regs. Sec. 1.1411-3 contains the rules for trusts and estates, including the types of trusts the tax applies to (ordinary trusts, as described in Regs. Sec. 301.7701-4(a)) (Prop. Regs. Sec. 1.1411-3(a)(1)(i)) and those it does not apply to (business trusts under Regs. Sec. 301.770-14( b), certain state law trusts, pooled income funds, cemetery perpetual care funds, qualified funeral trusts, etc., as well as tax-exempt trusts, excluding even unrelated business income of...