Proposed Rule2024-09434
Transactions With Foreign Trusts and Information Reporting on Transactions With Foreign Trusts and Large Foreign Gifts
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 8, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. This document also contains proposed amendments to the regulations relating to foreign trusts having one or more United States beneficiaries. The proposed regulations affect United States persons who engage in transactions with, or are treated as the owners of, foreign trusts, and United States persons who receive large gifts or bequests from foreign persons. This document also provides notice of a public hearing on the proposed regulations.
Full Text
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[Federal Register Volume 89, Number 90 (Wednesday, May 8, 2024)]
[Proposed Rules]
[Pages 39440-39485]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-09434]
[[Page 39439]]
Vol. 89
Wednesday,
No. 90
May 8, 2024
Part VIII
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Transactions With Foreign Trusts and Information Reporting on
Transactions With Foreign Trusts and Large Foreign Gifts; Proposed Rule
Federal Register / Vol. 89 , No. 90 / Wednesday, May 8, 2024 /
Proposed Rules
[[Page 39440]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-124850-08]
RIN 1545-BI04
Transactions With Foreign Trusts and Information Reporting on
Transactions With Foreign Trusts and Large Foreign Gifts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that provide
guidance regarding information reporting of transactions with foreign
trusts and receipt of large foreign gifts and regarding loans from, and
uses of property of, foreign trusts. This document also contains
proposed amendments to the regulations relating to foreign trusts
having one or more United States beneficiaries. The proposed
regulations affect United States persons who engage in transactions
with, or are treated as the owners of, foreign trusts, and United
States persons who receive large gifts or bequests from foreign
persons. This document also provides notice of a public hearing on the
proposed regulations.
DATES:
Comments: Electronic or written public comments must be received by
July 8, 2024.
Public Hearing: A public hearing on these proposed regulations has
been scheduled for August 21, 2024, at 10 a.m. ET. Requests to speak
and outlines of topics to be discussed at the public hearing must be
received by July 8, 2024. If no outlines are received by July 8, 2024,
the public hearing will be cancelled. Requests to attend the public
hearing must be received by 5:00 p.m. ET on August 19, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-124850-
08) by following the online instructions for submitting comments.
Requests for a public hearing must be submitted as prescribed in the
``Comments and Requests for a Public Hearing'' section. Once submitted
to the Federal eRulemaking Portal, comments cannot be edited or
withdrawn. The Department of the Treasury (Treasury Department) and the
IRS will publish for public availability any comments submitted to the
IRS's public docket.
Send paper submissions to: CC:PA:01:PR (REG-124850-08), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Lara A. Banjanin at (202) 317-6933 or S. Eva Wolf at (202) 317-3893
(not toll-free numbers); concerning submissions of comments, the
hearing, or to be placed on the building access list to attend the
hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by
email at <a href="/cdn-cgi/l/email-protection#09797c6b65606a616c687b60676e7a49607b7a276e667f"><span class="__cf_email__" data-cfemail="8bfbfee9e7e2e8e3eeeaf9e2e5ecf8cbe2f9f8a5ece4fd">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains proposed amendments to 26 CFR part 1 under
sections 643(i), 679, 6039F, 6048, and 6677 of the Internal Revenue
Code (Code) (the proposed regulations). Section 6048, as significantly
modified by the Small Business Job Protection Act of 1996 (1996 Act),
Public Law 104-188 (110 Stat. 1755), and further amended by the
Taxpayer Relief Act of 1997 (1997 Act), Public Law 105-34 (111 Stat.
788), and the Hiring Incentives to Restore Employment Act (HIRE Act),
Public Law 111-147 (124 Stat. 71), generally requires U.S. persons to
report transactions that involve foreign trusts. Section 6677, as
significantly modified by the 1996 Act and further amended by the HIRE
Act, imposes penalties on U.S. persons for failing to comply with
section 6048. Section 6039F, which was added to the Code by the 1996
Act, and modified by the Tax Cuts and Jobs Act, Public Law 115-97 (131
Stat. 2054), requires U.S. persons to report the receipt of large gifts
or bequests from foreign persons, and in the event of a failure to
provide this information, section 6039F(c) imposes penalties and allows
the IRS to recharacterize the purported gift or bequest as income.
Section 643(i), which was added to the Code by the 1996 Act and amended
by the HIRE Act, and section 679, as amended by the 1996 Act and the
HIRE Act, provide additional rules intended to prevent taxpayers from
avoiding U.S. income tax consequences through the use of foreign
trusts.
On June 2, 1997, the Treasury Department and the IRS issued Notice
97-34, 1997-1 CB 422, which provides guidance on sections 643(i), 679,
6039F, 6048 and 6677 (the foreign trust and gift provisions) as enacted
or modified by the 1996 Act. On August 7, 2000, the Treasury Department
and the IRS published a notice of proposed rulemaking and a notice of
public hearing (REG-209038-89) under section 679 in the Federal
Register (65 FR 48185). On July 20, 2001, the Treasury Department and
the IRS published final regulations under section 679. TD 8955 (66 FR
37866).
U.S. persons currently provide information required by the foreign
trust and gift provisions on Form 3520, Annual Return to Report
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,
and Form 3520-A, Annual Information Return of Foreign Trust With a U.S.
Owner (Under section 6048(b)). In 2015, section 2006(b)(9) and (10) of
the Surface Transportation and Veterans Health Care Choice Improvement
Act of 2015 (Surface Transportation Act), Public Law 114-41 (129 Stat.
443), modified the due dates for Forms 3520 and 3520-A for taxable
years beginning after December 31, 2015. On March 16, 2020, the
Treasury Department and the IRS issued Revenue Procedure 2020-17, 2020-
12 IRB 539, which exempts from section 6048 information reporting
requirements certain U.S. individuals' transactions with, and ownership
of, certain tax-favored foreign trusts that are established and
operated exclusively or almost exclusively to provide pension or
retirement benefits, or to provide medical, disability, or educational
benefits.
II. Purpose of Foreign Trust and Gift Provisions
During the mid- to late-1990s, abusive tax schemes, including
offshore schemes involving foreign trusts, reemerged in the United
States after last peaking in the 1980s. GAO, Efforts to Identify and
Combat Abusive Tax Schemes Have Increased, But Challenges Remain, GAO-
02-733 (Washington, DC: May 22, 2002). In these schemes, foreign trusts
were used to transfer large amounts of assets offshore, where it was
much more difficult for the IRS to identify whether U.S. persons owned
an interest in such trusts, and whether such persons were reporting and
paying the required taxes on their income from such trusts. Many of the
foreign trusts were established in tax haven jurisdictions with bank
secrecy laws. Before the 1996 Act amended sections 6048 and 6677, there
was no requirement for U.S. persons to report distributions from
foreign trusts, and the penalty for failing to report transfers to a
foreign trust, or an annual foreign trust information return (on
[[Page 39441]]
Form 3520-A), was limited to five percent of the transfer or trust
corpus, as applicable, not to exceed $1,000. Given that, it was
difficult for the IRS to obtain information about income earned by
U.S.-owned foreign trusts and distributions to U.S. beneficiaries of
foreign trusts, and sections 6048 and 6677 were generally ineffective
at ensuring that U.S. persons provided this information. The result was
``rampant tax avoidance.'' 141 Cong. Rec. S13859 (daily ed. Sept. 19,
1995) (remarks of Senator Moynihan).
The foreign trust and gift provisions in the 1996 Act were designed
to accommodate changes in the use of foreign trusts and to limit
avoidance and evasion of U.S. tax. The most significant changes were
made to sections 6048 and 6677 to enhance the IRS's ability to obtain
the information necessary to enforce the tax laws that apply to U.S.
persons' transactions with, and ownership of, foreign trusts. Other
changes included enactment of new section 643(i) and amendments to
section 679, each of which is designed to prevent tax avoidance through
the use of foreign trusts. In addition, the legislation included new
section 6039F, which enables the IRS to obtain information about large
foreign gifts or bequests received by U.S. persons.
III. Overview
A. Section 643(i)
Section 643(i), as originally enacted in 1996, generally provides
that, if a foreign trust makes a loan of cash or marketable securities
directly or indirectly to any grantor or beneficiary of the foreign
trust who is a U.S. person (other than an entity that is exempt from
tax under Chapter 1 of the Code), or to a U.S. person related (under
sections 267 and 707(b)) to such a grantor or beneficiary, the amount
of the loan is treated as a distribution by the trust to the grantor or
beneficiary. Section 643(i) also authorizes the Secretary to issue
regulations providing exceptions, under which a loan by a foreign trust
would not be treated as a distribution to the grantor or beneficiary of
the trust. The 1996 Act's legislative history explains that these
regulations are expected to provide an exception under section 643(i)
for loans with arm's-length terms, and in applying this exception, the
regulations should consider whether there is a reasonable expectation
that the grantor, beneficiary, or related person would repay the loan.
H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess., at 334 (1996).
Section V.A of Notice 97-34 provides that a loan of cash or
marketable securities by a foreign trust to a U.S. grantor or U.S.
beneficiary of the trust, or to a U.S. person who is related to a U.S.
grantor or U.S. beneficiary of the trust, is treated as a distribution
under section 643(i) unless the loan is made in consideration for a
``qualified obligation'' that satisfies certain specified requirements.
Notice 97-34 states that what constitutes a qualified obligation will
be provided in regulations. (Section III.C of Notice 97-34 provides
similar qualified obligation rules for transfers to foreign trusts. See
section III.B of this Background.)
In 2010, Congress expanded the scope of section 643(i) in response
to concerns that U.S. persons were avoiding the application of section
643(i) by using trust property other than cash or marketable securities
without compensating the foreign trust for the use of the property.
Section 533 of the HIRE Act amended section 643(i) to provide that any
uncompensated use of trust property by a U.S. grantor or U.S.
beneficiary of the foreign trust, or any U.S. person related to such
U.S. grantor or U.S. beneficiary, generally is treated as a
distribution of the fair market value of the use of such property to
the U.S. grantor or U.S. beneficiary. This rule does not apply if the
foreign trust is paid fair market value for the use of the trust
property within a reasonable timeframe.
Loans and use of trust property are reported on Part III of Form
3520. Taxpayers provide this information based on guidance in section
V.A of Notice 97-34, as well as the instructions for Form 3520. This
information allows the IRS to determine whether the loan or use of
trust property should be treated as a distribution pursuant to section
643(i).
B. Section 679
1. 1976 Act
Section 679 was enacted by the Tax Reform Act of 1976 (1976 Act),
Public Law 94-455 (90 Stat. 1520). Section 679 treats a U.S. person who
directly or indirectly transfers property to a foreign trust as the
owner of the portion of the foreign trust attributable to the
transferred property to the extent that, under the terms of the trust,
the income or corpus of the trust may be paid to or accumulated for the
benefit of a U.S. person during the taxable year, including if the
trust were to be terminated during the taxable year.
2. 1996 Act Amendments
Section 1903 of the 1996 Act made several important changes to
section 679. For example, Congress was concerned that taxpayers were
attempting to avoid the application of section 679(a)(1) by
transferring property to a foreign trust in exchange for obligations
from the foreign trust that might not be repaid and arguing that such
obligations satisfied the fair market value exception in section
679(a)(2). H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess., at 334-35
(1996). The fair market value exception provides that section 679(a)(1)
does not apply to any transfer of property to a foreign trust in
exchange for consideration of at least the fair market value of the
transferred property. Accordingly, Congress added new section
679(a)(3), which generally provides that obligations issued by the
foreign trust, by any grantor or beneficiary of the trust, or by any
person related to any grantor or beneficiary, are not taken into
account in applying the fair market value exception except as provided
in regulations.
Section III.C of Notice 97-34 implemented the fair market value
exception of section 679(a)(2)(B) and (a)(3) by providing that, if a
U.S. person transfers money or other property to a related foreign
trust in exchange for an obligation issued by the trust or by a person
related to the trust, the obligation is taken into account for purposes
of determining whether the U.S. person received fair market value from
the foreign trust only if the obligation is a qualified obligation that
satisfies certain specified requirements. (Section V.A of Notice 97-34
provides similar qualified obligation rules that apply with respect to
loans from foreign trusts under section 643(i). See section III.A of
this Background.) In 2001, the Treasury Department and the IRS issued
final regulations under section 679 in TD 8955 (66 FR 37886) that
included the section 679 qualified obligation rules described in Notice
97-34. See Sec. 1.679-4(d).
A U.S. person's transfers to a foreign trust are reported on Part I
of Form 3520, together with information about any qualified obligations
received from the trust. Taxpayers provide this information based on
the final regulations under section 679, as well as the instructions
for Form 3520. This information allows the IRS to determine whether the
U.S. person should be treated as an owner of the foreign trust under
section 679.
3. HIRE Act Amendments
In 2010, the HIRE Act made five amendments to section 679, three of
which are consistent with the final regulations under section 679, and
two of which set forth new rules not reflected in the final
regulations.
[[Page 39442]]
First, section 531(a) of the HIRE Act added new language to section
679(c)(1) to clarify that an amount is treated as accumulated for the
benefit of a U.S. person even if the U.S. person's interest in the
foreign trust is contingent on a future event. This statutory amendment
is consistent with Sec. 1.679-2(a)(2)(i), which states that the
determination as to whether income or corpus may be paid to or
accumulated for the benefit of a U.S. person is made without regard to
whether the income or corpus actually is distributed to the U.S. person
during the year, or whether the U.S. person's interest in the income or
corpus of the trust is contingent on a future event.
Second, section 531(b) of the HIRE Act added a new paragraph (4) to
section 679(c) to clarify that, if any person has the discretion to
make a distribution from the foreign trust to or for the benefit of any
person, the trust shall be treated as having a U.S. beneficiary unless
the terms of the trust specifically identify the class of persons to
whom such distributions may be made, and none of those persons are U.S.
persons during the taxable year. This statutory amendment is consistent
with Sec. 1.679-2(a)(1), which provides that a foreign trust is
treated as having a U.S. beneficiary unless no part of the trust's
income or corpus may be paid or accumulated to or for the benefit of a
U.S. person, and if the trust is terminated at any time during the
taxable year, no part of the trust's income or corpus could be paid to
or for the benefit of a U.S. person.
Third, section 531(c) of the HIRE Act added a new paragraph (5) to
section 679(c) to clarify that, if any U.S. person who directly or
indirectly transfers property to a foreign trust is directly or
indirectly involved in any agreement or understanding that may result
in the income or corpus of the trust being paid to or accumulated for
the benefit of a U.S. person, then such an agreement or understanding
shall be treated as constituting a term of the trust. This statutory
amendment is consistent with Sec. 1.679-2(a)(4)(i), which, assuming
that a transferor of property to a trust is generally directly or
indirectly involved with any agreements regarding the accumulation or
disposition of the income and corpus of the trust, allows the IRS to
treat a foreign trust as having a U.S. beneficiary by looking beyond
the language of the trust instrument to all written and oral agreements
and understandings related to the trust, memoranda or letters of
wishes, all records that relate to the actual distribution of income
and corpus, and all other documents relating to the trust, whether or
not of any purported legal effect.
Fourth, section 532 of the HIRE Act added a new paragraph (d) to
section 679, which provides a presumption that a foreign trust has a
U.S. beneficiary in certain circumstances. If a U.S. person directly or
indirectly transfers property to a foreign trust (other than certain
compensatory and charitable trusts), the IRS may treat the trust as
having a U.S. beneficiary for purposes of applying section 679 to the
transfer unless the U.S. person submits such information to the IRS as
the IRS may require and demonstrates to the satisfaction of the IRS
that the trust satisfies the requirements of section 679(c)(1).
Finally, section 533(c) of the HIRE Act added a new paragraph (6)
to section 679(c), which generally treats a loan of cash or marketable
securities to, or the use of any other trust property by, any U.S.
person, whether or not a beneficiary under the terms of the trust, as
paid to or accumulated for the benefit of a U.S. person. Section
679(c)(6) does not apply to the extent that the U.S. person repays the
loan at a market rate of interest or pays the fair market value of the
use of the property within a reasonable period of time. The effect of
section 679(c)(6) is that, if a foreign trust is not already treated as
having a U.S. beneficiary, a loan by the trust of cash or marketable
securities to a U.S. person or the uncompensated use of trust property
by a U.S. person may cause the foreign trust to be treated as having a
U.S. beneficiary, with the result that a U.S. person who transferred
property to the trust may be treated as the owner of the trust under
section 679(a).
Final regulations were issued under section 679 in 2001, and
although instructions for Form 3520 and Form 3520-A have been updated
to take into account the HIRE Act amendments to section 679,
regulations implementing these amendments have not been issued.
C. Section 6039F
Section 1905 of the 1996 Act created new reporting requirements
under section 6039F for U.S. persons (other than certain exempt
organizations) that receive large gifts (including bequests) from
foreign persons. The new information reporting provisions require U.S.
persons to provide information concerning the receipt of large amounts
that they treat as foreign gifts or bequests, giving the IRS an
opportunity to review the characterization of these payments and
determine whether they are properly treated as gifts.
Section 6039F(b) generally defines the term foreign gift as any
amount received from a person other than a U.S. person that the
recipient treats as a gift or bequest. However, a foreign gift does not
include a qualified transfer (within the meaning of section 2503(e)(2))
or a distribution from a foreign trust. A distribution from a foreign
trust must be reported as a distribution under section 6048(c)
(discussed in section III.E of this Background) rather than as a gift
under section 6039F.
Section 6039F(c) provides that, if a U.S. person fails, without
reasonable cause, to report a foreign gift as required by section
6039F, then (i) the tax consequences of the receipt of the gift will be
determined by the Secretary and (ii) the U.S. person will be subject to
a penalty equal to 5 percent of the amount of the gift for each month
the failure to report the foreign gift continues, with the total
penalty not to exceed 25 percent of the value of the gift. Under
sections 6039F(a) and (d), reporting is required if the value of the
aggregate foreign gifts received by a U.S. person during any taxable
year exceeds $10,000, as modified by cost-of-living adjustments. Under
section VI.B.1 of Notice 97-34, however, a U.S. person is required to
report gifts from a foreign individual or foreign estate only if the
aggregate amount of gifts from that foreign individual or foreign
estate exceeds $100,000 during the U.S. person's taxable year. Section
VI.B.3 of Notice 97-34 provides guidance on when a U.S. person must
aggregate foreign gifts received from foreign persons that the U.S.
person knows or has reason to know are related to each other. Once the
$100,000 threshold has been met, the U.S. person must identify each
foreign gift in excess of $5,000 but is not required to identify the
transferor.
A U.S. person who receives foreign gifts that exceed the threshold
amounts must report the foreign gifts on Part IV of Form 3520.
Taxpayers provide this information based on guidance in section VI of
Notice 97-34, as well as the instructions for Form 3520.
D. Section 6048
Section 6048(a) through (c) contains three distinct reporting
obligations with respect to a U.S. person's transactions with, and
ownership of, foreign trusts.
1. Section 6048(a)
Section 6048(a) generally requires a responsible party to file
information returns upon the occurrence of certain reportable events. A
responsible party is the U.S. grantor of an inter vivos foreign trust,
the U.S. transferor, or the executor of a U.S. decedent's estate. A
reportable event is (a) the creation of any foreign trust by a U.S.
person; (b) the direct or
[[Page 39443]]
indirect transfer of any money or property to a foreign trust by a U.S.
person, including a transfer by reason of death; or (c) the death of a
U.S. citizen or resident if the decedent was treated as the owner of
any portion of a foreign trust or if any portion of a foreign trust was
included in the gross estate of the decedent. Section 6048(a)(3)(B)(i)
provides an exception for transfers for fair market value (the fair
market value exception), and section 6048(a)(3)(B)(ii) provides an
exception for transfers to certain deferred compensation and charitable
trusts. (These exceptions correspond to the current substantive
exemptions to the scope of section 679. See section 679(a)(1) and
(2)(B).)
A reportable event is reported on Part I of Form 3520. Section III
of Notice 97-34 and the instructions for Form 3520 provide information
to taxpayers regarding this reporting. Section 6048(a) enables the IRS
to obtain the information necessary to enforce sections 679 (discussed
in section III.B of this Background) and 684 (added by section 1131(b)
of the 1997 Act to provide for recognition of gain on certain transfers
to foreign trusts).
2. Section 6048(b)
Section 6048(b)(1) generally requires a U.S. person who is treated
as the owner of any portion of a foreign trust under the grantor trust
rules (U.S. owner) to ensure that the trust (i) files an annual
information return to provide a full accounting of all the trust
activities for the trust's taxable year and (ii) furnishes an annual
information statement to each U.S. owner and to any other U.S. person
who receives (directly or indirectly) any distribution from the trust
during the year (U.S. beneficiary). In addition, the U.S. owner must
submit such information as the IRS may prescribe with respect to the
foreign trust.
Section 6048(b)(2) provides that, unless a foreign trust with a
U.S. owner appoints a U.S. agent, the Secretary may determine the
amounts required to be taken into account with respect to such trust by
the U.S. owner under the grantor trust rules. The U.S. agent will be
required to act as the foreign trust's limited agent solely for
purposes of applying sections 7602, 7603, and 7604 with respect to any
request or summons by the Secretary in connection with the tax
treatment of any items related to the trust. Certain rules (similar to
the rules of section 6038A(e)(2) and (4)) relating to the enforcement
of requests for certain records with respect to foreign-owned
corporations will apply. Information about the U.S. agent must be
reported on both the U.S. owner's Form 3520 and the foreign trust's
Form 3520-A.
The foreign trust's annual information return is Form 3520-A, and
any additional information required to be submitted by the U.S. owner
is provided on Part II of Form 3520. The information statements that
the foreign trust must furnish to each U.S. owner and to each U.S.
beneficiary who receives a distribution are the Foreign Grantor Trust
Owner Statement and the Foreign Grantor Trust Beneficiary Statement, as
applicable. Taxpayers provide this information based on guidance in
section IV of Notice 97-34, as well as the instructions for Form 3520
and Form 3520-A. If the foreign trust fails to file Form 3520-A,
section 6677 imposes a penalty on the U.S. owner. In order to avoid
penalties under section 6677, the U.S. owner must complete a substitute
Form 3520-A for the foreign trust and attach it to the U.S. owner's
Form 3520. See instructions for Part II of Form 3520.
3. Section 6048(c)
Section 6048(c)(1) provides that any U.S. person who directly or
indirectly receives any distribution from a foreign trust is required
to file an information return to report the name of the trust, the
aggregate amount of the distributions received, and any other
information that the Secretary may prescribe. Section 6048(c)(2)
generally provides that, if adequate records are not provided to the
Secretary to determine the proper treatment of a distribution from a
foreign trust, the distribution is treated as an accumulation
distribution. However, to the extent provided in regulations, this rule
does not apply if the foreign trust authorizes a U.S. person to act as
its limited agent under rules similar to the rules of section
6048(b)(2)(B) (discussed in section III.D.2 of this Background).
Section 6048(d)(5) (discussed in section III.D.4 of this Background)
provides that a U.S. person's treatment of a distribution from a
foreign trust must be consistent with the trust's treatment of such
item or the Secretary must be notified of the inconsistency.
Distributions from a foreign trust are reported on Part III of Form
3520. Taxpayers provide this information based on guidance in section V
of Notice 97-34, as well as the instructions for Form 3520. Section
6048(c) enables the IRS to obtain the information it needs to enforce
the rules relating to the taxation of accumulation distributions
(sections 665 through 669), as well as sections 672(f), 643(h), and
643(i). Section 6048(c) requires any U.S. person, including a U.S.
owner and U.S. beneficiary of a foreign trust, who receives a
distribution from a foreign trust to report information about the
distribution. See Wilson v. United States, 6 F.4th 432 (2d Cir. 2021),
rev'g, No. 19-CV-5037 (BMC), 2019 WL 6118013 (E.D.N.Y. Nov. 18, 2019)
(holding that when an individual is both the sole owner and beneficiary
of a foreign trust and fails to timely report distributions received
from the trust, the IRS may impose a penalty under section 6677 equal
to 35 percent of the gross reportable amount).
4. Section 6048(d)
Section 6048(d)(1) provides that, for purposes of section 6048, in
determining whether a U.S. person makes a transfer to, or receives a
distribution from, a foreign trust, the fact that a portion of the
trust is treated as owned by another person under the grantor trust
rules is disregarded.
Section 6048(d)(2) provides that, to the extent provided in
regulations, a domestic trust will be treated as a foreign trust for
purposes of sections 6048 and 6677 if the trust has substantial
activities, or holds substantial property, outside the United States.
The legislative history includes the statement ``that in exercising its
regulatory authority to treat a U.S. trust as a foreign trust for
purposes of information reporting purposes, the Secretary of the
Treasury will take into account the information that such a trust
reported under the domestic trust reporting rules.'' H.R. Conf. Rep.
737, 104th Cong., 2d Sess. at 338 (1996). Section VIII.C of Notice 97-
34 states that the Treasury Department and the IRS are studying the
appropriate scope of section 6048(d)(2) and that, until further
guidance is issued, a domestic trust is not treated as a foreign trust
pursuant to section 6048(d)(2).
Section 6048(d)(3) provides that any notice or return required
under section 6048 is to be made at such time and in such manner as the
Secretary prescribes.
Section 6048(d)(4) authorizes the IRS to suspend or modify any
requirement of section 6048 if the IRS determines that the United
States has no significant tax interest in obtaining the required
information. The Treasury Department and the IRS previously have issued
guidance providing that information reporting under section 6048(c) is
not required with respect to distributions from certain foreign
compensatory trusts, provided that the U.S. person who receives the
distribution reports the distribution as compensation income on an
applicable Federal income tax return, and that information reporting
under section 6048(a) through (c) is not required with respect to
certain
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Canadian retirement plans. See Section V of Notice 97-34; Rev. Proc.
2014-55, 2014-44 I.R.B. 753. In addition, on March 16, 2020, the
Treasury Department and the IRS issued Revenue Procedure 2020-17, which
exempts from section 6048 information reporting requirements certain
U.S. individuals' transactions with, and ownership of, certain tax-
favored foreign trusts that are established and operated exclusively or
almost exclusively to provide pension or retirement benefits or to
provide medical, disability, or educational benefits.
Section 6048(d)(5) (added by section 1027(b) of the 1997 Act)
provides that a U.S. person who either is treated as an owner of any
portion of a foreign trust or receives (directly or indirectly) any
distribution from a foreign trust must treat any portion owned or any
item distributed in a manner that is consistent with the trust's
treatment of such ownership or item; otherwise, the U.S. person must
notify the Secretary of the inconsistency. A similar rule in section
6034A(c) (added by section 1027(a) of the 1997 Act) generally provides
that a beneficiary of an estate or trust is required to file a return
in a manner that is consistent with the information received from the
estate or trust, unless the beneficiary files with the return a
notification of inconsistent treatment identifying the inconsistency.
The Treasury Department and the IRS are of the view that the rules in
sections 6034A(c) and 6048(d)(5) are to be interpreted as comparable to
the consistency rules that already apply to S corporation shareholders
and partners in partnerships. H.R. Conf. Rep. 220, 105th Cong., 1st
Sess. at 551 (1997). Taxpayers may use Form 8082, Notice of
Inconsistent Treatment or Administrative Adjustment Request (AAR), to
report an inconsistency.
Although regulations were issued under section 6048, these
regulations now are obsolete because they were issued under an earlier
version of section 6048. These regulations were removed as a result of
regulations issued pursuant to Executive Order 13789. See TD 9849 (84
FR 9231).
E. Section 6677
Under section 6677, as amended by section 1901(b) of the 1996 Act,
a U.S. person who fails to file a required information return under
section 6048(a) or (c) is subject to an initial penalty of 35 percent
of the gross reportable amount (generally, the value of the property
transferred or received). If an information return required under
section 6048(b) is not filed, the U.S. person who is treated as the
owner of the foreign trust is subject to an initial penalty of five
percent of the gross reportable amount (the trust corpus at the end of
the year). See also Wilson v. United States, 6 F.4th 432 (2d Cir. 2021)
(holding that gross reportable amount has multiple meanings under
section 6677(c) that differ depending on the part of section 6048 that
is violated), rev'g, No. 19-CV-5037 (BMC), 2019 WL 6118013 (E.D.N.Y.
2019). In all cases, if the failure to file an information return
continues for more than 90 days after the day on which the IRS mails
notification of the failure, an additional $10,000 penalty is imposed
for each 30-day period (or fraction thereof) during which the failure
continues. The total amount of the penalties with respect to any
failure cannot exceed the gross reportable amount with respect to that
failure. If the gross reportable amount is partially reported, then the
penalties are applied based on the amount that is unreported. Section
VII of Notice 97-34.
Section 535 of the HIRE Act strengthened the penalty structure by
further amending section 6677 to allow the IRS to impose penalties when
it does not have enough information to determine the gross reportable
amount. Section 6677, as amended, provides that the initial penalty is
the greater of $10,000 or 35 percent (five percent in the case of a
failure to comply with section 6048(b)) of the gross reportable amount.
Thus, the IRS may impose an initial penalty of $10,000 on a U.S. person
who fails to report information without having any information about
the foreign trust's gross reportable amount. The amendment did not
change the rules for the additional penalties of $10,000 for each 30-
day period (or fraction thereof) during which the failure to report
continues.
Section 6677, as amended, also provides that, if the IRS, after
having assessed penalties, obtains sufficient information to determine
the gross reportable amount, any subsequent penalty imposed will be
reduced as necessary to ensure that the aggregate amount of the
penalties does not exceed the gross reportable amount. To the extent
that the amount already paid exceeds the gross reportable amount, the
IRS will refund the excess to the U.S. person pursuant to section 6402.
Section 6677(d) provides that no penalty will be imposed on any
failure that is shown to be due to reasonable cause and not due to
willful neglect. It further provides that the fact that a foreign
jurisdiction would impose a civil or criminal penalty on the U.S.
person (or any other person) for disclosing the required information is
not reasonable cause.
Section 6677(e) provides that subchapter B of chapter 63 (relating
to deficiency procedures for income, estate, gift, and certain excise
taxes) does not apply in respect of the assessment or collection of any
penalty imposed under section 6677.
F. Section 643(a)(7)
Section 643(a)(7), which was added to the Code by section 1906(b)
of the 1996 Act, provides that the Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of part I of subchapter J of chapter 1 of the Code (sections
641 through 685), including regulations to prevent avoidance of such
purposes.
G. Information Return Due Dates
Section 2006(b) of the Surface Transportation Act provides that, in
the case of returns for taxable years beginning after December 31,
2015, the Secretary, or the Secretary's designee, shall modify the
appropriate regulations addressing certain due dates. Section
2006(b)(9) provides that the due date of Form 3520-A shall be the 15th
day of the third month after the close of the trust's taxable year, and
the maximum extension shall be a 6-month period beginning on such day.
Section 2006(b)(10) states that the due date of Form 3520 for calendar
year filers shall be April 15 with a maximum extension for a 6-month
period ending on October 15.
Explanation of Provisions
I. Section 643(i)--Loans to and Uses of Foreign Trust Property by U.S.
Persons
These proposed regulations provide rules relating to loans from
foreign trusts to U.S. persons and uses of foreign trust property by
U.S. persons. They generally incorporate the section 643(i) guidance
that was provided in Notice 97-34 (discussed in section III.A of the
Background), with certain modifications to provide procedural rules,
such as how to determine a loan's yield to maturity and how to extend
the period of assessment for any income tax associated with the loan,
and anti-abuse rules, such as requiring payments and information
reporting to be timely. In addition, the proposed regulations provide
guidance implementing the HIRE Act amendments to section 643(i).
A. Application of Section 643(i) to Loans by or Uses of Property of a
Foreign Trust
Proposed Sec. 1.643(i)-1 provides rules for determining when a
loan of cash or marketable securities from a foreign nongrantor trust,
made to a U.S. person who is either a grantor or beneficiary of
[[Page 39445]]
the foreign trust or is related to a U.S. person who is a grantor or
beneficiary of the foreign trust, will be treated as a distribution
under subchapter J of chapter 1 of the Code (a section 643(i)
distribution) to the U.S. grantor or beneficiary of the foreign trust.
These rules also apply to determine whether a distribution is made when
any such U.S. persons use the property of the foreign trust.
These rules apply solely for purposes of subparts B, C, and D
(sections 651-652, 661-664, and 665-668) of part I of subchapter J of
chapter 1 of the Code, and thus section 643(i) does not apply to a
foreign trust to the extent that it is a grantor trust described in
subpart E (sections 671 through 679) of part I of subchapter J.
Although section 643(i) applies to loans of cash or marketable
securities from a foreign trust to a U.S. grantor or a U.S. person
related to a U.S. grantor, these provisions of section 643(i) predate
the HIRE Act, which enacted section 679(c)(6). Under section 679, a
U.S. person who transfers property to a foreign trust is treated as the
owner of the portion of the trust attributable to the property
transferred to the trust if there is a U.S. beneficiary of any portion
of the trust, unless an exception applies. Section 679(c)(6) provides
that any direct or indirect loan of cash or marketable securities to a
U.S. person, or direct or indirect use of any other trust property by a
U.S. person, whether or not the U.S. person is a beneficiary under the
terms of the trust, will be treated as paid to or accumulated for the
benefit of a U.S. person, unless an exception applies (see proposed
Sec. 1.679-2(a)(5)(iii)). That is, the U.S. person will be treated as
a beneficiary of the foreign trust for purposes of section 679. In most
circumstances, this causes the foreign trust to be a grantor trust
under section 679, removing it from the purview of section 643(i).
Section 643(i), therefore, will rarely apply to a U.S. grantor or a
U.S. person related to a U.S. grantor. It might apply, however, if the
U.S. grantor created but did not make a transfer to the foreign trust.
Proposed Sec. 1.643(i)-1(b)(1) provides that, unless an exception
applies, any loan of cash or marketable securities made from a foreign
trust (whether from trust corpus or income) directly or indirectly to a
U.S. grantor or beneficiary of the trust or to any U.S. person related
to a U.S. grantor or beneficiary of the trust is treated as a section
643(i) distribution to such U.S. grantor or beneficiary as of the date
on which the loan is made. For these purposes, a loan to a grantor
trust or to a disregarded entity is treated as a loan to the owner of
the grantor trust or of the disregarded entity. For example, a loan to
a single member LLC treated as a disregarded entity is treated as a
loan to the owner of the LLC.
Proposed Sec. 1.643(i)-1(b)(2)(i) describes indirect loans for
purposes of section 643(i) to include loans made through an
intermediary, agent, or nominee. Proposed Sec. 1.643(i)-1(b)(2)(i)
also provides three examples of indirect loans: (1) a loan made by any
person to a U.S. grantor or beneficiary of a foreign trust or any U.S.
person related to a U.S. grantor or beneficiary if the foreign trust
guarantees (within the meaning of Sec. 1.679-3(e)(4)) the loan; (2) a
loan made by any person related (within the meaning of proposed Sec.
1.643(i)-1(d)(9)) to the foreign trust to a U.S. grantor or beneficiary
of the foreign trust or to a U.S. person related to a U.S. grantor or
beneficiary; and (3) a loan made by a foreign trust to a foreign
person, other than to a nonresident alien individual who is a grantor
or beneficiary of the trust, if the foreign person is related (within
the meaning of proposed Sec. 1.643(i)-1(d)(9)) to a U.S. grantor or
beneficiary of the trust. See proposed Sec. 1.643(i)-1(b)(2)(i)(A)
through (C). However, the loans described in examples (2) and (3) above
are excepted from section 643(i) treatment if the U.S. grantor or
beneficiary of the foreign trust satisfies the information reporting
requirements of proposed Sec. 1.6048-4 with respect to the loan and
attaches to a Federal income tax return an explanatory statement that
demonstrates to the satisfaction of the IRS that the loan would have
been made without regard to the U.S. grantor's or beneficiary's
relationship to the foreign trust. See proposed Sec. 1.643(i)-
1(b)(2)(ii). There is no such exception for a loan made by any person
that is guaranteed (within the meaning of Sec. 1.679-3(e)(4)) by a
foreign trust because a foreign trust is unlikely to guarantee such a
loan absent its relationship with the U.S. grantor or beneficiary.
Proposed Sec. 1.643(i)-1(b)(2)(iii) provides that loans from a
foreign trust to a U.S. grantor or beneficiary or U.S. person related
to a U.S. grantor or beneficiary through an intermediary are treated as
made directly from the foreign trust to the U.S. grantor or beneficiary
or U.S. person related to a U.S. grantor or beneficiary.
In order to discourage grantors and beneficiaries of a foreign
trust from changing their U.S. residence in a particular year to avoid
the application of section 643(i), proposed Sec. 1.643(i)-1(b)(3)
provides an anti-abuse rule. If a nonresident alien who is a grantor or
beneficiary of a foreign trust receives a loan from the foreign trust
and becomes a U.S. person within two years, that grantor or beneficiary
will be subject to section 643(i) with respect to the outstanding
amount of the loan as of the date the grantor or beneficiary acquires
U.S. residence or citizenship if the loan was not a qualified
obligation as of the date that it was made.
Proposed Sec. 1.643(i)-1(c) provides that any direct or indirect
use of other property of a foreign trust by a U.S. grantor or
beneficiary or any U.S. person related to a U.S. grantor or beneficiary
is treated as a section 643(i) distribution to the U.S. grantor or
beneficiary in the taxable year in which the use occurs. Use of
property of a foreign trust by a grantor trust or a disregarded entity
is treated as use by the owner of the grantor trust or of the
disregarded entity. For example, use of trust property by a single
member LLC treated as a disregarded entity would be treated as use by
the owner of the LLC.
Proposed Sec. 1.643(i)-1(c)(2)(i) describes indirect use of trust
property to include use by an agent or nominee. Indirect use of trust
property also includes use by a foreign person, other than a
nonresident alien individual who is a beneficiary of the foreign trust,
if the foreign person is related to a U.S. grantor or beneficiary of
the trust, unless the U.S. grantor or beneficiary reports the use of
trust property on Part III of Form 3520, as required by proposed Sec.
1.6048-4, and attaches to the U.S. grantor's or beneficiary's Federal
income tax return an explanatory statement that demonstrates to the
satisfaction of the IRS that the use of trust property would have been
made without regard to the U.S. grantor's or beneficiary's relationship
to the foreign trust. See proposed Sec. 1.643(i)-1(c)(2).
B. Exceptions
Proposed Sec. 1.643(i)-2(a) provides four exceptions to the
general rule of proposed Sec. 1.643(i)-1(b)(1):
First, the general rule will not apply to any loan of cash in
exchange for a qualified obligation within the meaning of proposed
Sec. 1.643(i)-2(b)(2)(iii). The proposed regulations do not provide an
exception from the general rule for loans of marketable securities as
such a rule would be more difficult to apply, and it is less likely
that a foreign trust would make a loan of marketable securities. The
Treasury Department and the IRS request comments on whether qualified
obligation rules are needed for loans of marketable securities.
Second, in the case of a use of trust property other than a loan of
cash or marketable securities, the general rule will not apply to the
extent that the
[[Page 39446]]
foreign trust receives the fair market value of such use within a
reasonable period (described in proposed Sec. 1.643(i)-2(a)(2)(ii) as
60 days or less) from the start of the use of the trust property. The
fair market value of the use will be based on all the facts and
circumstances, including the type of property used and the period of
use.
Third, the general rule will not apply to any de minimis use of
trust property (described in proposed Sec. 1.643(i)-2(a)(3) as
aggregate use by members of a group consisting of the U.S. grantors and
beneficiaries and the U.S. persons related to them for a total of 14
days or less during the taxable year), other than a loan of cash or
marketable securities, by a U.S. grantor or beneficiary or a U.S.
person related to a U.S. grantor or beneficiary.
Fourth, the general rule will not apply to a loan of cash that is
made by a foreign corporation to a U.S. beneficiary of the foreign
trust to the extent the aggregate amount of all such loans to the
beneficiary does not exceed undistributed earnings and profits of the
foreign corporation attributable to amounts that are, or have been,
included in the beneficiary's gross income under section 951, 951A, or
1293. This exception is intended to prevent double taxation that could
result by reason of the application of section 643(i) to an amount that
has already been included in the U.S. beneficiary's gross income as a
subpart F income inclusion, a global intangible low-taxed income
inclusion, an inclusion by reason of a controlled foreign corporation's
investment of earnings in United States property, or a qualified
electing fund inclusion. The Treasury Department and the IRS request
comments on whether the scope of the exception is appropriate, and
whether ordering rules to determine the sourcing of loan amounts, for
example, rules based on the principles of section 959 or similar to the
provisions of Sec. 1.672(f)-4(c)(3), or other clarifications on the
exception's application, are necessary.
C. Qualified Obligations
Proposed Sec. 1.643(i)-2(b) provides rules for determining whether
a loan of cash is made in exchange for a qualified obligation. Proposed
Sec. 1.643(i)-2(b)(2) defines the terms obligor, obligation, and
qualified obligation. The definitions of obligation and qualified
obligation are consistent with the amended definitions of obligation
and qualified obligation in proposed Sec. 1.679-1(c)(6) and Sec.
1.679-4(d), respectively. The term obligor means a person who issues an
obligation (within the meaning of proposed Sec. 1.643(i)-2(b)(2)(i))
to a foreign trust in exchange for a loan of cash. The term obligation
means any instrument or contractual arrangement that constitutes
indebtedness under general principles of Federal income tax law (for
example, a bond, note, debenture, certificate, bill receivable, account
receivable, note receivable, open account, or other evidence of
indebtedness), and an annuity contract that would not otherwise be
classified as indebtedness under general principles of Federal income
tax law. Under proposed Sec. 1.643(i)-2(b)(2)(iii)(A), the term
qualified obligation means an obligation that satisfies all of the
following requirements:
First, the obligation must be in writing.
Second, the term of the obligation must not exceed five years.
Third, all payments on the obligation must be made in cash in U.S.
dollars. The Treasury Department and the IRS stress this requirement to
make all payments in cash in U.S. dollars, in light of abusive
transactions in which taxpayers have used an inflated valuation of in-
kind property to purportedly repay an obligation.
Fourth, the obligation must be issued at par and must provide for
stated interest at a fixed rate or a qualified floating rate within the
meaning of Sec. 1.1275-5(b).
Fifth, the yield to maturity must be not less than 100 percent and
not greater than 130 percent of the applicable Federal rate in effect
under section 1274(d) on the day on which the obligation is issued. The
yield to maturity and the applicable Federal rate must be based on the
same compounding period. If an obligation is a variable rate debt
instrument that provides for stated interest at a qualified floating
rate, the rules in Sec. Sec. 1.1274-2(f)(1) and 1.1275-5(e) apply to
determine the obligation's yield to maturity.
Sixth, all stated interest on the obligation must be qualified
stated interest within the meaning of Sec. 1.1273-1(c).
In addition to these six initial requirements, for both the first
year and each succeeding year in which the obligation remains
outstanding, the three requirements of proposed Sec. 1.643(i)-
2(b)(2)(iii)(B) must be satisfied in order for the obligation to remain
a qualified obligation. First, the U.S. grantor or beneficiary (as the
person who would be subject to income tax if an obligation either is
not a qualified obligation or ceases to be a qualified obligation) must
extend the period for assessment on Part III of Form 3520 (under rules
described in proposed Sec. 1.643(i)-2(b)(2)(iii)(B)(1)) of any income
tax attributable to the loan and any consequent income tax changes for
each year that the obligation is outstanding to a date not earlier than
three years after the maturity date of the obligation issued in
consideration for the loan. Second, the U.S. grantor or beneficiary
must report the status of the obligation, including any payments made,
on Part III of Form 3520. Third, the obligor must make all payments of
principal and interest on the obligation according to the terms of the
obligation.
Proposed Sec. 1.643(i)-2(b)(3) provides that, if the terms of the
obligation are modified and the modification is treated as an exchange
under Sec. 1.1001-3, the new obligation that is deemed issued in the
exchange under Sec. 1.1001-3 must satisfy the requirements in proposed
Sec. 1.643(i)-2(b)(2)(iii) to be a qualified obligation using the
original obligation's issue date. If the modification is not treated as
an exchange under Sec. 1.1001-3, then the obligation is retested as of
the date of the modification to determine whether the obligation, as
modified, continues to satisfy the requirements to be a qualified
obligation.
Proposed Sec. 1.643(i)-2(b)(4) provides that if, while the
obligation is outstanding, the U.S. obligor directly or indirectly
issues another obligation to the foreign trust in exchange for cash,
the outstanding obligation is deemed to have the maturity date of the
new obligation for purposes of determining whether the term of the
outstanding obligation exceeds five years. The outstanding obligation
must be retested as of the issue date of the new obligation to
determine whether the outstanding obligation continues to be a
qualified obligation. The new obligation also must be separately tested
to see if it satisfies the requirements to be a qualified obligation.
Proposed Sec. 1.643(i)-2(b)(5) provides that the IRS may treat two
or more obligations issued by a U.S. obligor as a single obligation
that is not a qualified obligation if they are structured with a
principal purpose to avoid the application of section 643(i).
Proposed Sec. 1.643(i)-2(b)(6) provides that, if a qualified
obligation ceases to be a qualified obligation (for example, because a
modification causes the term of the obligation to exceed five years),
the U.S. grantor or beneficiary is treated as receiving a section
643(i) distribution from the foreign trust. In general, the amount of
the section 643(i) distribution is the obligation's outstanding stated
principal amount plus any accrued but
[[Page 39447]]
unpaid qualified stated interest (within the meaning of Sec. 1.1273-
1(c)) as of the date of the event that causes the obligation to no
longer be a qualified obligation. If the IRS treats two or more
obligations as a single obligation that is not a qualified obligation
under proposed Sec. 1.643(i)-2(b)(5), then the amount of the section
643(i) distribution will not exceed the sum of the outstanding stated
principal amounts of the obligations plus any accrued but unpaid
qualified stated interest as of the date determined by the IRS.
D. Trust Property Attributable to Nongrantor Trust Portion
Proposed Sec. 1.643(i)-2(c) provides rules for determining the
extent to which a loan or use of trust property from a partial
nongrantor trust will be attributable to the nongrantor trust portion.
Generally, a loan or use of trust property from a partial nongrantor
trust must be apportioned in a manner that is reasonable based on all
the facts and circumstances, including the terms of the governing
instrument, local law, and the practice of the trustee, if it is
reasonable and consistent. However, if a loan or use of trust property
can be made from only one portion of the foreign trust because the type
of property loaned or used is held only by that portion, then the loan
or use of property is attributable to that portion.
E. Reporting
The Treasury Department and the IRS are of the view that it is
appropriate to require reporting, pursuant to the authority granted to
the Treasury Department and the IRS by section 643(a)(7), of all loans
and uses of trust property that are potentially subject to section
643(i), in order to ensure that the IRS has the information necessary
to enforce taxpayer compliance with these rules. Thus, proposed Sec.
1.643(i)-2(d) provides that any loan of cash or marketable securities
by a foreign trust to a U.S. person and any use by a U.S. person of
property belonging to a foreign trust, without regard to whether such
loan or use of property is treated as a section 643(i) distribution,
also is a distribution within the meaning of proposed Sec. 1.6048-4(b)
and subject to the information reporting described under proposed Sec.
1.6048-4(a). See proposed Sec. 1.6048-4(b)(3)(ii) and (iii) and
(b)(4)(ii) and (iii).
F. Amount Treated as Section 643(i) Distribution
Proposed Sec. 1.643(i)-3(a) provides rules for determining the
amount that is treated as a section 643(i) distribution if an exception
does not apply. In the case of a loan of cash, the amount of the
section 643(i) distribution is the issue price of the loan as of the
date the loan is treated as a distribution from the foreign trust. In
the case of a loan of marketable securities, the amount of the section
643(i) distribution is the fair market value of the securities as of
the date the loan is treated as a distribution from the foreign trust.
In the case of the use of trust property without fair market value
compensation, the amount of the section 643(i) distribution is the fair
market value of the use of the property less any payments made for the
use of the property within a reasonable period of time.
G. Allocation of Section 643(i) Distribution Among Multiple U.S.
Grantors and Beneficiaries
Proposed Sec. 1.643(i)-3(b) provides a rule for allocating a
section 643(i) distribution among multiple U.S. grantors and
beneficiaries. If a U.S. person who is not a U.S. grantor or
beneficiary of a foreign trust but who is related to more than one U.S.
grantor or beneficiary of the foreign trust receives a loan of cash or
marketable securities from the trust, or uses trust property, and the
loan or use is treated as a section 643(i) distribution, then each U.S.
grantor or beneficiary who is related to the U.S. person receiving the
loan or using trust property is treated as receiving an equal share of
the section 643(i) distribution.
H. Tax Consequences of a Section 643(i) Distribution
Proposed Sec. 1.643(i)-3(c) provides rules to determine the tax
consequences of a section 643(i) distribution to a foreign trust
treated as making a section 643(i) distribution and to a U.S. grantor
or beneficiary treated as receiving the distribution. Proposed Sec.
1.643(i)-3(c)(2) provides that a foreign trust generally must treat the
section 643(i) distribution as an amount properly paid, credited, or
required to be distributed by the trust as described in section
661(a)(2) for which the trust may be allowed a distribution deduction
in computing its taxable income. In addition, a section 643(i)
distribution of marketable securities would cause a foreign trust to be
deemed to have elected to have section 643(e)(3) apply to such
distribution, which would cause the trust to recognize gain or loss as
if the marketable securities had been sold at fair market value. Any
capital gain recognized by the foreign trust would be included in the
trust's distributable net income (DNI) pursuant to section
643(a)(6)(C). As a result of the deemed election, a U.S. grantor or
beneficiary would be treated as including in gross income under section
662(a)(2) the fair market value of the marketable securities, and in
computing its taxable income, the foreign trust would be allowed to
deduct the fair market value of the marketable securities to the extent
allowed under section 661(a)(2).
Proposed 1.643(i)-3(c)(2)(iii) provides that the foreign trust may
issue a Foreign Nongrantor Trust Beneficiary Statement (described in
proposed Sec. 1.6048-4(c)(2)) to each U.S. grantor or beneficiary who
receives any loan of cash or marketable securities or uses other trust
property during the taxable year of the trust or is related to a U.S.
person who receives any loan of cash or marketable securities or uses
other trust property during the taxable year of the trust, whether or
not such U.S. grantor or beneficiary would be required to take the
amount into account as a section 643(i) distribution. A U.S. grantor or
beneficiary who does not receive a Foreign Nongrantor Trust Beneficiary
Statement with respect to a section 643(i) distribution is required to
determine the tax consequences of the distribution under the default
calculation method in proposed Sec. 1.643(i)-3(c)(3)(ii).
Proposed Sec. 1.643(i)-3(c)(3) provides that a U.S. grantor or
beneficiary who is treated as receiving a section 643(i) distribution
must determine the tax consequences of the distribution using either
the actual calculation method or the default calculation method. Under
the actual calculation method, set out under proposed Sec. 1.643(i)-
3(c)(3)(i), a U.S. grantor or beneficiary must treat a section 643(i)
distribution as an amount properly paid, credited, or required to be
distributed by the foreign trust as described in section 662(a)(2)
(relating to inclusions in gross income by beneficiaries of trusts
accumulating income or distributing corpus). The tax consequences of
the section 643(i) distribution to a U.S. grantor or beneficiary are
determined by using information provided in the Foreign Nongrantor
Trust Beneficiary Statement and applying the rules of subparts C and D
of part I of subchapter J of chapter 1 of the Code.
Under the default calculation method, as provided in proposed Sec.
1.643(i)-3(c)(3)(ii), a U.S. grantor or beneficiary must determine the
tax consequences of the section 643(i) distribution under the rules
provided in proposed Sec. 1.6048-4(d)(3). For an explanation of the
default calculation method, see section IV.C of this Explanation of
Provisions.
A U.S. grantor or beneficiary may not use the actual calculation
method unless the U.S. grantor or beneficiary
[[Page 39448]]
has received a Foreign Nongrantor Trust Beneficiary Statement
(described in proposed Sec. 1.6048-4(c)(2)) from the foreign trust. A
U.S. grantor or beneficiary who previously has used the default
calculation method must consistently use the default calculation method
to determine the tax consequences of all subsequent distributions from
the same foreign trust (including distributions other than section
643(i) distributions), except in the year in which the foreign trust
terminates. See proposed Sec. 1.6048-4(b) for the definition of the
term distribution, and see proposed Sec. 1.6048-4(d)(3)(iii) for rules
relating to the tax consequences to a U.S. grantor or beneficiary in
the year in which a foreign trust terminates.
I. Subsequent Transactions
Proposed Sec. 1.643(i)-3(d)(1) provides rules regarding the
treatment of any subsequent transaction between a foreign trust and an
obligor regarding the principal of any loan of cash or marketable
securities (or use of trust property) that is treated as a section
643(i) distribution, including complete or partial repayment,
satisfaction, cancellation, discharge, return of trust property, or
otherwise, but not including payments of interest. Proposed Sec.
1.643(i)-3(d)(2) provides that any subsequent transaction with respect
to the principal of any loan of cash or marketable securities or return
of trust property treated as a section 643(i) distribution has no tax
consequences to a foreign trust. However, payment to a foreign trust
other than the repayment of principal of any loan treated as a section
643(i) distribution, such as the payment of interest, is treated as
income to the trust.
Proposed Sec. 1.643(i)-3(d)(3) provides the consequences to an
obligor of subsequent transactions between a foreign trust and the
obligor related to a section 643(i) distribution. Generally, any
subsequent transaction regarding the principal of any loan of cash or
marketable securities or return of trust property treated as a section
643(i) distribution is treated as a transfer that is not a gratuitous
transfer by a U.S. person for purposes of Sec. 1.671-2(e)(2)(i) and
chapter 1 of the Code. Thus, the repayment of principal would not cause
an obligor to be treated as the owner of the foreign trust. However, if
an obligor satisfies the principal of any loan of cash or marketable
securities treated as a section 643(i) distribution through a transfer
of property to the foreign trust, the obligor will recognize as gain or
loss the difference between the fair market value of the property
transferred and its adjusted basis in the hands of the obligor under
the rules of section 1001 and the regulations issued under section
1001.
II. Section 679--Foreign Trusts Treated as Having a U.S. Beneficiary
The proposed regulations amend the definition of U.S. person in
Sec. 1.679-1(c)(2), the definition of obligation in Sec. 1.679-
1(c)(6), and the definition of qualified obligation in Sec. 1.679-
4(d). The amended definitions generally are consistent with the
definitions of the same terms in proposed Sec. Sec. 1.643(i)-1(d)(12)
and 1.643(i)-2(b)(2), except that the definition of a U.S. person in
proposed Sec. 1.679-1(c)(2) does not exclude tax-exempt entities.
The proposed regulations also make two additions to Sec. 1.679-2
that provide guidance on two statutory provisions added to section 679
by the HIRE Act. First, proposed Sec. 1.679-2(a)(5) and proposed Sec.
1.679-2(b)(3) provide guidance to determine when a loan from a foreign
trust to a U.S. person or the use of foreign trust property by a U.S.
person causes the foreign trust to be treated as having a U.S.
beneficiary. Second, proposed Sec. 1.679-2(d) implements section
679(d), which generally provides that, if a U.S. person directly or
indirectly transfers property to a foreign trust, the trust is presumed
to have a U.S. beneficiary in certain circumstances.
A. Definition of U.S. Person
Proposed Sec. 1.679-1(c)(2) amends the current definition of U.S.
person for purposes of Sec. Sec. 1.679-1 through 1.679-6 to remove the
explicit statement that a nonresident alien individual who elects under
section 6013(g) to be treated as a resident of the United States is a
U.S. person for purposes of section 679 without intending a substantive
change from the existing regulation regarding the treatment of persons
who make an election under section 6013(g). Additionally, a U.S. person
for purposes of section 679 will include a nonresident alien individual
who elects under section 6013(h) to be treated as a resident of the
United States. An election under either section 6013(g) or (h) is
effective for all purposes of chapter 1 of the Code, including section
679, and thus, no specific reference to either rule should be required.
Under the definition of U.S. person in the proposed regulations,
however, a dual resident taxpayer (within the meaning of Sec.
301.7701(b)-7(a)(1)) is not treated as a U.S. person with respect to
any taxable year (or portion of a taxable year) for which such person
computes U.S. tax liability as a nonresident alien pursuant to Sec.
301.7701(b)-7. The Treasury Department and the IRS are of the view that
it is not necessary to treat a dual resident taxpayer who has elected
to compute such person's income tax liability as a nonresident alien as
a U.S. person for purposes of Sec. Sec. 1.679-1 through 1.679-6 in
order to carry out the purposes of section 679. However, see Sec.
1.679-5 for rules that may apply if a dual resident taxpayer who has
been computing U.S. tax liability as a nonresident alien begins to
compute tax liability as a U.S. resident.
B. Definition of Obligation
Proposed Sec. 1.679-1(c)(6) amends the current definition of
obligation for purposes of Sec. Sec. 1.679-1 through 1.679-6 to
conform to the definition of obligation in proposed Sec. 1.643(i)-
2(b)(2)(i).
C. Loans From Foreign Trusts and Uses of Trust Property
Proposed Sec. 1.679-2(a)(5)(i) provides guidance under section
679(c)(6), which was added to the Code by the HIRE Act. As a general
rule, any direct or indirect loan of cash or marketable securities
(whether from trust income or corpus) by a foreign trust to, or the
direct or indirect use of any other property of a foreign trust by, any
U.S. person (whether or not a beneficiary under the terms of the trust)
will be treated as causing trust income or corpus to be paid to or
accumulated for the benefit of a U.S. person for purposes of Sec.
1.679-2(a)(1). For these purposes, a loan to, or use of any other
property of a foreign trust by, a grantor trust or a disregarded entity
is treated as a loan to, or use of trust property by, the owner of the
grantor trust or of the disregarded entity. (For example, a loan to a
single member LLC treated as a disregarded entity would be treated as a
loan to the owner of the LLC.) Consequently, a foreign trust that is
not already treated as having a U.S. beneficiary under Sec. 1.679-2 is
treated as having a U.S. beneficiary for purposes of Sec. 1.679-1,
with the result that a U.S. grantor who has made a transfer to the
foreign trust is treated as the owner of the trust (or a portion of the
trust). See proposed Sec. 1.6048-4 for rules relating to information
reporting with respect to loans from foreign trusts and the use of
property of a foreign trust.
Proposed Sec. 1.679-2(a)(5)(ii) provides that an indirect loan
from a foreign trust to a U.S. person includes a loan made by any
person, whether U.S. or foreign, if the foreign trust provides a
guarantee (within the meaning of Sec. 1.679-3(e)(4)) for the loan. An
indirect loan from a foreign trust to a U.S. person also
[[Page 39449]]
includes a loan made through an intermediary, such as an agent or
nominee of the foreign trust or of the U.S. beneficiary, and a loan
from a person related (within the meaning of proposed Sec. 1.643(i)-
1(d)(9)) to the foreign trust.
Proposed Sec. 1.679-2(a)(5)(iii) provides three exceptions to the
general rule of proposed Sec. 1.679-2(a)(5)(i).
First, the general rule does not apply if the U.S. person who
receives the loan of cash or marketable securities, or who uses trust
property, is described in section 501(c)(3).
Second, the general rule does not apply to any loan of cash
received by a U.S. person in exchange for a qualified obligation within
the meaning of proposed Sec. 1.643(i)-2(b)(2)(iii)(A), provided the
obligor timely makes all payments within the meaning of proposed Sec.
1.643(i)-2(b)(2)(iii)(B)(3).
Third, the general rule does not apply if the U.S. person who uses
trust property (other than a loan of cash or marketable securities)
pays the foreign trust the fair market value of the use of such
property within a reasonable period from the date of the start of the
use of the property. The fair market value is based on all the facts
and circumstances, including the type of property used and the period
of use. Proposed Sec. 1.679-2(a)(5)(iv) provides two safe harbors in
which this fair market value exception applies.
Proposed Sec. 1.679-2(a)(5)(v) addresses the interaction of
proposed Sec. 1.679-2(a)(5) with section 643(i) and confirms that
section 643(i) does not apply to the extent a foreign trust is treated
as having acquired a U.S. beneficiary and is treated as owned by a U.S.
person under section 679 (discussed in section I.A of this Explanation
of Provisions).
Proposed Sec. 1.679-2(b)(3) provides that a loan of cash or
marketable securities or the use of trust property that does not
qualify for the exceptions described in proposed Sec. 1.679-
2(a)(5)(iii) is treated as paid to or accumulated for the benefit of a
U.S. person if the loan is made to, or the property is used by, a
foreign entity described in Sec. 1.679-2(b)(1), or if the loan is made
through, or the property is used by, an intermediary or is made by any
other means where a U.S. person may obtain an actual or constructive
benefit, as described in Sec. 1.679-2(b)(2).
D. Presumption That Foreign Trust Has U.S. Beneficiary
Proposed Sec. 1.679-2(d)(1) provides guidance under section 679(d)
regarding whether a foreign trust is deemed to have a U.S. beneficiary.
As a general rule, if a U.S. person directly or indirectly transfers
property to a foreign trust (other than a compensatory or charitable
trust described in Sec. 1.679-4(a)(2) or (3)), the IRS may treat the
trust as having a U.S. beneficiary for purposes of applying Sec.
1.679-1 unless the U.S. person, for the tax year in which the transfer
is made, (i) satisfies the information reporting requirements of
proposed Sec. 1.6048-2 with respect to the transfer, and (ii) attaches
an explanatory statement to the U.S. person's Federal income tax return
demonstrating to the satisfaction of the IRS that the trust satisfies
the requirements of Sec. 1.679-2(a)(1) immediately after the transfer.
Section 1.679-2(a)(1) provides that a foreign trust is treated as
having a U.S. beneficiary unless, during the taxable year in which the
U.S. person made the transfer, (i) no part of the income or corpus of
the foreign trust may be paid to or accumulated for the benefit of,
directly or indirectly, a U.S. person, and (ii) if the foreign trust is
terminated at any time during the taxable year, no part of the income
or corpus of the trust could be paid to or for the benefit of, directly
or indirectly, a U.S. person.
Proposed Sec. 1.679-2(d)(2) provides that the IRS may request
additional information related to the foreign trust and its potential
beneficiaries to determine whether the trust satisfies the requirements
of Sec. 1.679-2(a)(1). Unless the U.S. person provides such additional
information within 60 days (90 days if the U.S. person is outside the
United States) after the IRS's written notice and request, the trust
will be presumed to have a U.S. beneficiary.
E. Definition of Qualified Obligation
Proposed Sec. 1.679-4(d) amends the current definition of
qualified obligation for purposes of Sec. 1.679-4 to conform to the
definition of qualified obligation in proposed Sec. 1.643(i)-
2(b)(2)(iii) and the additional rules in proposed Sec. Sec. 1.643(i)-
2(b)(3) through (6) (discussed in section I.C of this Explanation of
Provisions).
III. Section 6039F--Information Reporting Rules for U.S. Recipients of
Foreign Gifts
The proposed regulations provide information reporting rules for
U.S. recipients of foreign gifts by generally incorporating the section
6039F guidance that was provided in Notice 97-34 (discussed in section
III.C of the Background). They also provide additional guidance that is
needed to implement all of section 6039F and to address certain abuses
of which the IRS has become aware and relevant statutory developments
since 1997, including the enactment of section 2801 dealing with gifts
and bequests from certain expatriates.
A. In General
Proposed Sec. 1.6039F-1(a)(1) provides that any U.S. person who
treats an amount received from a foreign person as a foreign gift
during a taxable year must report that amount on Part IV of Form 3520
by the fifteenth day of the fourth month after the close of the U.S.
person's taxable year. Proposed Sec. 1.6039F-1(a)(2) provides that, if
the U.S. person qualifies for an automatic extension of time to file an
income tax return under section 6081 and Sec. 1.6081-5(a)(5) because
the U.S. person resides outside of the United States and Puerto Rico,
and the U.S. person's main place of business or post of duty is outside
of the United States or Puerto Rico, Form 3520 must be filed by the
fifteenth day of the sixth month after the close of the U.S. person's
taxable year. In either case, if the U.S. person has been granted an
extension of time to file an income tax return pursuant to section
6081, an extension of time for filing Form 3520 is automatically
granted to the fifteenth day of the tenth month following the close of
the U.S. person's taxable year. See proposed Sec. 1.6039F-1(a)(1) and
(2). Proposed Sec. 1.6039F-1(a)(3) provides that, if the U.S. person
dies, the executor of the U.S. person's estate must report the foreign
gift on Part IV of Form 3520 by the fifteenth day of the fourth month
following the close of the 12-month period which began with the first
day of the U.S. person's final taxable year or, if the executor has
been granted an extension of time to file the U.S. person's final
income tax return pursuant to section 6081, by the fifteenth day of the
tenth month following the close of the 12-month period which began with
the first day of the U.S. person's final taxable year. No additional
extension of time to file Form 3520 is allowed.
For purposes of proposed Sec. 1.6039F-1, the term U.S. person
means a United States person as defined under section 7701(a)(30).
However, under proposed Sec. 1.6039F-1(f), consistent with the
approach in proposed Sec. Sec. 1.643(i)-1(d)(12)(ii) and 1.679-
1(c)(2)(ii), neither a dual resident taxpayer nor a dual status
taxpayer is treated as a U.S. person for purposes of proposed Sec.
1.6039F-1 for a taxable year or any portion of a taxable year that the
taxpayer is treated as a nonresident alien for purposes of computing
U.S. tax liability. See section III.F of this Explanation of
Provisions.
[[Page 39450]]
B. Definition of ``Foreign Gift'' and Coordination With Section 6048(c)
For purposes of proposed Sec. 1.6039F-1, the term foreign gift is
defined to include any amount received from a person other than a U.S.
person that the recipient treats as a gift, bequest, devise, or
inheritance for Federal income tax purposes. The term, however, does
not include any qualified transfer within the meaning of section
2503(e)(2) (relating to certain transfers for educational or medical
expenses) or any transfer from a foreign trust that is treated as a
distribution (within the meaning of proposed Sec. 1.6048-4(b)) and
reported on a return under proposed Sec. 1.6048-4. Proposed Sec.
1.6039F-1(b)(1) also provides that a U.S. person who receives a
transfer from a foreign trust must treat the transfer as a distribution
from the trust that is reportable under proposed Sec. 1.6048-4, rather
than reportable as a foreign gift under proposed Sec. 1.6039F-1(a),
even if the U.S. person treats the transfer as a gift for another
purpose, such as computing the U.S. person's Federal income tax
liability.
Proposed Sec. 1.6039F-1(b)(2) includes an anti-avoidance rule that
provides that the term foreign gift includes transfers from a person
other than a U.S. person that the recipient does not treat as a gift,
bequest, devise, or inheritance for Federal income tax purposes, such
as a purported loan, if based on all the facts and circumstances the
IRS determines that the transfer is in substance a gift. The IRS has
become aware of U.S. persons who are seeking to circumvent the section
6039F information reporting rules by claiming that the amounts they
receive from foreign persons are not foreign gifts because they do not
treat them as gifts but that they are otherwise not taxable (claiming
instead that the transfers are loans). These amounts, however,
objectively have all the indicia of being a gift. Under the existing
principles of Federal tax law, the IRS therefore will recharacterize
these amounts as foreign gifts that should have been reported under
section 6039F.
C. Exceptions
Proposed Sec. 1.6039F-1(c) provides a number of exceptions to the
general rule in proposed Sec. 1.6039F-1(a). Proposed Sec. 1.6039F-
1(c)(1) provides that the general rule does not apply if the recipient
of the foreign gift is described in section 501(c) and is exempt from
tax under section 501(a). Proposed Sec. 1.6039F-1(c)(2)(i) through
(iii) provides exceptions from information reporting under proposed
Sec. 1.6039F-1(a) for amounts below the reporting thresholds.
Under proposed Sec. 1.6039F-1(c)(2)(i)(A), a U.S. person is not
required to report foreign gifts from foreign individuals or foreign
estates if, during the U.S. person's taxable year, the aggregate amount
of foreign gifts received, directly or indirectly, from any one
individual or estate (the transferor) does not exceed $100,000, as
modified by cost of living adjustments under proposed Sec. 1.6039F-
1(c)(2)(v). For purposes of determining whether the $100,000 reporting
threshold is met, all foreign gifts (including covered gifts and
bequests) from the transferor and from any foreign persons related to
the transferor are aggregated. See proposed Sec. 1.6039F-
1(c)(2)(i)(B).
If the aggregate amount of foreign gifts from a transferor exceeds
the $100,000 reporting threshold, the proposed regulations require the
U.S. person to separately identify each foreign gift in excess of
$5,000 received from the transferor and from each foreign person
related to the transferor, and to provide identifying information about
the transferor and related foreign persons, including foreign
individuals or foreign estates (for example, name and address).
Specific identifying information about the transferor is not currently
required to be provided on Form 3520. The Treasury Department and the
IRS are of the view that the additional identifying information would
assist the IRS in its determination of whether these amounts are
properly treated as foreign gifts, and the burden imposed on the U.S.
person should be minimal because the U.S. person would need to know the
transferor's identity in order to know whether the transferor is
foreign and in order to apply the aggregation rule.
Under proposed Sec. 1.6039F-1(c)(2)(ii), notwithstanding the
reporting threshold described above, beginning on the date on which
final regulations under section 2801 (tax on gifts and bequests from
expatriates) apply, a U.S. person who receives foreign gifts that are
covered gifts or bequests will be required to report the covered gifts
or bequests under proposed Sec. 1.6039F-1(a) if the aggregate amount
of all covered gifts and bequests received by the U.S. person during
the calendar year exceeds the exclusion amount under section 2801(c).
See proposed Sec. 1.6039F-1(h)(2). This exclusion amount is the dollar
amount of the per-donee gift tax exclusion in effect under section
2503(b) for the calendar year ($18,000 for 2024).
Under proposed Sec. 1.6039F-1(c)(2)(iii), a U.S. person is not
required to report foreign gifts from a foreign corporation or
partnership if, during the U.S. person's taxable year, the aggregate
amount of transfers received from any particular corporation or
partnership does not exceed $10,000, as modified by cost-of-living
adjustments under proposed Sec. 1.6039F-1(c)(2)(v). The proposed
regulations provide rules for aggregating and reporting foreign gifts
from persons related to the transferor.
Proposed Sec. 1.6039F-1(c)(2)(iv) provides that, with respect to
spouses who file joint income tax returns under section 6013, the
reporting threshold amounts apply separately to each spouse.
D. Valuation Principles
Proposed Sec. 1.6039F-1(d) provides that the amount of a foreign
gift is the value of the property at the time of the transfer. The
value of the property is the price at which the property would change
hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell, and both having reasonable knowledge of
relevant facts. The value is to be determined in accordance with the
Federal gift tax valuation principles of section 2512 and sections 2701
through 2704 (chapter 14 of the Code) and the related regulations.
E. Penalty for Failure To File Information
Proposed Sec. 1.6039F-1(e)(1) describes penalties for failure to
furnish the information required by proposed Sec. 1.6039F-1(a) by the
due date (including extensions) of Form 3520. The tax consequences of
the receipt of the foreign gift will be determined by the IRS based on
all the facts and circumstances. A U.S. person who fails to furnish the
required information is subject to a penalty equal to five percent of
the amount of the foreign gift for each month (or portion thereof) for
which the failure continues, but not to exceed 25 percent of the amount
of the foreign gift.
For purposes of determining the tax consequences of the receipt of
the foreign gift, the IRS may take into account the purported gift
rules in Sec. 1.672(f)-4 (which address the treatment of a purported
gift, as defined in Sec. 1.672(f)-4(d), from a partnership or foreign
corporation). Unless an exception described in Sec. 1.672(f)-4(b), (e)
or (f) applies, Sec. 1.672(f)-4 generally requires a U.S. person who
receives a purported gift or bequest, directly or indirectly, from a
partnership or foreign corporation to include the purported gift or
bequest in gross income as ordinary income.
Proposed Sec. 1.6039F-1(e)(2)(i) explains that no penalty is
imposed if the U.S.
[[Page 39451]]
person shows that the failure to comply is due to reasonable cause and
not due to willful neglect. The determination of whether a failure is
due to reasonable cause and not due to willful neglect will be made
under the principles set out in Sec. 1.6664-4 and Sec. 301.6651-1(c)
and will be made on a case-by-case basis, taking into account all
pertinent facts and circumstances.
F. Special Rules for Dual Resident and Dual Status Taxpayers
Proposed Sec. 1.6039F-1(f)(1) provides a special rule for dual
resident taxpayers (within the meaning of Sec. 301.7701(b)-7(a)(1)). A
dual resident taxpayer who, pursuant to a provision of an income tax
treaty that provides for resolution of conflicting claims of residence
by the United States and the treaty partner, claims to be treated as a
resident of the treaty partner as provided in Sec. 301.7701(b)-7 is
taxed as a nonresident for U.S. tax purposes for the portion of the
taxable year that the individual is treated as a nonresident. The
Treasury Department and the IRS are of the view that, because the dual
resident taxpayer's filing of relevant forms pursuant to Sec.
301.7701(b)-7 provides adequate information for the IRS to identify
residents in this category in order to ensure their tax compliance,
reporting on Form 3520 by such a taxpayer is not essential to effective
IRS tax enforcement efforts relating to this category of residents.
Similarly, proposed Sec. 1.6039F-1(f)(2) provides a special rule
for dual status taxpayers. As provided in Sec. 1.6012-1(b)(2)(ii), a
dual status taxpayer who, during the taxable year, abandons U.S.
citizenship or U.S. residence or acquires U.S. citizenship or U.S.
residence is not treated as a U.S. person for the part of the year that
the taxpayer is treated as a nonresident alien for purposes of
computing the taxpayer's income tax liability as reflected on the Form
1040NR or other similar schedule attached to such Form 1040NR.
These rules are relevant both for purposes of determining whether a
dual resident taxpayer or dual status taxpayer who receives a foreign
gift is a U.S. person required to report the foreign gift on Form 3520
and for purposes of determining whether a gift or bequest from a dual
resident taxpayer or dual status taxpayer is a gift from a foreign
person.
IV. Section 6048--Information With Respect to Certain Foreign Trusts
The proposed regulations provide information reporting rules with
respect to a U.S. person's transfers to, creation of, ownership of, and
receipt of distributions from foreign trusts. These proposed
regulations generally implement the rules set forth in Notice 97-34,
Revenue Procedure 2014-55, and Revenue Procedure 2020-17 (discussed in
section III.D of the Background) but also provide additional exceptions
to section 6048 reporting and include certain other modifications.
A. Section 6048(a)--Notice of Certain Events
The proposed regulations under section 6048(a) require a
responsible party to provide notice of reportable events that occur
during the taxable year on Part I of Form 3520. See proposed Sec.
1.6048-2(a)(1).
Proposed Sec. 1.6048-2(c) defines responsible party as the grantor
in the case of the creation of an inter vivos foreign trust, the
transferor in the case of a transfer of property to a foreign trust by
a U.S. person other than a transfer by reason of death, or the executor
of the estate of a deceased grantor or transferor in any other case,
even if the executor is not a U.S. person.
Proposed Sec. 1.6048-2(b) defines a reportable event as: (i) the
creation of a foreign trust by a U.S. person, (ii) any direct,
indirect, or constructive transfer, within the meaning of Sec. 1.679-3
or Sec. 1.684-2, of property (including cash) to a foreign trust by a
U.S. person, including a transfer by reason of death, and (iii) the
death of a citizen or resident of the United States if the decedent was
treated as the owner of any portion of a foreign trust under the
grantor trust rules or if any portion of a foreign trust was included
in the gross estate of the decedent. A reportable event also includes a
U.S. person's transfer of property to a domestic trust that becomes a
foreign trust, as described in Sec. 1.684-4 (outbound migrations of
domestic trusts), and a U.S. person's transfer of property in exchange
for any obligation of the foreign trust or of a related person, as
described in Sec. 1.679-4, without regard to whether the obligation is
a qualified obligation. A reportable event does not include transfers
to certain foreign charitable trusts, foreign compensatory trusts, and
tax-favored foreign retirement and non-retirement savings trusts, as
discussed in section IV.D.2.i of this Explanation of Provisions. See
proposed Sec. 1.6048-5.
Form 3520 generally must be filed by the fifteenth day of the
fourth month after the close of the responsible party's taxable year,
but no later than the fifteenth day of the tenth month if the
responsible party receives an extension of time to file the responsible
party's income tax return under section 6081. See proposed Sec.
1.6048-2(a)(2)(i). However, if the responsible party who is a grantor
or transferor qualifies for an automatic extension of time to file an
income tax return under section 6081 and Sec. 1.6081-5(a)(5) because
the responsible party resides outside of the United States and Puerto
Rico, and the responsible party's main place of business or post of
duty is outside of the United States or Puerto Rico, Form 3520 must be
filed by the fifteenth day of the sixth month after the close of the
responsible party's taxable year. See proposed Sec. 1.6048-
2(a)(2)(ii). If the responsible party who is a grantor or transferor
dies, the executor of the responsible party's estate must file Form
3520 by the fifteenth day of the fourth month after the close of the
12-month period which began on the first day of the responsible party's
final taxable year. See proposed Sec. 1.6048-2(a)(2)(iii).
B. Section 6048(b)--U.S. Owners of Foreign Trusts
The proposed regulations under section 6048(b) generally require
any U.S. person who is treated as the owner (U.S. owner) of any portion
of a foreign trust under the grantor trust rules to ensure that the
foreign trust: (i) files Form 3520-A with the IRS by the fifteenth day
of the third month after the end of the trust's taxable year (March 15
if the trust's taxable year is a calendar year) with a maximum
extension of a 6-month period beginning on such day, (ii) furnishes a
Foreign Grantor Trust Owner Statement (described in proposed Sec.
1.6048-4(c)(1)(i)) to each U.S. owner of the foreign trust, and (iii)
furnishes a Foreign Grantor Trust Beneficiary Statement (described in
proposed Sec. 1.6048-4(c)(1)(ii)) to each U.S. person to whom the
trust made distributions during the trust's taxable year. The foreign
trust must attach copies of each Foreign Grantor Trust Owner Statement
and each Foreign Grantor Trust Beneficiary Statement to the Form 3520-
A. See proposed Sec. 1.6048-3(a)(1). If the foreign trust does not
comply with all these requirements, the U.S. owner is required to: (i)
complete and file Part II of Form 3520 by the U.S. owner's Form 3520
due date, and (ii) complete the foreign trust's Form 3520-A and related
statements and file them with Part II of the U.S. owner's Form 3520.
Further, the U.S. owner must furnish the Foreign Grantor Trust
Beneficiary Statement to each U.S. beneficiary by the due date of the
U.S. owner's Form 3520. See proposed Sec. 1.6048-3(a)(2). If neither
the foreign trust nor the U.S. owner complies with these requirements,
the penalty for failure to comply is imposed on the U.S.
[[Page 39452]]
owner. See proposed Sec. 1.6677-1(b). As discussed in section IV.D.2.i
of this Explanation of Provisions, the proposed regulations under
section 6048(b) do not apply to tax-favored foreign retirement and non-
retirement savings trusts. See proposed Sec. 1.6048-5.
The proposed regulations require a U.S. person who receives a
Foreign Grantor Trust Owner Statement or Foreign Grantor Trust
Beneficiary Statement from a foreign trust to treat any item reported
by the trust consistently with the trust's treatment of such item
unless the U.S. person notifies the IRS about any inconsistency on Form
8082. See proposed Sec. 1.6048-3(b). If the U.S. person fails to
notify the IRS about the inconsistency, or if the U.S. person receives
information believed to be incorrect from the foreign trust, then,
similar to the rules of section 6034A(c) (addressing reporting in
respect of income tax returns), any adjustment relating to an
unreported item is treated as a mathematical or clerical error under
section 6213(b), with the result that the adjustment would not be
subject to the usual restrictions on assessment and the U.S. grantor or
U.S. beneficiary would have no right to file a Tax Court petition based
on the adjustment.
Proposed Sec. 1.6048-3(c) provides that, unless a foreign trust
with a U.S. owner appoints a limited U.S. agent, the determination of
amounts required to be taken into account with respect to the trust by
the U.S. owner under the grantor trust rules will be determined by the
IRS based on all the facts and circumstances. Proposed Sec. 1.6048-
3(d) provides rules relating to the appointment and duties of the
limited U.S. agent. Proposed Sec. 1.6048-3(d) also provides rules
concerning the issuance of a summons to a U.S. person (either directly
or as the limited agent of the foreign trust) or to the foreign trust
to produce records or testimony to determine the amounts required to be
taken into account under the grantor trust rules.
C. Section 6048(c)--Reporting by U.S. Persons Receiving Distributions
From Foreign Trusts
1. In General
Unless an exception described in proposed Sec. 1.6048-5 applies,
proposed regulations under section 6048(c) generally require a U.S.
person to complete and file Part III of Form 3520 for each taxable year
in which the U.S. person receives (directly or indirectly) any
distribution from a foreign trust (including a foreign trust that the
U.S. person is treated as owning under the grantor trust rules). Part
III of Form 3520 must be filed by the due date of the U.S. person's
Form 3520 for that taxable year. See proposed Sec. 1.6048-4(a). The
Treasury Department and the IRS interpret section 6048(c) as requiring
any U.S. person, including a U.S. owner, to report the receipt of
foreign trust distributions. This interpretation is consistent with
both the plain language of section 6048(c) and its purpose--to address
Congress's concerns that U.S. taxpayers were avoiding their U.S. tax
obligations through the use of foreign trusts that are less visible to
the IRS--and empowers the IRS to obtain information that would allow it
to enforce U.S. tax laws.
2. Distributions
Proposed Sec. 1.6048-4(b)(1) provides that, as a general rule, the
term distribution for purposes of proposed Sec. 1.6048-4 means any
transfer of property from a foreign trust received directly or
indirectly by a U.S. person to the extent such property exceeds the
fair market value of any property or services received by the foreign
trust in exchange, without regard to whether any portion of the trust
is treated as owned by the grantor or another person under the grantor
trust rules, whether the recipient is designated as a beneficiary under
the terms of the trust, or whether the distribution has any income tax
consequences. A distribution includes any amount actually or
constructively received and includes the receipt of a gift or bequest
described in section 663(a). For purposes of proposed Sec. 1.6048-
4(b)(1), a transfer of property from a foreign trust to a grantor trust
or to a disregarded entity is treated as a transfer to the U.S. owner
of the grantor trust or of the disregarded entity.
Proposed Sec. 1.6048-4(b)(2)(i) provides that the term
distribution also includes any transfer of property from a foreign
trust received by a U.S. person through an intermediary, nominee, or
agent. In such a case, the intermediary, nominee, or agent generally is
treated as an agent of the foreign trust, and the property is treated
as distributed to the U.S. person in the year the property is
transferred or made available to the U.S. person. However, proposed
Sec. 1.6048-4(b)(2)(ii) provides that, if the IRS determines that the
intermediary, nominee, or agent is an agent of the U.S. person, then
the property is treated as being transferred from the foreign trust to
the U.S. person on the date of the transfer from the foreign trust to
the intermediary, nominee, or agent. Regardless of the income tax
consequences of such a transfer, pursuant to proposed Sec. 1.6048-
4(b)(2)(iii), the U.S. person receiving an indirect transfer of
property from a foreign trust must report it on Part III of Form 3520.
Proposed Sec. 1.6048-4(b)(3) provides that a distribution includes
any transfer of property from an entity owned by a foreign trust to a
U.S. person who is related (within the meaning of Sec. 1.679-1(c)(5))
to the foreign trust. It also explains that the transfer is treated as
a distribution from the entity to the foreign trust followed by a
distribution from the foreign trust to the U.S. person, unless the U.S.
person demonstrates to the satisfaction of the IRS that the
distribution from the entity is attributable to the U.S. person's
ownership interest in the entity. This rule is the converse of the rule
of Sec. 1.679-3(f)(1), which provides that a transfer by a U.S. person
to an entity owned by a foreign trust is treated as a transfer to the
foreign trust followed by a transfer from the foreign trust to the
entity, unless the U.S. person demonstrates to the satisfaction of the
IRS that the transfer to the entity is attributable to the U.S.
person's ownership interest in the entity.
Proposed Sec. 1.6048-4(b)(4) provides that a distribution includes
the migration of a foreign trust to a domestic trust. In such a case,
the income and corpus of the foreign trust is treated as distributed to
the domestic trust on the date the foreign trust becomes a domestic
trust. See Sec. 301.7701-7 for the rules that apply to determine
whether a trust is a foreign trust or domestic trust.
Proposed Sec. 1.6048-4(b)(5)(i) provides that a distribution
includes any loan of cash or marketable securities made from a foreign
trust (whether from corpus or income) directly or indirectly to a U.S.
person. It also clarifies that a loan to a grantor trust or to an
entity disregarded as an entity separate from its owner will be treated
as a loan to the owner of the grantor trust or of the disregarded
entity. Loans from a foreign trust also include a loan made by any
foreign or U.S. person if the foreign trust guarantees the loan, as
well as a loan made to a U.S. person through any intermediary, nominee
or agent.
Proposed Sec. 1.6048-4(b)(5)(ii) further provides that a
distribution includes any loan of cash or marketable securities made
directly or indirectly to a U.S. grantor or beneficiary (as defined in
proposed Sec. 1.643(i)-1(d)(1)) of a foreign nongrantor trust or to a
U.S. person related (as defined in proposed Sec. 1.643(i)-1(d)(9)) to
a U.S. grantor or beneficiary of such foreign nongrantor trust without
regard to whether the foreign trust receives an obligation (within the
meaning of proposed
[[Page 39453]]
Sec. 1.643(i)-2(b)(2)(i)) in exchange for the loan.
Proposed Sec. 1.6048-4(b)(5)(iii) provides that a loan of cash or
marketable securities from a foreign trust must be reported by the U.S.
person who receives the loan without regard to whether the loan would
have any U.S. income tax consequences to a U.S. grantor or beneficiary
of the foreign trust. If the U.S. person who receives the loan is
related to a U.S. grantor or beneficiary of a foreign nongrantor trust,
then the U.S. grantor or beneficiary also must report the distribution.
Proposed Sec. 1.6048-4(b)(6)(i) provides that a distribution
includes the fair market value of the direct or indirect use of trust
property by a U.S. person without regard to whether the use of trust
property would be treated as having any U.S. income tax consequences to
a U.S. grantor or beneficiary of the foreign trust. For these purposes,
the use of trust property by a grantor trust or a disregarded entity is
treated as used by the owner of the grantor trust or of the disregarded
entity, respectively. Proposed Sec. 1.6048-4(b)(6)(ii) further
provides that a distribution includes the fair market value of the
direct or indirect use of trust property by a U.S. grantor or
beneficiary of a foreign nongrantor trust or by a U.S. person related
to such U.S. grantor or beneficiary whether or not the foreign trust is
paid the fair market value for such use. Proposed Sec. 1.6048-
4(b)(6)(iii) provides that the use of trust property must be reported
on Part III of Form 3520 by the U.S. person that uses the trust
property without regard to whether the use of trust property would have
any U.S. income tax consequences to a U.S. grantor or beneficiary of
the foreign trust. If the U.S. person who uses the trust property is
related to a U.S. grantor or beneficiary of a foreign nongrantor trust,
then the U.S. grantor or beneficiary also must report the distribution.
The Treasury Department and the IRS are of the view that because,
under section 643(i), a distribution to a U.S. person related to a U.S.
grantor or beneficiary affects the U.S. grantor's or beneficiary's
income tax liability, it is appropriate to require reporting by both
the U.S. person receiving a distribution from a foreign trust and the
U.S. grantor or beneficiary of the foreign trust who is related to that
U.S. person. Requiring both parties to report the distribution ensures
that the IRS has the information it needs for tax compliance efforts.
Proposed Sec. 1.6048-4(b)(7) confirms that the term distribution
also includes any covered gift or bequest (within the meaning of
section 2801(e)) that is received from a foreign trust.
3. Information Statements
Proposed Sec. 1.6048-4(c) lists four types of information
statements that may be provided by a foreign trust if a U.S. person
receives a distribution (including a loan of cash or marketable
securities or the use of other trust property) from the foreign trust--
Foreign Grantor Trust Owner Statement, Foreign Grantor Trust
Beneficiary Statement, Foreign Nongrantor Trust Beneficiary Statement,
and Foreign-Owned Grantor Trust Beneficiary Statement. The instructions
for Form 3520 will be modified after these regulations are finalized to
include a list of items that must be included on a Foreign-Owned
Grantor Trust Beneficiary Statement. The list will be similar to the
lists of items that must be included on the Foreign Grantor Trust
Beneficiary Statement and the Foreign Nongrantor Trust Beneficiary
Statement. A U.S. person who receives one of these statements may use
the statement to determine the tax consequences of the distribution.
4. Tax Consequences of Distributions
Proposed Sec. 1.6048-4(d) describes the rules that a U.S. person
(other than a U.S. owner of the distributing trust) must use to
determine the tax consequences of a distribution from a foreign trust
other than a distribution that is a loan of cash or marketable
securities or the use of other trust property that is not treated as a
section 643(i) distribution under proposed Sec. 1.643(i)-1. Two
methods to determine the tax consequences are provided: (i) the actual
calculation method and (ii) the default calculation method. If the U.S.
person who receives the distribution does not receive a copy of the
relevant statement (see proposed Sec. 1.6048-4(c)), the U.S. person
must determine the tax consequences of the distribution under the
default calculation method. A U.S. person who receives the relevant
statement generally may compute the tax consequences of the
distribution under either the actual calculation method or the default
calculation method. However, a U.S. person may not use the actual
calculation method if the U.S. person knows or has reason to know that
the information in the relevant statement is incorrect. Additionally,
if the U.S. person has previously used the default calculation method
with respect to distributions from the foreign trust, the U.S. person
must consistently use the default calculation method to determine the
tax consequences of any subsequent distributions from the trust for all
future years, except for the year in which the trust terminates.
Under the actual calculation method provided in proposed Sec.
1.6048-4(d)(2), a U.S. person who receives a Foreign Grantor Trust
Beneficiary Statement or a Foreign-Owned Grantor Trust Beneficiary
Statement from the foreign trust determines the income tax consequences
of the distribution as a distribution being made from a grantor trust.
Thus, if the distribution is a gift under section 102, the U.S. person
does not include the distribution in gross income, but the distribution
remains subject to the proposed Sec. 1.6048-4 reporting requirements.
A U.S. person who receives a Foreign Nongrantor Trust Beneficiary
Statement determines the tax consequences of the distribution by
applying the rules of subparts C and D of Part 1 of subchapter J of
chapter 1 of the Code.
Under the default calculation method provided in proposed Sec.
1.6048-4(d)(3)(i)(A), the U.S. person treats a portion of the
distribution as a distribution of current income based on the average
amount of the distributions that the U.S. person received from the
foreign trust during the prior three taxable years, with only the
excess amount of the distribution (that is, the amount that exceeds 125
percent of that average) treated as an accumulation distribution within
the meaning of section 665(b) consisting of undistributed net income
(UNI) of the foreign trust. In applying the default calculation method,
in the absence of actual information provided on a statement described
in proposed Sec. 1.6048-4(c), the U.S. person must presume that the
applicable number of years the foreign trust has been in existence is
ten years and that no taxes described in section 665(d) have been
imposed on the trust in any applicable previous year (even if a
distribution has been made and tax under section 665(d) has previously
been imposed). These rules are consistent with the default calculation
method that is currently prescribed in the instructions for Part III of
Form 3520. The U.S. person's use of the default calculation method does
not affect any calculations made by the foreign trust for purposes of
trust accounting. See proposed Sec. 1.6048-4(d)(3)(ii).
5. Accumulation Distributions and U.S. Agents
Proposed Sec. 1.6048-4(e) provides that, if a U.S. person fails to
provide adequate records to the IRS for purposes of determining the
income tax consequences of a distribution from a foreign trust (within
the meaning of
[[Page 39454]]
proposed Sec. 1.6048-4(b)) other than a loan or use of trust property
that is not treated as a section 643(i) distribution under proposed
Sec. 1.643(i)-1, then the entire distribution is treated as an
accumulation distribution includible in the U.S. person's income.
However, if the trustee of the foreign trust authorizes a U.S. person
to act as the trust's limited agent under the rules prescribed in
proposed Sec. 1.6048-3(e), then the IRS can summons and examine trust
records through the U.S. agent and thus may determine the tax
consequences of the distribution under the general rules provided in
proposed Sec. 1.6048-4(d)(1) rather than treating the entire
distribution as an accumulation distribution.
6. Coordination With the Rule for Reporting Large Foreign Gifts
Proposed Sec. 1.6048-4(f) addresses the interaction of proposed
Sec. 1.6048-4 and proposed Sec. 1.6039F-1. If a U.S. person receives
a distribution from a foreign trust, the U.S. person must report the
distribution under proposed Sec. 1.6048-4(a) and not under proposed
Sec. 1.6039F-1, regardless of whether the distribution is taxable to
the U.S. person.
D. Exceptions
1. Exceptions To Reporting Transfers of Property to Foreign Trusts
Proposed Sec. 1.6048-5(a) provides an exception from section
6048(a) reporting based on section 6048(a)(3)(B). The proposed
regulations provide that, for purposes of proposed Sec. 1.6048-2, a
reportable event does not include any of the following: (1) a transfer
of property to a foreign trust that is a transfer for fair market value
within the meaning of Sec. 1.679-4(b) (other than a transfer described
in the following sentence); (2) any transfer of property to certain
compensatory foreign trusts, as described in section 402(b), 404(a)(4),
or 404A; and (3) any transfer of property to a foreign trust provided
that the trust has received a determination letter from the IRS that
has not been revoked that recognizes the trust as an organization
described in section 501(c)(3) that is exempt from Federal income tax
under section 501(a). However, a reportable event does include a
transfer for fair market value if the transfer is made by a U.S.
transferor that is a related person (as defined in Sec. 1.679-1(c)(5))
with respect to the foreign trust in exchange for any obligation of the
trust or of a related person, without regard to whether such obligation
is a qualified obligation described in proposed Sec. 1.679-4(d).
2. Additional Exceptions To Reporting Transactions With Foreign Trusts
Proposed Sec. 1.6048-5(b) through (e) provides additional
exceptions from section 6048 reporting based on the authority granted
to the IRS by section 6048(d)(4) to suspend or modify the requirements
of section 6048.
i. Tax-Favored Foreign Retirement Trusts, Non-Retirement Savings
Trusts, and de Minimis Savings Trusts
Proposed Sec. 1.6048-5(b) provides an exception from section
6048(a) through (c) and proposed Sec. Sec. 1.6048-2 through 1.6048-4
for certain eligible U.S. individuals' transactions with, or ownership
of, certain tax-favored foreign retirement trusts, non-retirement
savings trusts, and de minimis savings trusts. These exceptions to
section 6048 reporting generally follow the exceptions provided under
Rev. Proc. 2020-17, but are modified to address comments received,
including comments requesting that future guidance include an increase
to the applicable contribution limitation thresholds, rules for tax-
favored foreign retirement trusts that may allow limited contributions
of unearned income, and relief with respect to certain trusts that do
not fall within the listed categories but that have values below a
certain threshold.
A tax-favored foreign retirement trust means a foreign trust that
is established under the laws of a foreign jurisdiction to operate
exclusively or almost exclusively to provide, or to earn income for the
provision of, pension or retirement benefits and ancillary or
incidental benefits, and that meets certain additional requirements,
such as contribution limitations or value thresholds, conditions for
withdrawal, and information reporting. See proposed Sec. 1.6048-
5(b)(2). A tax-favored foreign non-retirement savings trust means a
foreign trust that is established under the laws of a foreign
jurisdiction to operate exclusively or almost exclusively to provide,
or to earn income for the provision of, medical, disability, or
educational benefits, and that also meets certain additional
requirements, such as contribution limitations, conditions for
withdrawal, and information reporting. See proposed Sec. 1.6048-
5(b)(3). A tax-favored foreign de minimis savings trust means a foreign
trust that is established under the laws of a foreign jurisdiction to
operate as a savings vehicle, that is not treated as a tax-favored
foreign retirement trust or a tax-favored foreign non-retirement
savings trust, and that meets certain additional requirements, such as
information reporting, and whose value is under a de minimis threshold.
See proposed Sec. 1.6048-5(b)(4).
The Treasury Department and the IRS are of the view that it would
be appropriate to exempt U.S. individuals from the requirement to
provide information about these foreign trusts for several reasons.
First, these foreign trusts generally are subject to written
restrictions, such as contribution limitations, conditions for
withdrawal, and information reporting, under the laws of the country in
which they are established that are broadly consistent with the
eligibility requirements under the Code for U.S. trusts serving similar
policy goals. Second, U.S. individuals with an interest in these trusts
may be required under section 6038D to separately report information
about their interests in accounts held by, or through, these trusts.
Additionally, with respect to tax-favored foreign de minimis savings
trusts and tax-favored foreign retirement trusts, the Treasury
Department and the IRS are of the view that exempting U.S. individuals
from the section 6048 requirements based on the value of the trust is
appropriate and consistent with the reporting thresholds under section
6038D.
ii. Distributions From Certain Foreign Compensatory Trusts
The proposed regulations implement the exception from section
6048(c) reporting provided in section V of Notice 97-34 for
distributions from certain foreign compensatory trusts described in
Sec. 1.672(f)-3(c)(1) (section 402(b) employee trusts and foreign
rabbi trusts). Proposed Sec. 1.6048-5(c). The exception applies only
if the U.S. individual who receives the distribution reports the
distribution as compensation income on a Federal income tax return.
iii. Distributions Received by Certain Domestic Charitable
Organizations
Proposed Sec. 1.6048-5(d) implements the exception from section
6048(c) reporting provided in section V of Notice 97-34 for
distributions received by a domestic organization described in section
501(c)(3). The exception applies only if the domestic organization has
received a determination letter from the IRS that has not been revoked
recognizing the domestic organization's exemption from Federal income
tax under section 501(a) as an organization described in section
501(c)(3).
iv. Certain Trusts Located in a Mirror Code Possession
Proposed Sec. 1.6048-5(e) provides an exemption from sections
6048(a)
[[Page 39455]]
through (c) for a trust located in a mirror code possession to the
extent the responsible party (within the meaning of section
6048(a)(4)), U.S. owner, or U.S. recipient is a bona fide resident
(within the meaning of Sec. 1.937-1(b)) of the mirror code possession.
For this purpose, a mirror code possession is a possession of the
United States where, under the income tax system of the possession, the
income tax liability of the residents of the possession is determined
by reference to the income tax laws of the United States as if the
possession were the United States, A trust is located in a mirror code
possession if a court within such mirror code possession is able to
exercise primary supervision over the administration of the trust and
one or more bona fide residents of the mirror code possession have the
authority to control all substantial decisions of the trust.
E. Special Rules
1. Dual Resident and Dual Status Taxpayers
Proposed Sec. 1.6048-6(a)(1) provides that a dual resident
taxpayer (within the meaning of Sec. 301.7701(b)-7(a)(1)) who computes
U.S. income tax liability as a nonresident alien and complies with the
filing requirements of Sec. 301.7701(b)-7(b) and (c) is not treated as
a U.S. person for purposes of the proposed regulations for the portion
of the year that the dual resident taxpayer is treated as a nonresident
alien. Similarly, under proposed Sec. 1.6048-6(a)(2), a dual status
taxpayer who abandons U.S. citizenship or residence during the tax year
or acquires U.S. citizenship or residence during the taxable year, as
provided in Sec. 1.6012-1(b)(2)(ii), is not treated as a U.S. person
for purposes of the proposed regulations for the portion of the year
that the dual status taxpayer is treated as a nonresident alien. As a
result, these taxpayers are not subject to section 6048 reporting for
the portion of the year during which they are treated as nonresident
aliens for purposes of computing their U.S. income tax liability.
2. Reporting by all U.S. Transferors and Recipients
Section 6048(d)(1) provides that, ``For purposes of [section 6048],
in determining whether a United States person makes a transfer to, or
receives a distribution from, a foreign trust, the fact that a portion
of such trust is treated as owned by another person under the rules of
subpart E of Part I of subchapter J of chapter 1 shall be
disregarded.'' The Treasury Department and the IRS are of the view that
it is necessary to receive information about transfers to, and
distributions from, foreign grantor trusts with regard to all U.S.
transferors and U.S. recipients, including the U.S. owner, in order to
administer the foreign trust provisions and to determine a taxpayer's
U.S. tax liability with respect to foreign trusts. For example, the IRS
uses this information to determine whether the transferor should be
treated as the owner of the foreign trust, the value of the foreign
trust's corpus at the end of the year for purposes of assessing
penalties under section 6677, and the tax consequences of distributions
in later years, such as distributions of corpus or UNI, if the foreign
trust becomes a nongrantor trust (because, for example, the grantor
dies). Therefore, proposed Sec. 1.6048-6(b) clarifies that, pursuant
to section 6048(d)(1), a transfer to, or a distribution from, a foreign
trust is reportable under section 6048(a) and (c) and the proposed
regulations without regard to whether the trust is a grantor trust or a
nongrantor trust, and whether or not there are any U.S. income tax
consequences associated with the transfer or distribution.
3. Domestic Trust With Substantial Foreign Activities or Assets
Proposed Sec. 1.6048-6(c) is reserved for rules under section
6048(d)(2). Section 6048(d)(2) provides that, to the extent provided in
regulations, a domestic trust is treated as a foreign trust for
purposes of sections 6048 and 6677 if the trust has substantial
activities, or holds substantial property, outside the United States.
See section III.D.4 of the Background.
4. Joint Filers
Proposed Sec. 1.6048-6(d) provides that married U.S. persons, each
of whom is subject to the information reporting requirements under
proposed Sec. 1.6048-2(a) (as a grantor or transferor required to file
Part I of Form 3520), proposed Sec. 1.6048-3(a)(2) (as a U.S. owner of
a foreign trust required to file a substitute Form 3520-A), or proposed
Sec. 1.6048-4(a) (as a U.S. recipient of a distribution from a foreign
trust required to file Part III of Form 3520) for the same foreign
trust, may file one Form 3520 for purposes of proposed Sec. Sec.
1.6048-2 through 1.6048-4, but only if they file a joint income tax
return under section 6013 for the tax year for which reporting is
required.
V. Section 6677--Civil Penalties for Failure To File Information With
Respect to Certain Foreign Trusts
Proposed Sec. 1.6677-1 provides rules for civil penalties that may
be assessed if any notice or return required to be filed under proposed
Sec. Sec. 1.6048-2 through 1.6048-4 is not timely filed or contains
incomplete or incorrect information. The proposed regulations provide
for three separate civil penalties that correspond to each separate
reporting requirement under proposed Sec. 1.6048-2, Sec. 1.6048-3,
and Sec. 1.6048-4. The Treasury Department and the IRS interpret
section 6677 as assessing a penalty based on a percentage of a gross
reportable amount, a term that is defined separately under section
6677(c) and in the proposed regulations with respect to each
corresponding section 6048 reporting requirement. This interpretation
is consistent with the plain text of sections 6048 and 6677 and the
purpose of the 1996 Act's modifications to these sections, which is to
discourage U.S. persons from using foreign trusts to avoid their U.S.
tax obligations.
A. General Rules
Proposed Sec. 1.6677-1(a)(1) provides that, as a general rule, a
person who fails to timely file a required notice or return, or fails
to provide complete and correct information, is subject to a penalty
equal to the greater of $10,000 or 35 percent of the applicable gross
reportable amount (defined in proposed Sec. 1.6677-1(c)) for each such
failure (or for each year, in the case of a failure under proposed
Sec. 1.6048-3 relating to information reporting about U.S. owners of
foreign trusts). If a person reports an amount that is less than the
gross reportable amount, the penalty is based on the amount that is
unreported.
Proposed Sec. 1.6677-1(a)(2) provides that, if the failure to
comply with the applicable reporting requirement continues for more
than 90 days after the day on which the IRS mails notice of the failure
to the U.S. person required to pay the penalty, the person is required
to pay an additional penalty of $10,000 for each 30-day period (or
fraction thereof) during which the failure continues.
Proposed Sec. 1.6677-1(a)(3)(i) addresses maximum penalties.
Proposed Sec. 1.6677-1(a)(3)(i) provides that the aggregate amount of
the penalties imposed by proposed Sec. 1.6677-1(a)(1) and (2) (as
modified by proposed Sec. 1.6677-1(b), if applicable) with respect to
any single failure may not exceed the gross reportable amount with
respect to that failure (provided that the IRS receives
[[Page 39456]]
enough information to accurately determine the gross reportable
amount). In some cases, the IRS can begin to assess penalties before it
has received enough information to determine the gross reportable
amount. If the aggregate amount of the penalty collected exceeds the
applicable gross reportable amount (because the penalty was assessed
and collected before the IRS was able to determine the gross reportable
amount), the IRS will refund the excess amount pursuant to section
6402.
Proposed Sec. 1.6677-1(a)(3)(ii) provides that the limitations
period for claims for refund under section 6511(a) and (b) applies to
the refund of any excess amount.
B. Failures To Comply With Proposed Sec. 1.6048-3
Proposed Sec. 1.6677-1(b) makes two modifications to the rules of
proposed Sec. 1.6677-1(a) in the case of a notice or return required
to be filed under proposed Sec. 1.6048-3 (relating to information
reporting about U.S. owners of foreign trusts). First, in the case of a
notice or return required to be filed by a foreign trust under proposed
Sec. 1.6048-3(a), the U.S. owner, rather than the foreign trust, must
pay the penalty. Second, the amount of any penalty that initially is
imposed under proposed Sec. 1.6677-1(a)(1) is the greater of $10,000
or five percent (rather than 35 percent) of the gross reportable
amount.
C. Gross Reportable Amount
Proposed Sec. 1.6677-1(c)(1) provides that the term gross
reportable amount means (i) the gross value of the property involved in
the reportable event (determined as of the date of the event) in the
case of a failure relating to proposed Sec. 1.6048-2, (ii) the gross
value of the portion of the foreign trust's assets (at the close of the
trust's taxable year) treated as owned by the U.S. person in the case
of a failure relating to proposed Sec. 1.6048-3, and (iii) the gross
amount of the distribution or deemed distribution in the case of a
failure relating to proposed Sec. 1.6048-4. Proposed Sec. 1.6677-
1(c)(2) provides guidance on how to determine the gross value or gross
amount of property for purposes of proposed Sec. 1.6677-1(c)(1).
D. Reasonable Cause
Proposed Sec. 1.6677-1(d) provides that the penalty does not apply
if the person required to file the notice or return (including a U.S.
person who is treated as an owner of a foreign trust that fails to
comply with proposed Sec. 1.6048-3(b)) shows that the failure to file
is due to reasonable cause and not due to willful neglect. The
determination of whether a failure is due to reasonable cause and not
due to willful neglect will be made under the principles set out in
Sec. 1.6664-4 and Sec. 301.6651-1(c) and will be made on a case-by-
case basis, taking into account all pertinent facts and circumstances.
The fact that a foreign jurisdiction would impose a civil or criminal
penalty on any person for disclosing the required information will not
satisfy the reasonable cause exception. In addition, refusal on the
part of a foreign trustee to provide information for any reason,
including difficulty in producing the required information or the
existence of provisions in the trust instrument that prevent the
disclosure of required information, does not constitute reasonable
cause.
E. Inapplicability of Deficiency Procedures
Proposed Sec. 1.6677-1(e) provides that deficiency procedures do
not apply in the case of the assessment or collection of a penalty
imposed under section 6677.
F. Joint Filers
Proposed Sec. 1.6677-1(f)(1) provides that married U.S. persons
who jointly file Form 3520 for purposes of proposed Sec. Sec. 1.6048-2
through 1.6048-4 and jointly file an income tax return under section
6013 (as described section IV.E of this Explanation of Provisions) are
treated as a single U.S. person for purposes of assessing section 6677
penalties.
In addition, proposed Sec. 1.6677-1(f)(2) provides that the IRS
may treat married U.S. persons who file a joint income tax return under
section 6013, but who did not file an information return as required
under Sec. Sec. 1.6048-2 through 1.6048-4, as a single U.S. person for
purposes of assessing section 6677 penalties, unless the IRS determines
that, based on all the facts and circumstances, only one of the spouses
was subject to the information reporting requirement (for example,
because only one spouse had an interest in the property constituting
the transfer to, or receipt from, a foreign trust). In these cases, it
can be difficult for the IRS to determine who, between spouses, should
be treated as the transferor, grantor, or owner of, or the recipient of
a distribution from, a foreign trust (because, for example, a transfer
of property to, or the receipt of property from, a foreign trust was
made from (or to) a joint bank account). By enabling the IRS to assess
section 6677 penalties on a joint and several basis against married U.S
persons who do not file information returns required under section
6048, proposed Sec. 1.6677-1(f)(2) allows the IRS to properly enforce
section 6048, while still allowing each spouse to demonstrate that they
should not be jointly and severally liable for the section 6677
penalties assessed (for example, because one spouse did not have an
interest in the underlying property giving rise to a reporting
requirement under proposed Sec. Sec. 1.6048-2 through 1.6048-4).
The liability of married U.S. persons treated as a single person is
joint and several pursuant to proposed Sec. 1.6677-1(f)(3).
VI. Proposed Applicability Dates
These regulations are proposed to apply to transactions with
foreign trusts and the receipt of foreign gifts in taxable years
beginning after the date on which the final regulations are published
in the Federal Register. However, a taxpayer may rely on these proposed
regulations for any taxable year ending after May 8, 2024 and beginning
on or before the date that final regulations are published in the
Federal Register, provided that the taxpayer and all related persons
(within the meaning of sections 267(b) and 707(b)(1)) apply the
proposed regulations in their entirety and in a consistent manner for
all taxable years beginning with the first taxable year of reliance
until the applicability date of the final regulations.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit.
The estimated number of taxpayers impacted by these proposed
regulations is 58,000. This is the number of taxpayers who currently
file Form 3520 and Form 3520-A to report information required by
sections 643(i), 679, 6039F, and 6048 as reflected under OMB
[[Page 39457]]
control numbers 1545-0074 (for individual filers), 1545-0123 (for
business filers), and 1545-0159 (for trust and estate filers). However,
the Treasury Department and the IRS estimate that 58,000 is the upper
bound because the proposed regulations exempt certain taxpayers from
information reporting under sections 6039F and 6048. See, e.g.,
proposed Sec. Sec. 1.6039F-1(c) and 1.6048-5.
The collections of information in the proposed regulations are in
proposed Sec. Sec. 1.643(i)-1(b)(2)(ii), 1.643(i)-1(c)(2)(ii), 1.679-
2(d)(1), 1.679-4(d)(1)(ii), 1.6039F-1(a), 1.6039F-1(e), 1.6048-2(a),
1.6048-3(a), 1.6048-4(c), and 1.6677-1(d). In general, the collections
of information contained in these proposed regulations are currently
reflected in the collection of information for Form 3520 and Form 3520-
A, which have been reviewed and approved by the OMB in accordance with
the PRA under control numbers 1545-0074 (for individual filers), 1545-
0123 (for business filers), and 1545-0159 (for trust and estate
filers). Thus, the burden estimates for OMB control numbers 1545-0074,
1545-0123, and 1545-0159 will be updated to reflect the collections of
information associated with the proposed regulations.
An agency may not conduct or sponsor and a person is not required
to respond to a collection of information unless it displays a valid
OMB control number.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency ``to
prepare and make available for public comment an initial regulatory
flexibility analysis'' that will ``describe the impact of the proposed
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement if the agency certifies that
the proposed rulemaking will not have a significant economic impact on
a substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS do not expect the proposed
regulations to have a significant economic impact on a substantial
number of small entities within the meaning of sections 601(3) through
601(6) of the RFA. The proposed regulations generally reflect the
existing collection of information requirements for Form 3520 and Form
3520-A. However, because the proposed regulations generally apply to
any U.S. person, including small entities, that engage in certain
transactions with foreign trusts or receive large foreign gifts, an
initial regulatory flexibility analysis has been prepared for this
notice of proposed rulemaking under 5 U.S.C. chapter 6 and is provided
below. The Treasury Department and the IRS request comments on the
number of small entities that may be impacted and whether that impact
will be economically significant.
A. Statement of the Need for, and Objectives of, the Proposed
Regulations
As discussed in the Background and Explanation of Provisions, the
proposed regulations implement sections 643(i), 679, 6039F, 6048 and
6677 (the foreign trust and gift provisions), which were added to the
Code or significantly modified to address the use of foreign trusts and
similar offshore arrangements by United States persons to avoid U.S.
tax. These provisions also enhance the IRS's ability to obtain
information regarding these offshore arrangements, including the
receipt of large foreign gifts by United States persons. The proposed
regulations address potential uncertainty under current law, including
the necessary requirements for complying with the foreign trust and
gift provisions, and the relevant tax consequences and potential
penalties for compliance failures.
B. Small Entities To Which the Proposed Regulations Will Apply
The proposed regulations generally define a United States person
using the definition in section 7701(a)(30), which includes domestic
partnerships and domestic corporations, subject to exceptions for
certain entities that are exempt from taxation under chapter 1 of the
Code. See, e.g., proposed Sec. Sec. 1.643(i)-1(d)(12), 1.679-1(c)(2),
1.6039F-1(a), and 1.6048-1(b)(7). Because the number of small
businesses that file Form 3520 and Form 3520-A is reflected in the
taxpayer compliance burden provided for U.S. business income tax
returns under OMB 1545-0123, an estimate of the number of small
businesses affected by the proposed regulations is not currently
feasible, and, therefore, this initial regulatory flexibility analysis
assumes that a substantial number of small businesses will be affected.
The Treasury Department and the IRS do not expect that the proposed
regulations will affect a substantial number of small nonprofit
organizations or small governmental jurisdictions.
C. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The proposed regulations generally do not impose additional
reporting, recordkeeping, or other compliance obligations. The proposed
regulations are substantially similar to the existing guidance in
Notice 97-34, Revenue Procedure 2014-55, and Revenue Procedure 2020-17
and the existing instructions to Form 3520 and Form 3520-A. The
proposed regulations include certain limited clarifications to the
existing guidance and also provide additional taxpayer relief,
including with respect to small entities. Moreover, even without the
proposed regulations, small entities would continue to be required to
file Form 3520 or Form 3520-A to comply with the statutory
requirements. Therefore, these regulations generally are not expected
to impose new compliance burdens, other than the time necessary for
small entities to read the proposed regulations.
D. Duplicate, Overlapping, or Relevant Federal Rules
The Treasury Department and the IRS are not aware of any Federal
rules that duplicate, overlap, or conflict with the proposed
regulations.
E. Alternatives Considered
The foreign trust and gift provisions apply to any United States
person, and the statutes do not establish different rules for small
entities. Because the foreign trust and gift provisions are intended to
address the use of foreign trusts and similar arrangements to avoid
U.S. tax, which can be structured using large and small business
entities, the Treasury Department and the IRS are of the view that the
proposed regulations should apply uniformly to all business entities.
The Treasury Department and the IRS did not consider any significant
alternatives. The proposed regulations address potential uncertainty
under current law without imposing additional economic burdens on these
entities. Therefore, the proposed regulations adopt the approach with
the least economic impact.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Internal Revenue Code, this
regulation will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
[[Page 39458]]
and benefits and take certain other actions before issuing a final rule
that includes any Federal mandate that may result in expenditures in
any one year by a State, local, or Tribal government, in the aggregate,
or by the private sector, of $100 million in 1995 dollars, updated
annually for inflation. The proposed regulations do not include any
Federal mandate that may result in expenditures by State, local, or
Tribal governments, or by the private sector in excess of that
threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled Federalism) prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. The proposed regulations do not have
federalism implications, do not impose substantial direct compliance
costs on State and local governments, and do not preempt State law
within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to any comments
regarding the notice of proposed rulemaking that are submitted timely
to the IRS, as prescribed in this preamble under the ``Addresses''
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed rules. Comments are specifically requested in
Section I.B. of the Explanation of Provisions, regarding whether
qualified obligation rules are needed for loans of marketable
securities and regarding the scope and application of the exception
from section 643(i) distribution treatment for certain loans made by a
foreign corporation. All comments will be made available at
<a href="http://www.regulations.gov">www.regulations.gov</a>. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn.
A public hearing has been scheduled for August 21, 2024, at 10 a.m.
ET, in the Auditorium at the Internal Revenue Building, 1111
Constitution Avenue NW, Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. Participants may alternatively attend the public
hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit an outline of
the topics to be discussed and the time to be devoted to each topic by
July 8, 2024. Outlines must be submitted electronically via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-124850-
08). A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing. If no
outline of the topics to be discussed at the hearing is received by
July 8, 2024, the public hearing will be cancelled. If the public
hearing is cancelled, a notice of cancellation of the public hearing
will be published in the Federal Register.
Individuals who want to testify in person at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#d2a2a7b0bebbb1bab7b3a0bbbcb5a192bba0a1fcb5bda4"><span class="__cf_email__" data-cfemail="deaeabbcb2b7bdb6bbbfacb7b0b9ad9eb7acadf0b9b1a8">[email protected]</span></a> to have your name added to
the building access list. The subject line of the email must contain
the regulation number REG-124850-08 and the language TESTIFY in Person.
For example, the subject line may say: Request to TESTIFY in Person at
Hearing for REG-124850-08.
Individuals who want to testify by telephone at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#9dede8fff1f4fef5f8fceff4f3faeeddf4efeeb3faf2eb"><span class="__cf_email__" data-cfemail="c0b0b5a2aca9a3a8a5a1b2a9aea7b380a9b2b3eea7afb6">[email protected]</span></a> to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-124850-08 and the language
TESTIFY Telephonically. For example, the subject line may say: Request
to TESTIFY Telephonically at Hearing for REG-124850-08.
Individuals who want to attend the public hearing in person without
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#bfcfcaddd3d6dcd7dadecdd6d1d8ccffd6cdcc91d8d0c9"><span class="__cf_email__" data-cfemail="c2b2b7a0aeaba1aaa7a3b0abaca5b182abb0b1eca5adb4">[email protected]</span></a> to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-124850-08 and the language
ATTEND In Person. For example, the subject line may say: Request to
ATTEND Hearing in Person for REG-124850-08. Requests to attend the
public hearing must be received by 5:00 p.m. ET on August 19, 2024.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing please contact the
Publications and Regulations Branch of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#88f8fdeae4e1ebe0ede9fae1e6effbc8e1fafba6efe7fe"><span class="__cf_email__" data-cfemail="8afaffe8e6e3e9e2efebf8e3e4edf9cae3f8f9a4ede5fc">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number) by at least August 16, 2024.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices and other guidance
cited in this document are published in the Internal Revenue Bulletin
or Cumulative Bulletin and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at https://<a href="http://www.irs.gov">www.irs.gov</a>.
Drafting Information
The principal authors of these proposed regulations are Lara A.
Banjanin, Tracy M. Villecco, and S. Eva Wolf of the Office of Associate
Chief Counsel (International), and M. Grace Fleeman, formerly of the
Office of Associate Chief Counsel (International). However, other
personnel from the Treasury Department and the IRS participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and IRS propose to amend 26
CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1.The authority citation for part 1 is amended by adding
entries in numerical order and revising entries for Sec. Sec. 1.679-1,
1.679-2, and 1.679-4 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.643(i)-1 also issued under 26 U.S.C. 643.
Sections 1.643(i)-2 through 1.643(i)-4 also issued under 26
U.S.C. 643 and 6048.
Section 1.643(i)-5 also issued under 26 U.S.C. 643.
* * * * *
Section 1.679-1 also issued under 26 U.S.C. 643 and 679.
Section 1.679-2 also issued under 26 U.S.C. 643 and 679.
Section 1.679-4 also issued under 26 U.S.C. 643 and 679.
* * * * *
Section 1.6039F-1 also issued under 26 U.S.C. 6039F.
* * * * *
Sections 1.6048-1 through 1.6048-6 also issued under 26 U.S.C.
643 and 6048.
* * * * *
[[Page 39459]]
Section 1.6677-1 also issued under 26 U.S.C. 643 and 6048.
* * * * *
0
Par. 2. Sections 1.643(i)-1, 1.643(i)-2, 1.643(i)-3, 1.643(i)-4, and
1.643(i)-5 are added to read as follows:
Sec. 1.643(i)-1 Loans from and use of trust property of foreign
nongrantor trusts.
(a) Loans and use of trust property--(1) In general. For purposes
of subparts B, C, and D of part I of subchapter J of chapter 1 of the
Internal Revenue Code, a loan or use of trust property described in
paragraph (b) or (c) of this section is treated as a section 643(i)
distribution from a foreign trust to a U.S. grantor or beneficiary of
the foreign trust under subchapter J of chapter 1 of the Internal
Revenue Code, as provided in such paragraphs. Paragraph (d) of this
section provides definitions for this section and Sec. Sec. 1.643(i)-2
through 1.643(i)-5. Section 1.643(i)-2 provides exceptions to the
general rules of this section. Section 1.643(i)-3 provides rules
relating to the determination of the amount treated as a section 643(i)
distribution and the tax consequences of a section 643(i) distribution.
Section 1.643(i)-4 provides examples, and Sec. 1.643(i)-5 provides the
applicability date for the rules in this section and Sec. Sec.
1.643(i)-2 through 1.643(i)-4.
(2) Interaction with section 6048(c). For rules relating to
information reporting of loans from foreign trusts and the use of
property of a foreign trust, see Sec. 1.6048-4. That provision applies
without regard to whether the loan or use of property is treated as a
section 643(i) distribution or has any other tax consequences, and
without regard to whether the foreign trust is a nongrantor or grantor
trust.
(b) Loan of cash or marketable securities from foreign nongrantor
trust generally treated as a distribution--(1) In general. Except as
provided in Sec. 1.643(i)-2, any direct or indirect loan of cash or
marketable securities from a foreign nongrantor trust (whether from
trust corpus or income) to any U.S. grantor or beneficiary of that
trust or any U.S. person related to such a U.S. grantor or beneficiary
is treated as a section 643(i) distribution to the U.S. grantor or
beneficiary on the date such loan is made. For these purposes, a loan
from a nongrantor trust to a grantor trust or to a disregarded entity
is treated as a loan to the owner of the grantor trust or of the
disregarded entity, respectively. For example, a loan to a single
member LLC treated as a disregarded entity is treated as a loan to the
owner of the LLC.
(2) Indirect loans--(i) In general. Except as provided in paragraph
(b)(2)(ii) of this section, an indirect loan of cash or marketable
securities from a foreign nongrantor trust includes a loan of cash or
marketable securities made by an intermediary, agent, or nominee of the
trust, as well as a loan made to an intermediary, agent, or nominee of
a U.S. grantor or beneficiary or of a U.S. person related to a U.S.
grantor or beneficiary. For example, such indirect loans include:
(A) Loans made by any person other than the trust to either a U.S.
grantor or beneficiary of a foreign trust or any U.S. person related to
a U.S. grantor or beneficiary if the foreign trust provides a guarantee
(within the meaning of Sec. 1.679-3(e)(4)) for the loan;
(B) Loans made by any person related to a foreign trust, to either
a U.S. grantor or beneficiary of the trust, or a U.S. person related to
a U.S. grantor or beneficiary; and
(C) Loans made by a foreign trust to a foreign person, other than
to a nonresident alien individual grantor or beneficiary of the trust,
if the foreign person is related to a U.S. grantor or beneficiary of
the trust.
(ii) Limitation. The loans described in paragraphs (b)(2)(i)(B) and
(b)(2)(i)(C) of this section will not be treated as a section 643(i)
distribution if the U.S. grantor or beneficiary:
(A) Satisfies the information reporting requirements of Sec.
1.6048-4 with respect to the loan, and
(B) Includes an explanatory statement attached to the U.S. grantor
or beneficiary's Federal income tax return that demonstrates to the
satisfaction of the Commissioner that the loan would have been made
without regard to the fact that the U.S. grantor or beneficiary is a
grantor or beneficiary of the foreign trust.
(iii) Effect of indirect loans--(A) In general. In the case of a
loan described in paragraph (b)(2)(i)(A) or (B) of this section, the
person making the loan is treated as an agent of the foreign trust.
(B) Loans to a foreign person related to a U.S. grantor or
beneficiary. In the case of a loan described in paragraph (b)(2)(i)(C)
of this section, the foreign person related to the U.S. grantor or
beneficiary is treated as an agent of the U.S. grantor or beneficiary,
and the date the loan is made to the foreign person is treated as the
date the loan is made to the U.S. grantor or beneficiary.
(3) Rule for nonresident alien individual grantors or beneficiaries
of a foreign trust who become U.S. persons. If a nonresident alien
individual who is a grantor or beneficiary of a foreign trust receives
a loan from the trust and, while the loan is outstanding, becomes a
U.S. resident (within the meaning of section 7701(b)) or a U.S. citizen
within two years after the date the loan was made, the loan will be
treated as a section 643(i) distribution with respect to the
outstanding amount of the loan as of the date the individual acquires
U.S. residence or citizenship unless an exception described in Sec.
1.643(i)-2 applies.
(c) Use of trust property generally treated as a distribution--(1)
In general. Except as provided in Sec. 1.643(i)-2, any direct or
indirect use of property of a foreign trust, other than a loan of cash
or marketable securities, by any U.S. grantor or beneficiary of the
trust or any U.S. person related to a U.S. grantor or beneficiary is
treated as a section 643(i) distribution to the U.S. grantor or
beneficiary in the taxable year in which the use occurs. For these
purposes, use of property of a nongrantor trust by a grantor trust or
by a disregarded entity is treated as use by the owner of the grantor
trust or of the disregarded entity, respectively. For example, use of
trust property by a single member LLC treated as a disregarded entity
would be treated as use by the owner of the LLC.
(2) Indirect use of trust property--(i) In general. Indirect use of
property of a foreign trust includes use by an agent or nominee of a
U.S. grantor or beneficiary of the trust or an agent or nominee of a
U.S. person related to a U.S. grantor or beneficiary. Indirect use of
trust property also includes use by a foreign person, other than a
nonresident alien individual beneficiary of the trust, if the foreign
person is related to a U.S. grantor or beneficiary of the trust, unless
paragraph (c)(2)(ii) of this section applies.
(ii) Limitation. The use of trust property described in the second
sentence of paragraph (c)(2)(i) of this section is not treated as a
section 643(i) distribution to the U.S. grantor or beneficiary if the
U.S. grantor or beneficiary:
(A) Satisfies the information reporting requirements of Sec.
1.6048-4 with respect to the use; and
(B) Includes an explanatory statement attached to the U.S.
grantor's or beneficiary's Federal income tax return that demonstrates
to the satisfaction of the Commissioner that the use of trust property
would have been allowed without regard to the fact that the U.S.
grantor or beneficiary is a grantor or beneficiary of the foreign
trust.
(iii) Effect of indirect use of trust property. In the case of the
use of trust property by a foreign person related to the U.S. grantor
or beneficiary described in paragraph (c)(2)(i) of this section, such
foreign person is treated as an agent of the U.S. grantor or
beneficiary.
[[Page 39460]]
(d) Definitions. The following definitions apply for purposes of
this section and Sec. Sec. 1.643(i)-2 through 1.643(i)-5:
(1) Beneficiary. The term beneficiary means a person to whom or for
whose benefit, under the terms of the trust instrument or applicable
local law, at any time during the term of the trust or upon
termination, trust income or corpus may be paid (including pursuant to
a power of appointment that has been exercised in favor of that person)
or accumulated, directly or indirectly. All references to a U.S.
beneficiary mean a beneficiary who is a U.S. person.
(2) Cash. The term cash includes foreign currencies and cash
equivalents.
(3) Disregarded entity. The term disregarded entity means an entity
that, under Sec. Sec. 301.7701-1 through 301.7701-3 of this chapter,
is disregarded as an entity separate from its owner.
(4) Foreign person. The term foreign person means any person who is
not a U.S. person within the meaning of section 7701(a)(30).
(5) Grantor trust. The term grantor trust means a trust or any
portion of a trust that is treated as owned by any person under subpart
E of part I of subchapter J of chapter 1 of the Internal Revenue Code.
(6) Loan of cash. Except as provided in Sec. 1.643(i)-2(a)(1), the
term loan of cash includes an extension of credit.
(7) Marketable securities. The term marketable securities means
marketable securities within the meaning of section 731(c)(2)(A), but
not including foreign currencies.
(8) Nongrantor trust. The term nongrantor trust means a trust or
any portion of a trust that is not treated as owned by any person under
subpart E of part I of subchapter J of chapter 1 of the Internal
Revenue Code.
(9) Related. A person will be considered to be related to another
person if the relationship between such persons would result in a
disallowance of losses under section 267 or 707(b). In applying section
267 for purposes of the previous sentence, section 267(c)(4) is applied
as if the family of an individual includes the spouses of the members
of the individual's family.
(10) Section 643(i) distribution. The term section 643(i)
distribution means a transaction described in paragraph (b) or (c) of
this section.
(11) U.S. grantor. The term U.S. grantor means a U.S. person
described in Sec. 1.671-2(e).
(12) U.S. person--(i) In general. Subject to paragraph (d)(12)(ii)
of this section, the term U.S. person means a United States person as
defined in section 7701(a)(30) but does not include an entity that is
exempt from tax under chapter 1 of the Internal Revenue Code.
(ii) Special rules--(A) Dual resident taxpayers. If a dual resident
taxpayer (within the meaning of Sec. 301.7701(b)-7(a)(1) of this
chapter) computes U.S. income tax liability as a nonresident alien on
the last day of the taxable year and complies with the filing
requirements of Sec. 301.7701(b)-7(b) and (c) of this chapter, the
dual resident taxpayer is not treated as a U.S. person for purposes of
section 643(i) with respect to the portion of the taxable year the dual
resident taxpayer was treated as a nonresident alien for purposes of
computing U.S. income tax liability.
(B) Dual status taxpayers. Except as provided in paragraph (b)(3)
of this section, if a taxpayer abandons U.S. citizenship or residence
during the tax year or acquires U.S. citizenship or residence during
the taxable year as provided in Sec. 1.6012-1(b)(2)(ii), the taxpayer
is not treated as a U.S. person with respect to the portion of the
taxable year the taxpayer was treated as a nonresident alien for
purposes of computing U.S. income tax liability.
Sec. 1.643(i)-2 Exceptions
(a) In general. A loan of cash or use of trust property will not be
treated as a section 643(i) distribution if the loan of cash or use of
trust property is one of the following:
(1) Loan of cash in exchange for a qualified obligation. A loan of
cash that is in exchange for a qualified obligation (within the meaning
of paragraph (b)(2)(iii) of this section).
(2) Compensated use of trust property--(i) In general. Use of trust
property, other than a loan of cash or marketable securities, to the
extent that the trust is paid the fair market value of such use within
a reasonable period from the start of the use of the property. A
determination as to the fair market value of the use of such property
and as to whether a fair market value payment is made within a
reasonable period must be based on all the facts and circumstances,
including the type of property used and the period of use. In
appropriate cases, such as rental of real property, payments may be
made on a periodic basis consistent with arm's length dealings between
unrelated parties.
(ii) Safe harbor. For purposes of paragraph (a)(2)(i) of this
section, a payment is made within a reasonable period if the payment is
made or periodic payments commence within 60 days of the start of the
use of trust property.
(3) De minimis use of trust property. Use of trust property, other
than a loan of cash or marketable securities, if such use is de
minimis. Use of trust property will be considered de minimis if
aggregate use by members of the group consisting of the U.S. grantors,
U.S. beneficiaries, and the U.S. persons related to any U.S. grantor or
beneficiary does not exceed 14 days during the calendar year.
(4) Certain loans made by a foreign corporation. A loan of cash
that is made by a foreign corporation to a U.S. beneficiary of the
foreign trust to the extent the aggregate amount of all such loans to
the beneficiary does not exceed undistributed earnings and profits of
the foreign corporation attributable to amounts that are, or have been,
included in the beneficiary's gross income under section 951, 951A, or
1293.
(b) Qualified obligations--(1) In general. The rules in this
paragraph (b) apply to determine whether a loan of cash is in exchange
for a qualified obligation.
(2) Definitions. The following definitions apply for purposes of
this section and Sec. Sec. 1.643(i)-1 and 1.643(i)-3 through 1.643(i)-
5:
(i) Obligation. The term obligation means any instrument or
contractual arrangement that constitutes indebtedness under general
principles of Federal income tax law (for example, a bond, note,
debenture, certificate, bill receivable, account receivable, note
receivable, open account, or other evidence of indebtedness), and any
annuity contract that would not otherwise be classified as indebtedness
under general principles of Federal income tax law.
(ii) Obligor. The term obligor means the person who issues an
obligation to a foreign trust in exchange for a loan of cash.
(iii) Qualified obligation--(A) General requirements. The term
qualified obligation means an obligation that at all times satisfies
all of the following requirements:
(1) The obligation is reduced to writing in an express written
agreement.
(2) The term of the obligation does not exceed five years. For
purposes of determining the term of an obligation, the obligation's
maturity date is the last possible date that the obligation can be
outstanding under the terms of the obligation.
(3) All payments on the obligation must be made in cash in U.S.
dollars.
(4) The obligation is issued at par and provides for stated
interest at a fixed rate or a qualified floating rate within the
meaning of Sec. 1.1275-5(b).
(5) The yield to maturity of the obligation is not less than 100
percent
[[Page 39461]]
of the applicable Federal rate and not greater than 130 percent of the
applicable Federal rate. The applicable Federal rate for an obligation
is the applicable Federal rate in effect under section 1274(d) for the
day on which the obligation is issued, as published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter). The yield
to maturity and the applicable Federal rate must be based on the same
compounding period. If an obligation is a variable rate debt instrument
that provides for stated interest at a qualified floating rate, the
equivalent fixed rate debt instrument rules in Sec. 1.1274-2(f)(1) or
Sec. 1.1275-5(e), whichever is applicable, apply to determine the
obligation's yield to maturity.
(6) All stated interest on the obligation is qualified stated
interest within the meaning of Sec. 1.1273-1(c).
(B) Additional requirements to remain a qualified obligation. An
obligation will remain a qualified obligation only if, for the first
year and each succeeding year that the obligation remains outstanding,
the following requirements are satisfied:
(1) The U.S. grantor or beneficiary timely extends the period for
assessment of any income tax attributable to the obligation and any
consequent income tax changes for each year that the obligation is
outstanding to a date not earlier than three years after the maturity
date of the obligation. This extension of the period for assessment is
not necessary with respect to the taxable year of the U.S. grantor or
beneficiary in which the maturity date of the obligation falls,
provided that the obligation is paid in cash in U.S. dollars within
that year. The period of assessment is extended by completing and
filing Part III of Form 3520, Annual Return to Report Transactions with
Foreign Trusts and Receipt of Certain Foreign Gifts, for every year
that the obligation is outstanding. The waiver in Part III of Form 3520
shall also contain such other terms with respect to assessment as may
be considered necessary by the Commissioner to ensure the assessment
and collection of the correct tax liability for each year for which the
waiver is required. When Part III of Form 3520 is properly executed and
filed, the consent to extend the period for assessment of tax will be
deemed to be agreed upon and executed by the Commissioner for purposes
of Sec. 301.6501(c)-1(d).
(2) The U.S. grantor or beneficiary timely reports the status of
the obligation, including principal and interest payments, on Part III
of Form 3520 for each year that the obligation is outstanding.
(3) The obligor timely makes all payments of principal and interest
on the obligation according to the terms of the obligation (which may
include a reasonable grace period of no more than thirty days for a
late payment).
(3) Modification of a qualified obligation. If the terms of a
qualified obligation are modified and the modification is treated as an
exchange under Sec. 1.1001-3, the new obligation that is deemed issued
in the exchange under Sec. 1.1001-3 must satisfy all the requirements
in paragraph (b)(2)(iii) of this section to be a qualified obligation
using the original obligation's issue date. If the modification is not
treated as an exchange under Sec. 1.1001-3, then the obligation must
be retested as of the date of the modification to determine whether the
obligation, as modified, continues to satisfy the requirements in
paragraph (b)(2)(iii) of this section to be a qualified obligation.
(4) Additional loans. If a qualified obligation is outstanding and
the obligor directly or indirectly issues an additional obligation to
the foreign trust in exchange for cash, the outstanding obligation is
deemed to have the maturity date of the additional obligation in
determining whether the outstanding obligation exceeds the specified
five-year term. The outstanding obligation must be retested as of the
issue date of the additional obligation to determine whether it would
have satisfied, as of the outstanding obligation's issue date, all the
requirements in paragraph (b)(2)(iii) of this section to be a qualified
obligation. If there is more than one qualified obligation outstanding,
the determination is made based on the outstanding obligation with the
earliest issue date. The additional obligation also must be separately
tested to see if it satisfies the requirements in paragraph (b)(2)(iii)
of this section to be a qualified obligation.
(5) Anti-abuse rule. Notwithstanding paragraphs (b)(3) and (4) of
this section, if the Commissioner determines, based on all of the facts
and circumstances, that two or more obligations issued by a U.S.
obligor are structured with a principal purpose to avoid the
application of section 643(i), the Commissioner may treat the
obligations as a single obligation that is not a qualified obligation.
(6) Obligations that cease to be qualified--(i) In general. If an
obligation ceases to be a qualified obligation (for example, because an
obligation is modified so that the term of the obligation exceeds 5
years), the U.S. grantor or beneficiary is treated as receiving a
section 643(i) distribution from the trust.
(ii) Amount of section 643(i) distribution. Except as otherwise
provided in this paragraph (b)(6)(ii), the amount of the section 643(i)
distribution treated as received pursuant to paragraph (b)(6)(i) of
this section is equal to the obligation's outstanding stated principal
amount plus any accrued but unpaid qualified stated interest (within
the meaning of Sec. 1.1273-1(c)) as of the date of the event that
causes the obligation to no longer be a qualified obligation. In the
case of an obligation that ceases to be a qualified obligation because
the Commissioner treats two or more obligations as a single obligation
pursuant to paragraph (b)(5) of this section, the amount of the section
643(i) distribution will not exceed the sum of the outstanding stated
principal amount plus any accrued but unpaid qualified stated interest
on each of the obligations as of the date determined by the
Commissioner under paragraph (b)(6)(iii) of this section.
(iii) Date of section 643(i) distribution. In general, the U.S.
grantor or beneficiary is treated as receiving a section 643(i)
distribution on the date of the event that causes an obligation to no
longer be a qualified obligation. However, based on all of the facts
and circumstances, if an obligation (or obligations) is structured with
a principal purpose to avoid the application of section 643(i), the
Commissioner may deem a section 643(i) distribution to have occurred on
any date on or after the issue date of the obligation(s).
(c) Trust property attributable to nongrantor trust portion--(1) In
general. A loan or use of trust property from a partial nongrantor
trust must be apportioned between the nongrantor and grantor portions
of the trust in a manner that is reasonable in light of all the facts
and circumstances, including the terms of the governing instrument,
local law, and the practice of the trustee if it is reasonable and
consistent.
(2) Specific property. If a loan of cash or marketable securities,
or a use of trust property, can be made from only one portion of the
foreign trust because the type of property loaned or used is held only
by that portion, then the loan or use of property is deemed to be
attributable to that portion.
(d) Reporting. A loan of cash or marketable securities from, or the
use of any property of, a foreign grantor or nongrantor trust to or by
a U.S. person is a distribution for purposes of Sec. 1.6048-4(b)(3) or
(4), as applicable, and must be reported by the U.S.
[[Page 39462]]
person, and if the trust is a foreign nongrantor trust, by the U.S.
grantor or beneficiary, under Sec. 1.6048-4(a), irrespective of
whether the loan or use of trust property is a section 643(i)
distribution.
(e) Examples. The following examples illustrate the rules of
paragraphs (b) through (d) of this section:
(1) Example 1: Loan of cash not in exchange for qualified
obligation. Y, a nonresident alien, created and funded a foreign
nongrantor trust, FT, for the benefit of X, a U.S. person. X is the
sole beneficiary of FT. In Year 1, FT makes a loan of cash to X in
exchange for a demand note that permits FT to require repayment by X at
any time. The demand note issued by X is not a qualified obligation
within the meaning of paragraph (b)(2)(iii) of this section because X's
obligation to FT could remain outstanding for more than five years.
Accordingly, the qualified obligation exception in paragraph (a)(1) of
this section does not apply. Under Sec. 1.643(i)-1(b) and Sec.
1.643(i)-3(a), X is treated as receiving a section 643(i) distribution
from FT. X must determine the tax consequences of the distribution
under Sec. 1.643(i)-3(c). Under Sec. 1.6048-4(a), X is required to
report the section 643(i) distribution on Part III of Form 3520 for
Year 1, as a distribution from a foreign trust.
(2) Example 2: Beneficiary fails to extend period of assessment and
fails to report loan on Form 3520. Y, a nonresident alien, created and
funded a foreign nongrantor trust for the benefit of X, a U.S. person.
On June 30, Year 1, FT makes a loan of cash to X in exchange for an
obligation that satisfies the requirements of paragraph (b)(2)(iii)(A)
of this section. However, X fails to timely file Form 3520 and did not
request an extension to file. As a result, X has failed to extend the
period for assessment of any income tax attributable to the loan
through the filing of Form 3520 by its due date as required under
paragraph (b)(2)(iii)(B)(1) of this section. X also has failed to
report the status of the loan on Form 3520 as required under paragraph
(b)(2)(iii)(B)(2) of this section. Either one of X's failures is
sufficient to cause the loan to be treated as a section 643(i)
distribution under Sec. 1.643(i)-1(b). Because the loan fails to
continue to be treated as a qualified obligation, the loan is treated
as a section 643(i) distribution from FT as of April 15, Year 2, the
date that X's Form 3520 was due.
(3) Example 3: Effect of subsequent obligation on original
obligation. Y, a nonresident alien, created and funded a foreign
nongrantor trust for the benefit of X, a U.S. person. On January 1,
Year 1, FT makes a loan of cash to X in exchange for Note 1, an
obligation with a maturity date of January 1, Year 6, that satisfies
the requirements of paragraph (b)(2)(iii) of this section. On June 30,
Year 1, FT makes an additional loan of cash to X in exchange for Note
2, an obligation with a maturity date of June 30, Year 6. Under
paragraph (b)(4) of this section, Note 1 will be deemed to have a
maturity date of June 30, Year 6 (i.e., a greater than five-year term)
and will cease to be a qualified obligation. Under paragraph (b)(6)(ii)
of this section, X will be treated as receiving a section 643(i)
distribution equal to Note 1's outstanding stated principal amount plus
any accrued but unpaid qualified stated interest (within the meaning of
Sec. 1.1273-1(c)) as of June 30, Year 1. Note 2 will be separately
tested to determine whether it satisfies the requirements of paragraph
(b)(2)(iii) of this section.
(4) Example 4: Anti-abuse rule. Y, a nonresident alien, created and
funded a foreign nongrantor trust for the benefit of X, a U.S. person.
On January 1, Year 1, FT makes a loan of cash to X in exchange for Note
1, an obligation with a maturity date of January 1, Year 4 that
satisfies the requirements of paragraph (b)(2)(iii) of this section. On
January 1, Year 4, FT makes another loan of cash to X in exchange for
Note 2, an obligation with a maturity date of January 1, Year 7, but
otherwise has the same terms as Note 1. Based on all of the facts and
circumstances, the Commissioner determines under paragraph (b)(5) of
this section that Notes 1 and 2 are structured with a principal purpose
to avoid the application of section 643(i). Therefore, under paragraph
(b)(5) and paragraph (b)(6)(ii) and (iii) of this section, the
Commissioner may treat Notes 1 and 2 as a single obligation (with a
six-year term) that is not a qualified obligation and may treat X as
receiving a section 643(i) distribution equal to the combined
outstanding stated principal amounts of Note 1 and Note 2 plus any
accrued but unpaid qualified stated interest as of any date determined
by the Commissioner.
(5) Example 5: Allocation of trust property attributable to partial
grantor trust. In Year 1, Y, a nonresident alien, creates and settles a
foreign trust, FT, for the benefit of X, a U.S. beneficiary. Y funds
the trust with a vacation home valued at $500,000 and $500,000 cash.
Under the trust document, Y has the power to revoke the trust as to the
vacation home and any income earned by the vacation home at any time
without the consent of any person. This power to revoke results in Y
being treated as the owner of the portion of the trust comprising the
vacation home (the grantor trust portion) under section 676 (after
application of Sec. 1.672(f)-3(a)). Y has no powers that would cause Y
to be treated as the owner of the portion of the trust comprising the
cash Y contributed or any income earned by that cash. X uses the
vacation home for 2 months in Year 2 and does not compensate the trust
for the use of the vacation home. Under paragraph (c)(2) of this
section, the use of the vacation home will be deemed to be attributable
to the grantor trust portion and thus will not be treated as a section
643(i) distribution to X. Under paragraph (d) of this section, X must
comply with the reporting requirements of Sec. 1.6048-4 with respect
to the use of the vacation home. Under Sec. 1.6048-4(b)(4), X is
required to report the use of the vacation home on Part III of Form
3520 for Year 2 as a distribution from FT.
Sec. 1.643(i)-3 Consequences of section 643(i) distribution.
(a) Amount treated as section 643(i) distribution--(1) Loan of
cash. Except as provided otherwise, in the case of a loan of cash
treated as a section 643(i) distribution, the amount of the section
643(i) distribution is the issue price of the loan, as determined under
Sec. 1.446-2(d)(1), Sec. 1.1273-2 or Sec. 1.1274-2 (whichever is
applicable), as of the date (described in Sec. 1.643(i)-2(b)(6)) the
loan is treated as a section 643(i) distribution.
(2) Loan of marketable securities. In the case of a loan of
marketable securities treated as a section 643(i) distribution, the
amount of the section 643(i) distribution is the fair market value of
the securities as of the date the loan is treated as a section 643(i)
distribution.
(3) Uncompensated use of trust property. In the case of the use of
trust property treated as a section 643(i) distribution, the amount of
the section 643(i) distribution is the fair market value of the use of
the property less the amount of any payments made within a reasonable
period (described in Sec. 1.643(i)-2(a)(2)) for the use of such
property. The fair market value of the use of the property is based on
all the facts and circumstances, including the type of property used
and the period of use.
(b) Allocation of section 643(i) distribution among multiple U.S.
grantors and beneficiaries. If a U.S. person who is not a U.S. grantor
or beneficiary of a foreign trust but who is related to more than one
U.S. grantor or beneficiary of the trust receives a loan of cash or
marketable securities, or uses
[[Page 39463]]
trust property, that is treated as a section 643(i) distribution, then
each U.S. grantor and beneficiary who is related to the U.S. person
receiving the loan or using trust property is treated as receiving an
equal share of the section 643(i) distribution. For purposes of this
allocation, the term U.S. beneficiary includes only those beneficiaries
who must or may receive a current distribution from the foreign trust.
(c) Tax consequences of a section 643(i) distribution--(1) In
general. A U.S. grantor or beneficiary who is treated as receiving a
section 643(i) distribution must determine the tax consequences of the
distribution under either the actual calculation method (as defined in
Sec. 1.6048-4(d)(2)) or the default calculation method (as defined in
Sec. 1.6048-4(d)(3)). A U.S. grantor or beneficiary may not use the
actual calculation method to determine the tax consequences of a
section 643(i) distribution in a tax year in which the U.S. grantor or
beneficiary has not received a Foreign Nongrantor Trust Beneficiary
Statement (see Sec. 1.6048-4(d)(2)) from the foreign trust before
completing the U.S. grantor's or beneficiary's return, knows or has
reason to know that the information in the Foreign Nongrantor Trust
Beneficiary Statement is incorrect, or previously has used the default
calculation method for the same trust. A U.S. grantor or beneficiary
who previously has used the default calculation method must
consistently use the default calculation method to determine the tax
consequences of any subsequent distribution (within the meaning of
Sec. 1.6048-4(b)) from the same trust in all future years, except in
the year in which the trust terminates. See Sec. 1.6048-4(d)(3)(iii).
(2) Consequences to foreign trust--(i) Treatment of amount under
section 661(a)(2). In the case of a section 643(i) distribution,
regardless of whether a U.S. grantor or beneficiary uses the default
calculation method or the actual calculation method of computing the
tax consequences of a distribution, the foreign trust must treat the
section 643(i) distribution as an amount properly paid, credited, or
required to be distributed by the trust as described in section
661(a)(2).
(ii) Distribution of marketable securities. If the section 643(i)
distribution is of marketable securities, the trust will be deemed to
have made an election to have section 643(e)(3) apply with respect to
all section 643(i) distributions of marketable securities made by the
trust during the taxable year, and any resulting capital gain is
included in the trust's distributable net income pursuant to section
643(a)(6)(C).
(iii) Foreign Nongrantor Trust Beneficiary Statement. The foreign
trust may issue a Foreign Nongrantor Trust Beneficiary Statement (as
described in Sec. 1.6048-4(c)(2)) to each U.S. person who receives a
loan of cash or marketable securities, or uses trust property other
than a loan of cash or marketable securities, during the taxable year
of the trust, without regard to whether a U.S. person would be required
to take the amount of the loan or use of trust property into account as
a section 643(i) distribution. If a U.S. person to whom a statement is
issued is not a U.S. grantor or beneficiary but is related to a U.S.
grantor or beneficiary, the foreign trust may issue a duplicate
statement to the U.S. grantor or beneficiary.
(3) Consequences to U.S. grantor or beneficiary--(i) Actual
calculation method. If a U.S. grantor or beneficiary is eligible to
use, and uses, the actual calculation method, the U.S. grantor or
beneficiary must treat a section 643(i) distribution as an amount
properly paid, credited, or required to be distributed by the trust as
described in section 662(a)(2) using information about the foreign
trust as provided in the Foreign Nongrantor Trust Beneficiary Statement
and applying the rules of subparts C and D of part I of subchapter J of
chapter 1 of the Internal Revenue Code.
(ii) Default calculation method. Under the default calculation
method, a U.S. grantor or beneficiary must apply the rules provided in
Sec. 1.6048-4(d)(3).
(d) Subsequent transactions for loans or use of trust property--(1)
In general. Any subsequent transaction regarding the principal of any
loan of cash or marketable securities treated as a section 643(i)
distribution (including complete or partial repayment, satisfaction,
cancellation, discharge, or otherwise, but not including the payment of
interest) or the return of trust property the use of which was treated
as a section 643(i) distribution has the consequences described in
paragraphs (d)(2) and (3) of this section.
(2) Consequences to foreign trust. Any subsequent transaction
regarding the principal of any loan of cash or marketable securities or
the return of trust property treated as a section 643(i) distribution
has no tax consequences to the trust. However, any payment to the trust
other than the repayment of principal of any loan treated as a section
643(i) distribution, including the payment of interest, is treated as
income to the trust.
(3) Consequences to obligor--(i) In general. Any subsequent
transaction regarding the principal of any loan of cash or marketable
securities or the return of trust property treated as a section 643(i)
distribution is treated as a transfer that is not a gratuitous transfer
by a U.S. person for purposes of Sec. 1.671-2(e)(2)(i) and chapter 1
of the Internal Revenue Code.
(ii) Satisfaction of loan with property. Any transfer of property
to a foreign trust in satisfaction of any amount due under a loan of
cash or marketable securities treated as a section 643(i) distribution
causes the obligor to recognize as gain or loss the difference between
the fair market value of the property transferred and the adjusted
basis of such property in the hands of the obligor in accordance with
the rules of section 1001 and the regulations under section 1001 in
this part.
Sec. 1.643(i)-4 Examples.
(a) Scope. The examples in this section illustrate the rules of
Sec. Sec. 1.643(i)-1 through 1.643(i)-3.
(b) Example 1: Loan to contingent remainder beneficiary treated as
loan to U.S. beneficiary. Y, a nonresident alien, created and funded a
foreign nongrantor trust, FT, for the benefit of Y's two children from
Y's first marriage, A and B, who are both nonresident aliens. FT's
governing trust instrument provides that, upon the death of the second
to die of A and B, the trust may make a distribution to any of Y's
surviving children, in the discretion of the trustee. In Year 1, X, a
U.S. person who is Y's daughter from Y's second marriage, receives a
loan of $100,000 from FT in exchange for an obligation that is not a
qualified obligation within the meaning of Sec. 1.643(i)-2(b)(2)(iii).
Under Sec. 1.643(i)-1(d)(1), X is a U.S. beneficiary of FT because X
is a U.S. person to whom, at some point before the termination of the
trust, the trust income or corpus may be paid at the discretion of the
trustee. Under Sec. Sec. 1.643(i)-1(b)(1) and 1.643(i)-3(a)(1), X is
treated as receiving a section 643(i) distribution from FT in the
amount of $100,000. X must determine the tax consequences of the
distribution under Sec. 1.643(i)-3(c). Under Sec. 1.6048-4(a), X is
required to report the section 643(i) distribution on Part III of Form
3520 for Year 1 as a distribution from a foreign trust.
(c) Example 2: Loan from foreign nongrantor trust to a foreign
grantor trust treated as section 643(i) distribution to U.S. owner. The
facts are the same as in paragraph (b) of this section (Example 1),
except that instead of a loan to X, in Year 1, FT makes a loan of
$100,000 to GT, a foreign grantor trust treated as wholly owned by X,
in
[[Page 39464]]
exchange for an obligation that is not a qualified obligation within
the meaning of Sec. 1.643(i)-2(b)(2)(iii). Under Sec. 1.643(i)-
1(d)(1), X is a U.S. beneficiary of FT as explained in paragraph (b) of
this section (Example 1). Under Sec. Sec. 1.643(i)-1(b)(1) and
1.643(i)-3(a)(1), X, who is treated as the owner of GT, is treated as
receiving a section 643(i) distribution from FT in the amount of
$100,000. X must determine the tax consequences of the distribution
under Sec. 1.643(i)-3(c). Under Sec. 1.6048-4(a), X is required to
report the section 643(i) distribution on Part III of Form 3520 for
Year 1 as a distribution from a foreign trust.
(d) Example 3: Loan by a person related to a foreign nongrantor
trust treated as a section 643(i) distribution. X, a U.S. person, is a
beneficiary of FT, a foreign nongrantor trust. FT owns 55% of the stock
of FC, a foreign corporation that is not a controlled foreign
corporation within the meaning of section 957 or a passive foreign
investment company within the meaning of section 1297. FC is related to
FT within the meaning of Sec. 1.643(i)-1(d)(9). On January 2, Year 1,
FC lends cash to X in exchange for an obligation that is not a
qualified obligation within the meaning of Sec. 1.643(i)-2(b)(2)(iii).
Under Sec. 1.643(i)-1(b)(2)(iii), FC is treated as the agent of FT
with respect to the loan, and under Sec. 1.643(i)-1(b)(1) and (2)(i),
X is treated as receiving the loan from FT on January 2, Year 1.
Nevertheless, under Sec. 1.643(i)-1(b)(2)(ii), the loan is not treated
as a section 643(i) distribution if X satisfies the reporting
requirements of Sec. 1.6048-4 and attaches a statement to X's income
tax return that demonstrates to the satisfaction of the Commissioner
that the loan would have been made without regard to X's relationship
with FT. Otherwise, X is treated as receiving a section 643(i)
distribution and must determine the tax consequences of the
distribution under Sec. 1.643(i)-3(c). Regardless of whether X claims
the exception described in Sec. 1.643(i)-1(b)(2)(ii), under Sec.
1.6048-4(a), X is required to report the loan on Part III of Form 3520
for Year 1 as a distribution from a foreign trust.
(e) Example 4: Guaranteed loan by an unrelated person treated as a
section 643(i) distribution. X is a U.S. beneficiary of FT, a foreign
nongrantor trust. On January 2, Year 1, X borrows $100,000 from Bank in
exchange for an obligation that is not a qualified obligation within
the meaning of Sec. 1.643(i)-2(b)(2)(iii), and FT provides a guarantee
(within the meaning of Sec. 1.679-3(e)(4)) for the loan. Under Sec.
1.643(i)-1(b)(1) and (2)(i), X is treated as receiving a loan from FT
on January 2, Year 1, in the amount of $100,000 because FT guaranteed
the loan from Bank to X. On January 2, Year 1, X is treated as
receiving a section 643(i) distribution. X must determine the tax
consequences of the distribution under Sec. 1.643(i)-3(c). Under Sec.
1.6048-4(a), X is required to report the section 643(i) distribution on
Part III of Form 3520 as a distribution from a foreign trust.
(f) Example 5: Loan to a foreign person related to a U.S.
beneficiary. X is a U.S. beneficiary of FT, a foreign nongrantor trust.
X is also the sole shareholder of CFC, a foreign corporation, treated
as a controlled foreign corporation under section 957. On January 2,
Year 1, FT lends $100,000 to CFC in exchange for an obligation that is
not a qualified obligation within the meaning of Sec. 1.643(i)-
2(b)(2)(iii). CFC is related to X within the meaning of Sec. 1.643(i)-
1(d)(9). Under Sec. 1.643(i)-1(b)(1) and (2)(i), X is treated as
receiving a loan from FT on January 2, Year 1, in the amount of
$100,000 because FT made the loan to CFC, a foreign person related to
X. Under Sec. 1.643(i)-1(b)(2)(ii), the loan is not treated as a
section 643(i) distribution if X reports the loan consistent with the
requirements of Sec. 1.6048-4 and attaches a statement to X's income
tax return that demonstrates to the satisfaction of the Commissioner
that the loan from FT to CFC would have been made without regard to X's
relationship with FT. Otherwise, X is treated as receiving a section
643(i) distribution and must determine the tax consequences of the
distribution under Sec. 1.643(i)-3(c). Regardless of whether X claims
the limitation described in Sec. 1.643(i)-1(b)(2)(ii), under Sec.
1.6048-4(a), X is required to report the loan on Part III of Form 3520
for Year 1 as a distribution from a foreign trust.
(g) Example 6: Loan to wholly owned corporation of U.S.
beneficiary. Y, a nonresident alien, created and funded a foreign
nongrantor trust, FT, for the benefit of Y's child, X, a U.S. person. X
is a U.S. beneficiary within the meaning of Sec. 1.643(i)-1(d)(1). X
wholly owns XYZ Corp, a domestic corporation. On July 1, Year 1, FT
lends $100,000 to XYZ Corp in exchange for an obligation that is not a
qualified obligation within the meaning of Sec. 1.643(i)-2(b)(2)(iii).
Under Sec. 1.643(i)-1(d)(9) and (12), XYZ Corp is a U.S. person
related to X. Under Sec. 1.643(i)-1(b)(1) and (2)(i) and Sec.
1.643(i)-3(a)(1), X is treated as receiving a section 643(i)
distribution from FT in the amount of $100,000. X must determine the
tax consequences of the distribution under Sec. 1.643(i)-3(c). Under
Sec. Sec. 1.6048-4(a), X and XYZ Corp are required to report the loan
on Part III of Form 3520 for Year 1 as a distribution from a foreign
trust.
(h) Example 7: Subsequent transactions with respect to loan treated
as a section 643(i) distribution. The facts are the same as in
paragraph (g) of this section (Example 6). In Year 1, XYZ Corp makes a
payment to FT that it characterizes in part as a partial repayment of
principal and in part as interest on its obligation to FT. Under Sec.
1.643(i)-3(d)(3)(i), the portion of the payment that is characterized
as a repayment of principal will be treated as a transfer that is not a
gratuitous transfer by a U.S. person for purposes of Sec. 1.671-
2(e)(2)(i) and chapter 1 of the Internal Revenue Code. Under Sec.
1.643(i)-3(d)(2), the transfer of principal will have no tax
consequences to FT. Furthermore, under Sec. 1.643(i)-3(d)(2), the
portion of the payment that is characterized as interest by XYZ Corp
will be treated as income to FT.
(i) Example 8: Uncompensated use of trust property. Y, a
nonresident alien, created and funded a foreign nongrantor trust, FT,
for the benefit of Y's daughter, A, a U.S. person. A is a U.S.
beneficiary of FT within the meaning of Sec. 1.643(i)-1(d)(1). FT owns
real property that could be rented to an unrelated person at fair
market value for $10,000 a month. During all of Year 1, A lives in the
property rent-free. Under Sec. Sec. 1.643(i)-1(c) and Sec. 1.643(i)-
3(a)(3), A is treated as receiving a section 643(i) distribution from
FT in Year 1 in the amount of $120,000 (12 x $10,000). A must determine
the tax consequences of the distribution under Sec. 1.643(i)-3(c).
Under Sec. 1.6048-4(a), A must report the section 643(i) distribution
on Part III of Form 3520 for Year 1 as a distribution from FT.
(j) Example 9: Partially compensated use of trust property. The
facts are the same as in paragraph (i) of this section (Example 8)
except that A pays FT $2,000 on the first of each month for the use of
the property even though the fair market value is $10,000. Under
Sec. Sec. 1.643(i)-1(c), 1.643(i)-2(a)(2), and 1.643(i)-3(a)(3), A is
treated as receiving a section 643(i) distribution in Year 1 from FT in
the amount of $96,000 (12 x ($10,000-$2,000)). A must determine the tax
consequences of the distribution under Sec. 1.643(i)-3(c). Under
Sec. Sec. 1.6048-4(a), A must report the entire fair market value of
$120,000 on Part III of Form 3520 for Year 1 as a distribution from FT
even through only a portion of the fair market value is treated as a
section 643(i) distribution due to partial compensation.
(k) Example 10: Uncompensated use of trust property treated as
distribution
[[Page 39465]]
from accumulated income. On January 1, Year 1, Y, a nonresident alien,
creates and funds a foreign nongrantor trust, FT, for the benefit of
Y's son, X, a U.S. person. X is a U.S. beneficiary of FT within the
meaning of Sec. 1.643(i)-1(d)(1). FT has $60,000 of distributable net
income (DNI), as defined under section 643(a), in Year 1, $80,000 of
DNI in Year 2, and $90,000 of DNI in Year 3. FT has never made any
distributions. FT owns real property that could be rented to an
unrelated person for $10,000 a month. During all of Year 3, X occupies
the property rent free. Under Sec. 1.643(i)-1(c) and Sec. 1.643(i)-
3(a)(3), X is treated as receiving a section 643(i) distribution from
FT in Year 3 in the amount of $120,000, the fair market value use of
the trust property (12 x $10,000). Under Sec. 1.6048-4(a), X must
report the section 643(i) distribution on Part III of Form 3520 for
Year 3 as a distribution from FT. X receives a Foreign Nongrantor Trust
Beneficiary Statement from FT and uses the actual calculation method
under Sec. 1.643(i)-3(c)(3)(i) to determine the tax consequences of
the section 643(i) distribution. The $120,000 is treated as an amount
properly paid, credited, or required to be distributed by the trust as
described in section 662(a)(2). As a result of X's uncompensated use of
FT's property, X's section 643(i) distribution consists of a
distribution of DNI of $90,000 (FT's DNI in Year 3) and an accumulation
distribution of $30,000 under subpart D of subchapter J of chapter 1 of
the Internal Revenue Code.
(l) Example 11: Use of property of partial grantor trust not
treated as section 643(i) distribution. X and Y are married. X is a
U.S. person and Y is a nonresident alien. X and Y have three children,
A, B, and C. A and B are both nonresident aliens. C is a U.S. person.
In Year 1, X and Y created a foreign trust, FT, for the benefit of A
and B to which X contributed a vacation home and Y contributed cash and
securities. Neither X nor Y retained any powers described in sections
673 through 677. In Year 2, C lived in the vacation home rent free.
Although C is not a beneficiary of FT under the terms of the trust,
under Sec. 1.679-2(a)(5), C's uncompensated use of the vacation home
causes FT to be treated as having a U.S. beneficiary. Thus, under Sec.
1.679-1(a), X will be treated as the owner of the portion of FT
attributable to the vacation home. Under Sec. 1.643(i)-2(c)(2), C's
use of the vacation home will be treated as the use of property from
the grantor trust portion of FT. C will not be treated as receiving a
section 643(i) distribution. Under Sec. Sec. 1.6048-4(a), C must
report the use of the vacation home on Part III of Form 3520 for Year 2
as a distribution from FT.
(m) Example 12: Use of trust property by exempt entity not treated
as section 643(i) distribution. In Year 1, X, a nonresident alien,
creates a foreign nongrantor trust, FT, and funds the trust with cash
and a valuable painting. In Year 1, pursuant to the terms of the trust
instrument, FT lends the painting to E, a U.S. organization described
in section 501(c)(3) with a valid determination letter from the
Commissioner. E exhibits the painting and does not reimburse FT for the
use of the painting. E is not a U.S. person within the meaning of Sec.
1.643(i)-1(d)(12) because E is an entity that is exempt from tax under
chapter 1 of the Internal Revenue Code. Accordingly, E's use of the
painting is not a section 643(i) distribution under Sec. 1.643(i)-
1(c). E's use of the painting, however, is a distribution within the
meaning of Sec. 1.6048-4(b). Nevertheless, under Sec. 1.6048-5(d), E
is not required to report the use of the painting on Part III of Form
3520 because E is a section 501(c)(3) entity that has received a
determination letter from the Commissioner that recognizes that E is
exempt from Federal income tax under section 501(a) as an organization
described in section 501(c)(3), and the determination letter has not
been revoked.
Sec. 1.643(i)-5 Applicability date.
The rules of Sec. Sec. 1.643(i)-1 through 1.643(i)-4 apply to
loans of cash or marketable securities made from, and to the use of any
other property of, a foreign trust after the [date of publication of
the final regulations in the Federal Register].
0
Par. 3. Section 1.679-0 is amended by:
0
a. Revising entry for Sec. 1.679-1(c)(2).
0
b. Adding new entry for Sec. 1.679-2(a)(5).
0
c. Redesignating the entry for Sec. 1.679-2(b)(3) as the entry for
Sec. 1.679-2(b)(4).
0
d. Adding new entry for Sec. 1.679-2(b)(3).
0
e. Adding new entries for Sec. 1.679-2(b)(4)(i) through (vi).
0
f. Adding new entry for Sec. 1.679-2(d).
0
g. Revising the entries for Sec. 1.679-4(d)(1) through (6).
0
h. Removing the entry for Sec. 1.679-4(d)(7).
0
i. Revising the entry for Sec. 1.679-7.
The revisions and additions read as follows:
Sec. 1.679-0 Outline of major topics.
* * * * *
Sec. 1.679-1 U.S. transferor treated as owner of foreign trust.
(c) * * *
(2) U.S. person.
(i) In general.
(ii) Special rules.
(A) Dual resident taxpayers.
(B) Dual status taxpayers.
* * * * *
(6) Obligation.
Sec. 1.679-2 Trusts treated as having a U.S. beneficiary.
(a) * * *
(5) Loan or uncompensated use of trust property treated as paid
or accumulated for the benefit of a U.S. person.
(i) In general.
(ii) Indirect loans.
(iii) Exceptions.
(iv) Safe harbors.
(A) Reasonable period.
(B) De minimis use.
(v) Interaction with section 643(i).
(vi) Examples.
(A) Example 1: Loan of cash to U.S. person.
(B
[…truncated; see source link]Indexed from Federal Register on May 8, 2024.
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