II

104TH CONGRESS

2D SESSION H. R. 3286

IN THE SENATE OF THE UNITED STATES

MAY 13, 1996

Received; read twice and referred to the Committee on Finance

MAY 23, 1996

Ordered, if and when reported by the Committee on Finance the bill then be

referred to the Committee on Indian Affairs for the purpose of considering title 3, for a period of 10 days of session, to report or be discharged

AN ACT

To help families defray adoption costs, and to promote the

adoption of minority children.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Adoption Promotion

5 and Stability Act of 1996’’.
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1 SEC. 2. TABLE OF CONTENTS.

2 The table of contents of this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.

TITLE I—CREDIT FOR ADOPTION EXPENSES

Sec. 101. Credit for adoption expenses.

TITLE II—INTERETHNIC ADOPTION

Sec. 201. Removal of barriers to interethnic adoption.

TITLE III—CHILD CUSTODY PROCEEDINGS AFFECTED BY THE

INDIAN CHILD WELFARE ACT OF 1978

Sec. 301. Inapplicability of the Indian Child Welfare Act of 1978 to child custody proceedings involving a child whose parents do not maintain affiliation with their Indian tribe.

Sec. 302. Membership and child custody proceedings.

Sec. 303. Effective date.

TITLE IV—REVENUE OFFSETS

Sec. 400. Amendment of 1986 Code.

Subtitle A—Exclusion for Energy Conservation Subsidies Limited to Subsidies

With Respect to Dwelling Units

Sec. 401. Exclusion for energy conservation subsidies limited to subsidies with

respect to dwelling units.

Subtitle B—Foreign Trust Tax Compliance

Sec. 411. Improved information reporting on foreign trusts.

Sec. 412. Comparable penalties for failure to file return relating to transfers to

foreign entities.

Sec. 413. Modifications of rules relating to foreign trusts having one or more

United States beneficiaries.

Sec. 414. Foreign persons not to be treated as owners under grantor trust

rules.

Sec. 415. Information reporting regarding foreign gifts.

Sec. 416. Modification of rules relating to foreign trusts which are not grantor

trusts.

Sec. 417. Residence of trusts, etc.

3 TITLE I—CREDIT FOR ADOPTION

4 EXPENSES

5 SEC. 101. CREDIT FOR ADOPTION EXPENSES.

6 (a) IN GENERAL.—Subpart A of part IV of sub7 chapter A of chapter 1 of the Internal Revenue Code of
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1 1986 (relating to nonrefundable personal credits) is

2 amended by inserting after section 22 the following new

3 section:

4 ‘‘SEC. 23. ADOPTION EXPENSES.

5 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in6 dividual, there shall be allowed as a credit against the tax

7 imposed by this chapter for the taxable year the amount

8 of the qualified adoption expenses paid or incurred by the

9 taxpayer during such taxable year.

10 ‘‘(b) LIMITATIONS.—

11 ‘‘(1) DOLLAR LIMITATION.—The aggregate

12 amount of qualified adoption expenses which may be

13 taken into account under subsection (a) for all tax14 able years with respect to the adoption of a child by

15 the taxpayer shall not exceed $5,000.

16 ‘‘(2) INCOME LIMITATION.—The amount allow17 able as a credit under subsection (a) for any taxable

18 year shall be reduced (but not below zero) by an

19 amount which bears the same ratio to the amount

20 so allowable (determined without regard to this

21 paragraph but with regard to paragraph (1)) as—

22 ‘‘(A) the amount (if any) by which the tax23 payer’s adjusted gross income (determined

24 without regard to sections 911, 931, and 933)

25 exceeds $75,000, bears to
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1 ‘‘(B) $40,000.

2 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

3 ‘‘(A) IN GENERAL.—No credit shall be al4 lowed under subsection (a) for any expense for

5 which a deduction or credit is allowable under

6 any other provision of this chapter.

7 ‘‘(B) GRANTS.—No credit shall be allowed

8 under subsection (a) for any expense to the ex9 tent that funds for such expense are received

10 under any Federal, State, or local program.

11 The preceding sentence shall not apply to ex12 penses for the adoption of a child with special

13 needs.

14 ‘‘(C) REIMBURSEMENT.—No credit shall

15 be allowed under subsection (a) for any expense

16 to the extent that such expense is reimbursed

17 and the reimbursement is excluded from gross

18 income under section 137.

19 ‘‘(c) CARRYFORWARDS OF UNUSED CREDIT.—If the

20 credit allowable under subsection (a) for any taxable year

21 exceeds the limitation imposed by section 26(a) for such

22 taxable year reduced by the sum of the credits allowable

23 under this subpart (other than this section), such excess

24 shall be carried to the succeeding taxable year and added

25 to the credit allowable under subsection (a) for such tax-
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1 able year. No credit may be carried forward under this

2 subsection to any taxable year following the fifth taxable

3 year after the taxable year in which the credit arose. For

4 purposes of the preceding sentence, credits shall be treated

5 as used on a first-in first-out basis.

6 ‘‘(d) DEFINITIONS.—For purposes of this section—

7 ‘‘(1) QUALIFIED ADOPTION EXPENSES.—The

8 term ‘qualified adoption expenses’ means reasonable

9 and necessary adoption fees, court costs, attorney

10 fees, and other expenses—

11 ‘‘(A) which are directly related to, and the

12 principal purpose of which is for, the legal

13 adoption of an eligible child by the taxpayer,

14 and

15 ‘‘(B) which are not incurred in violation of

16 State or Federal law or in carrying out any sur17 rogate parenting arrangement.

18 ‘‘(2) EXPENSES FOR ADOPTION OF SPOUSE’S

19 CHILD NOT ELIGIBLE.—The term ‘qualified adoption

20 expenses’ shall not include any expenses in connec21 tion with the adoption by an individual of a child

22 who is the child of such individual’s spouse.

23 ‘‘(3) ELIGIBLE CHILD.—The term ‘eligible

24 child’ means any individual—
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1 ‘‘(A) who has not attained age 18 as of the

2 time of the adoption, or

3 ‘‘(B) who is physically or mentally incapa4 ble of caring for himself.

5 ‘‘(4) CHILD WITH SPECIAL NEEDS.—The term

6 ‘child with special needs’ means any child if—

7 ‘‘(A) a State has determined that the child

8 cannot or should not be returned to the home

9 of his parents, and

10 ‘‘(B) such State has determined that there

11 exists with respect to the child a specific factor

12 or condition (such as his ethnic background,

13 age, or membership in a minority or sibling

14 group, or the presence of factors such as medi15 cal conditions or physical, mental, or emotional

16 handicaps) because of which it is reasonable to

17 conclude that such child cannot be placed with

18 adoptive parents without providing adoption as19 sistance.

20 ‘‘(e) SPECIAL RULES FOR FOREIGN ADOPTIONS.—In

21 the case of a foreign adoption—

22 ‘‘(1) subsection (a) shall not apply to any quali23 fied adoption expense with respect to such adoption

24 unless such adoption becomes final, and
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1 ‘‘(2) any such expense which is paid or incurred

2 before the taxable year in which such adoption be3 comes final shall be taken into account under this

4 section as if such expense were paid or incurred dur5 ing such year.

6 ‘‘(f) MARRIED COUPLES MUST FILE JOINT RE7 TURNS.—Rules similar to the rules of paragraphs (2), (3),

8 and (4) of section 21(e) shall apply for purposes of this

9 section.

10 ‘‘(g) BASIS ADJUSTMENTS.—For purposes of this

11 subtitle, if a credit is allowed under this section for any

12 expenditure with respect to any property, the increase in

13 the basis of such property which would (but for this sub14 section) result from such expenditure shall be reduced by

15 the amount of the credit so allowed.

16 ‘‘(h) REGULATIONS.—The Secretary shall prescribe

17 such regulations as may be appropriate to carry out this

18 section and section 137, including regulations which treat

19 unmarried individuals who pay or incur qualified adoption

20 expenses with respect to the same child as 1 taxpayer for

21 purposes of applying the dollar limitation in subsection

22 (b)(1) of this section and in section 137(b)(1).’’.

23 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM24 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III

25 of subchapter B of chapter 1 of such Code (relating to
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1 items specifically excluded from gross income) is amended

2 by redesignating section 137 as section 138 and by insert3 ing after section 136 the following new section:

4 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

5 ‘‘(a) IN GENERAL.—Gross income of an employee

6 does not include amounts paid or expenses incurred by the

7 employer for qualified adoption expenses in connection

8 with the adoption of a child by an employee if such

9 amounts are furnished pursuant to an adoption assistance

10 program.

11 ‘‘(b) LIMITATIONS.—

12 ‘‘(1) DOLLAR LIMITATION.—The aggregate

13 amount excludable from gross income under sub14 section (a) for all taxable years with respect to the

15 adoption of a child by the taxpayer shall not exceed

16 $5,000.

17 ‘‘(2) INCOME LIMITATION.—The amount ex18 cludable from gross income under subsection (a) for

19 any taxable year shall be reduced (but not below

20 zero) by an amount which bears the same ratio to

21 the amount so excludable (determined without re22 gard to this paragraph but with regard to paragraph

23 (1)) as—
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1 ‘‘(A) the amount (if any) by which the tax2 payer’s adjusted gross income exceeds $75,000,

3 bears to

4 ‘‘(B) $40,000.

5 ‘‘(3) DETERMINATION OF ADJUSTED GROSS IN6 COME.—For purposes of paragraph (2), adjusted

7 gross income shall be determined—

8 ‘‘(A) without regard to this section and

9 sections 911, 931, and 933, and

10 ‘‘(B) after the application of sections 86,

11 135, 219, and 469.

12 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For pur13 poses of this section, an adoption assistance program is

14 a plan of an employer—

15 ‘‘(1) under which the employer provides employ16 ees with adoption assistance, and

17 ‘‘(2) which meets requirements similar to the

18 requirements of paragraphs (2), (3), and (5) of sec19 tion 127(b).

20 An adoption reimbursement program operated under sec21 tion 1052 of title 10, United States Code (relating to

22 armed forces) or section 514 of title 14, United States

23 Code (relating to members of the Coast Guard) shall be

24 treated as an adoption assistance program for purposes

25 of this section.
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1 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For pur2 poses of this section, the term ‘qualified adoption ex3 penses’ has the meaning given such term by section 23(d).

4 ‘‘(e) CERTAIN RULES TO APPLY.—Rules similar to

5 the rules of subsections (e) and (g) of section 23 shall

6 apply for purposes of this section.’’.

7 (c) CONFORMING AMENDMENTS.—

8 (1) Sections 86(b)(2)(A) and 135(c)(4)(A) of

9 such Code are each amended by inserting ‘‘137,’’ be10 fore ‘‘911’’.

11 (2) Clause (i) of section 219(g)(3)(A) of such

12 Code is amended by inserting ‘‘, 137,’’ before ‘‘and

13 911’’.

14 (3) Clause (ii) of section 469(i)(3)(E) of such

15 Code is amended to read as follows:

16 ‘‘(ii) the amounts excludable from

17 gross income under sections 135 and

18 137,’’.

19 (4) Subsection (a) of section 1016 of such Code

20 is amended by striking ‘‘and’’ at the end of para21 graph (24), by striking the period at the end of

22 paragraph (25) and inserting ‘‘, and’’, and by add23 ing at the end the following new paragraph:

24 ‘‘(26) to the extent provided in sections 23(g)

25 and 137(e).’’
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1 (5) The table of sections for subpart A of part

2 IV of subchapter A of chapter 1 of such Code is

3 amended by inserting after the item relating to sec4 tion 22 the following new item:

‘‘Sec. 23. Adoption expenses.’’.

5 (6) The table of sections for part III of sub6 chapter B of chapter 1 of such Code is amended by

7 striking the item relating to section 137 and insert8 ing the following:

‘‘Sec. 137. Adoption assistance programs.

‘‘Sec. 138. Cross reference to other Acts.’’.

9 (d) EFFECTIVE DATE.—The amendments made by

10 this section shall apply to taxable years beginning after

11 December 31, 1996.

12 TITLE II—INTERETHNIC

13 ADOPTION

14 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP15 TION.

16 (a) STATE PLAN REQUIREMENTS.—Section 471(a)

17 of the Social Security Act (42 U.S.C 671(a)) is amend18 ed—

19 (1) by striking ‘‘and’’ at the end of paragraph

20 (16);

21 (2) by striking the period at the end of para22 graph (17) and inserting ‘‘; and’’; and

23 (3) by adding at the end the following:
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1 ‘‘(18) not later than January 1, 1997, provides

2 that neither the State nor any other entity in the

3 State that receives funds from the Federal Govern4 ment and is involved in adoption or foster care

5 placements may—

6 ‘‘(A) deny to any person the opportunity to

7 become an adoptive or a foster parent, on the

8 basis of the race, color, or national origin of the

9 person, or of the child, involved; or

10 ‘‘(B) delay or deny the placement of a

11 child for adoption or into foster care, on the

12 basis of the race, color, or national origin of the

13 adoptive or foster parent, or the child, in14 volved.’’.

15 (b) ENFORCEMENT.—Section 474 of such Act (42

16 U.S.C. 674) is amended by adding at the end the follow17 ing:

18 ‘‘(d)(1) If a State’s program operated under this part

19 is found, as a result of a review conducted under section

20 1123, to have violated section 471(a)(18) during a quarter

21 with respect to any person, then, notwithstanding sub22 section (a) of this section and any regulations promulgated

23 under section 1123(b)(3), the Secretary shall reduce the

24 amount otherwise payable to the State under this part,

25 for the quarter and for each subsequent quarter before
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1 the 1st quarter for which the State program is found, as

2 a result of such a review, not to have violated section

3 471(a)(18) with respect to any person, by—

4 ‘‘(A) 2 percent of such otherwise payable

5 amount, in the case of the 1st such finding with re6 spect to the State;

7 ‘‘(B) 5 percent of such otherwise payable

8 amount, in the case of the 2nd such finding with re9 spect to the State; or

10 ‘‘(C) 10 percent of such otherwise payable

11 amount, in the case of the 3rd or subsequent such

12 finding with respect to the State.

13 ‘‘(2) Any other entity which is in a State that receives

14 funds under this part and which violates section

15 471(a)(18) during a quarter with respect to any person

16 shall remit to the Secretary all funds that were paid by

17 the State to the entity during the quarter from such funds.

18 ‘‘(3)(A) Any individual who is aggrieved by a viola19 tion of section 471(a)(18) by a State or other entity may

20 bring an action seeking relief from the State or other en21 tity in any United States district court.

22 ‘‘(B) An action under this paragraph may not be

23 brought more than 2 years after the date the alleged viola24 tion occurred.
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1 ‘‘(4) This subsection shall not be construed to affect

2 the application of the Indian Child Welfare Act of 1978.’’.

3 (c) CIVIL RIGHTS.—

4 (1) PROHIBITED CONDUCT.—A person or gov5 ernment that is involved in adoption or foster care

6 placements may not—

7 (A) deny to any individual the opportunity

8 to become an adoptive or a foster parent, on the

9 basis of the race, color, or national origin of the

10 individual, or of the child, involved; or

11 (B) delay or deny the placement of a child

12 for adoption or into foster care, on the basis of

13 the race, color, or national origin of the adop14 tive or foster parent, or the child, involved.

15 (2) ENFORCEMENT.—Noncompliance with para16 graph (1) is deemed a violation of title VI of the

17 Civil Rights Act of 1964.

18 (3) NO EFFECT ON THE INDIAN CHILD WEL19 FARE ACT OF 1978.—This subsection shall not be

20 construed to affect the application of the Indian

21 Child Welfare Act of 1978.

22 (d) CONFORMING REPEAL.—Section 553 of the How23 ard M. Metzenbaum Multiethnic Placement Act of 1994

24 (42 U.S.C. 5115a) is repealed.
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1 TITLE III—CHILD CUSTODY PRO2 CEEDINGS AFFECTED BY THE

3 INDIAN CHILD WELFARE ACT

4 OF 1978

5 SEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WEL6 FARE ACT OF 1978 TO CHILD CUSTODY PRO7 CEEDINGS INVOLVING A CHILD WHOSE PAR8 ENTS DO NOT MAINTAIN AFFILIATION WITH

9 THEIR INDIAN TRIBE.

10 Title I of the Indian Child Welfare Act of 1978 (25

11 U.S.C. 1911 et seq.) is amended by adding at the end

12 the following:

13 ‘‘SEC. 114. (a) This title does not apply to any child

14 custody proceeding involving a child who does not reside

15 or is not domiciled within a reservation unless—

16 ‘‘(1) at least one of the child’s biological par17 ents is of Indian descent; and

18 ‘‘(2) at least one of the child’s biological par19 ents maintains significant social, cultural, or politi20 cal affiliation with the Indian tribe of which either

21 parent is a member.

22 ‘‘(b) The factual determination as to whether a bio23 logical parent maintains significant social, cultural, or po24 litical affiliation with the Indian tribe of which either par-
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1 ent is a member shall be based on such affiliation as of

2 the time of the child custody proceeding.

3 ‘‘(c) The determination that this title does not apply

4 pursuant to subsection (a) is final, and, thereafter, this

5 title shall not be the basis for determining jurisdiction over

6 any child custody proceeding involving the child.’’.

7 SEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEED8 INGS.

9 Title I of the Indian Child Welfare Act of 1978 (25

10 U.S.C. 1911 et seq.), as amended by section 301 of this

11 title, is further amended by adding at the end the follow12 ing:

13 ‘‘SEC. 115. (a) A person who attains the age of 18

14 years before becoming a member of an Indian tribe may

15 become a member of an Indian tribe only upon the per16 son’s written consent.

17 ‘‘(b) For the purposes of any child custody proceeding

18 involving an Indian child, membership in an Indian tribe

19 shall be effective from the actual date of admission to

20 membership in the Indian tribe and shall not be given ret21 roactive effect.’’.

22 SEC. 303. EFFECTIVE DATE.

23 The amendments made by this title shall take effect

24 on the date of the enactment of this Act and shall apply
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1 with respect to any child custody proceeding in which a

2 final decree has not been entered as of such date.

3 TITLE IV—REVENUE OFFSETS

4 SEC. 400. AMENDMENT OF 1986 CODE.

5 Except as otherwise expressly provided, whenever in

6 this title an amendment or repeal is expressed in terms

7 of an amendment to, or repeal of, a section or other provi8 sion, the reference shall be considered to be made to a

9 section or other provision of the Internal Revenue Code

10 of 1986.

11 Subtitle A—Exclusion for Energy

12 Conservation Subsidies Limited

13 to Subsidies With Respect to

14 Dwelling Units

15 SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUB16 SIDIES LIMITED TO SUBSIDIES WITH RE17 SPECT TO DWELLING UNITS.

18 (a) IN GENERAL.—Paragraph (1) of section 136(c)

19 (defining energy conservation measure) is amended by

20 striking ‘‘energy demand—’’ and all that follows and in21 serting ‘‘energy demand with respect to a dwelling unit.’’

22 (b) CONFORMING AMENDMENTS.—

23 (1) Subsection (a) of section 136 is amended to

24 read as follows:
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1 ‘‘(a) EXCLUSION.—Gross income shall not include

2 the value of any subsidy provided (directly or indirectly)

3 by a public utility to a customer for the purchase or instal4 lation of any energy conservation measure.’’

5 (2) Paragraph (2) of section 136(c) is amend6 ed—

7 (A) by striking subparagraph (A) and by

8 redesignating subparagraphs (B) and (C) as

9 subparagraphs (A) and (B), respectively, and

10 (B) by striking ‘‘AND SPECIAL RULES’’ in

11 the paragraph heading.

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to amounts received after Decem14 ber 31, 1996, unless received pursuant to a written bind15 ing contract in effect on September 13, 1995, and at all

16 times thereafter.

17 Subtitle B—Foreign Trust Tax

18 Compliance

19 SEC. 411. IMPROVED INFORMATION REPORTING ON FOR20 EIGN TRUSTS.

21 (a) IN GENERAL.—Section 6048 (relating to returns

22 as to certain foreign trusts) is amended to read as follows:

23 ‘‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN

24 FOREIGN TRUSTS.

25 ‘‘(a) NOTICE OF CERTAIN EVENTS.—
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1 ‘‘(1) GENERAL RULE.—On or before the 90th

2 day (or such later day as the Secretary may pre3 scribe) after any reportable event, the responsible

4 party shall provide written notice of such event to

5 the Secretary in accordance with paragraph (2).

6 ‘‘(2) CONTENTS OF NOTICE.—The notice re7 quired by paragraph (1) shall contain such informa8 tion as the Secretary may prescribe, including—

9 ‘‘(A) the amount of money or other prop10 erty (if any) transferred to the trust in connec11 tion with the reportable event, and

12 ‘‘(B) the identity of the trust and of each

13 trustee and beneficiary (or class of bene14 ficiaries) of the trust.

15 ‘‘(3) REPORTABLE EVENT.—For purposes of

16 this subsection—

17 ‘‘(A) IN GENERAL.—The term ‘reportable

18 event’ means—

19 ‘‘(i) the creation of any foreign trust

20 by a United States person,

21 ‘‘(ii) the transfer of any money or

22 property (directly or indirectly) to a for23 eign trust by a United States person, in24 cluding a transfer by reason of death, and
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1 ‘‘(iii) the death of a citizen or resident

2 of the United States if—

3 ‘‘(I) the decedent was treated as

4 the owner of any portion of a foreign

5 trust under the rules of subpart E of

6 part I of subchapter J of chapter 1,

7 or

8 ‘‘(II) any portion of a foreign

9 trust was included in the gross estate

10 of the decedent.

11 ‘‘(B) EXCEPTIONS.—

12 ‘‘(i) FAIR MARKET VALUE SALES.—

13 Subparagraph (A)(ii) shall not apply to

14 any transfer of property to a trust in ex15 change for consideration of at least the fair

16 market value of the transferred property.

17 For purposes of the preceding sentence,

18 consideration other than cash shall be

19 taken into account at its fair market value

20 and the rules of section 679(a)(3) shall

21 apply.

22 ‘‘(ii) DEFERRED COMPENSATION AND

23 CHARITABLE TRUSTS.—Subparagraph (A)

24 shall not apply with respect to a trust

25 which is—
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1 ‘‘(I) described in section 402(b),

2 404(a)(4), or 404A, or

3 ‘‘(II) determined by the Sec4 retary to be described in section

5 501(c)(3).

6 ‘‘(4) RESPONSIBLE PARTY.—For purposes of

7 this subsection, the term ‘responsible party’

8 means—

9 ‘‘(A) the grantor in the case of the cre10 ation of an inter vivos trust,

11 ‘‘(B) the transferor in the case of a report12 able event described in paragraph (3)(A)(ii)

13 other than a transfer by reason of death, and

14 ‘‘(C) the executor of the decedent’s estate

15 in any other case.

16 ‘‘(b) UNITED STATES GRANTOR OF FOREIGN

17 TRUST.—

18 ‘‘(1) IN GENERAL.—If, at any time during any

19 taxable year of a United States person, such person

20 is treated as the owner of any portion of a foreign

21 trust under the rules of subpart E of part I of sub22 chapter J of chapter 1, such person shall be respon23 sible to ensure that—

24 ‘‘(A) such trust makes a return for such

25 year which sets forth a full and complete ac-
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1 counting of all trust activities and operations

2 for the year, the name of the United States

3 agent for such trust, and such other informa4 tion as the Secretary may prescribe, and

5 ‘‘(B) such trust furnishes such information

6 as the Secretary may prescribe to each United

7 States person (i) who is treated as the owner of

8 any portion of such trust or (ii) who receives

9 (directly or indirectly) any distribution from the

10 trust.

11 ‘‘(2) TRUSTS NOT HAVING UNITED STATES

12 AGENT.—

13 ‘‘(A) IN GENERAL.—If the rules of this

14 paragraph apply to any foreign trust, the deter15 mination of amounts required to be taken into

16 account with respect to such trust by a United

17 States person under the rules of subpart E of

18 part I of subchapter J of chapter 1 shall be de19 termined by the Secretary.

20 ‘‘(B) UNITED STATES AGENT REQUIRED.—

21 The rules of this paragraph shall apply to any

22 foreign trust to which paragraph (1) applies un23 less such trust agrees (in such manner, subject

24 to such conditions, and at such time as the Sec25 retary shall prescribe) to authorize a United
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1 States person to act as such trust’s limited

2 agent solely for purposes of applying sections

3 7602, 7603, and 7604 with respect to—

4 ‘‘(i) any request by the Secretary to

5 examine records or produce testimony re6 lated to the proper treatment of amounts

7 required to be taken into account under

8 the rules referred to in subparagraph (A),

9 or

10 ‘‘(ii) any summons by the Secretary

11 for such records or testimony.

12 The appearance of persons or production of

13 records by reason of a United States person

14 being such an agent shall not subject such per15 sons or records to legal process for any purpose

16 other than determining the correct treatment

17 under this title of the amounts required to be

18 taken into account under the rules referred to

19 in subparagraph (A). A foreign trust which ap20 points an agent described in this subparagraph

21 shall not be considered to have an office or a

22 permanent establishment in the United States,

23 or to be engaged in a trade or business in the

24 United States, solely because of the activities of

25 such agent pursuant to this subsection.
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1 ‘‘(C) OTHER RULES TO APPLY.—Rules

2 similar to the rules of paragraphs (2) and (4)

3 of section 6038A(e) shall apply for purposes of

4 this paragraph.

5 ‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES

6 OF FOREIGN TRUSTS.—

7 ‘‘(1) IN GENERAL.—If any United States per8 son receives (directly or indirectly) during any tax9 able year of such person any distribution from a for10 eign trust, such person shall make a return with re11 spect to such trust for such year which includes—

12 ‘‘(A) the name of such trust,

13 ‘‘(B) the aggregate amount of the distribu14 tions so received from such trust during such

15 taxable year, and

16 ‘‘(C) such other information as the Sec17 retary may prescribe.

18 ‘‘(2) INCLUSION IN INCOME IF RECORDS NOT

19 PROVIDED.—

20 ‘‘(A) IN GENERAL.—If adequate records

21 are not provided to the Secretary to determine

22 the proper treatment of any distribution from a

23 foreign trust, such distribution shall be treated

24 as an accumulation distribution includible in

25 the gross income of the distributee under chap-
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1 ter 1. To the extent provided in regulations, the

2 preceding sentence shall not apply if the foreign

3 trust elects to be subject to rules similar to the

4 rules of subsection (b)(2)(B).

5 ‘‘(B) APPLICATION OF ACCUMULATION

6 DISTRIBUTION RULES.—For purposes of apply7 ing section 668 in a case to which subpara8 graph (A) applies, the applicable number of

years for purposes of section 668(a) shall be 1 9 ⁄2

10 of the number of years the trust has been in ex11 istence.

12 ‘‘(d) SPECIAL RULES.—

13 ‘‘(1) DETERMINATION OF WHETHER UNITED

14 STATES PERSON MAKES TRANSFER OR RECEIVES

15 DISTRIBUTION.—For purposes of this section, in de16 termining whether a United States person makes a

17 transfer to, or receives a distribution from, a foreign

18 trust, the fact that a portion of such trust is treated

19 as owned by another person under the rules of sub20 part E of part I of subchapter J of chapter 1 shall

21 be disregarded.

22 ‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI23 TIES.—To the extent provided in regulations, a trust

24 which is a United States person shall be treated as

25 a foreign trust for purposes of this section and sec-
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1 tion 6677 if such trust has substantial activities, or

2 holds substantial property, outside the United

3 States.

4 ‘‘(3) TIME AND MANNER OF FILING INFORMA5 TION.—Any notice or return required under this sec6 tion shall be made at such time and in such manner

7 as the Secretary shall prescribe.

8 ‘‘(4) MODIFICATION OF RETURN REQUIRE9 MENTS.—The Secretary is authorized to suspend or

10 modify any requirement of this section if the Sec11 retary determines that the United States has no sig12 nificant tax interest in obtaining the required infor13 mation.’’.

14 (b) INCREASED PENALTIES.—Section 6677 (relating

15 to failure to file information returns with respect to cer16 tain foreign trusts) is amended to read as follows:

17 ‘‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT

18 TO CERTAIN FOREIGN TRUSTS.

19 ‘‘(a) CIVIL PENALTY.—In addition to any criminal

20 penalty provided by law, if any notice or return required

21 to be filed by section 6048—

22 ‘‘(1) is not filed on or before the time provided

23 in such section, or
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1 ‘‘(2) does not include all the information re2 quired pursuant to such section or includes incorrect

3 information,

4 the person required to file such notice or return shall pay

5 a penalty equal to 35 percent of the gross reportable

6 amount. If any failure described in the preceding sentence

7 continues for more than 90 days after the day on which

8 the Secretary mails notice of such failure to the person

9 required to pay such penalty, such person shall pay a pen10 alty (in addition to the amount determined under the pre11 ceding sentence) of $10,000 for each 30-day period (or

12 fraction thereof) during which such failure continues after

13 the expiration of such 90-day period. In no event shall the

14 penalty under this subsection with respect to any failure

15 exceed the gross reportable amount.

16 ‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC17 TION 6048(b).—In the case of a return required under

18 section 6048(b)—

19 ‘‘(1) the United States person referred to in

20 such section shall be liable for the penalty imposed

21 by subsection (a), and

22 ‘‘(2) subsection (a) shall be applied by sub23 stituting ‘5 percent’ for ‘35 percent’.
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1 ‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes

2 of subsection (a), the term ‘gross reportable amount’

3 means—

4 ‘‘(1) the gross value of the property involved in

5 the event (determined as of the date of the event)

6 in the case of a failure relating to section 6048(a),

7 ‘‘(2) the gross value of the portion of the trust’s

8 assets at the close of the year treated as owned by

9 the United States person in the case of a failure re10 lating to section 6048(b)(1), and

11 ‘‘(3) the gross amount of the distributions in

12 the case of a failure relating to section 6048(c).

13 ‘‘(d) REASONABLE CAUSE EXCEPTION.—No penalty

14 shall be imposed by this section on any failure which is

15 shown to be due to reasonable cause and not due to willful

16 neglect. The fact that a foreign jurisdiction would impose

17 a civil or criminal penalty on the taxpayer (or any other

18 person) for disclosing the required information is not rea19 sonable cause.

20 ‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—

21 Subchapter B of chapter 63 (relating to deficiency proce22 dures for income, estate, gift, and certain excise taxes)

23 shall not apply in respect of the assessment or collection

24 of any penalty imposed by subsection (a).’’.

25 (c) CONFORMING AMENDMENTS.—
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1 (1) Paragraph (2) of section 6724(d) is amend2 ed by striking ‘‘or’’ at the end of subparagraph (S),

3 by striking the period at the end of subparagraph

4 (T) and inserting ‘‘, or’’, and by inserting after sub5 paragraph (T) the following new subparagraph:

6 ‘‘(U) section 6048(b)(1)(B) (relating to

7 foreign trust reporting requirements).’’.

8 (2) The table of sections for subpart B of part

9 III of subchapter A of chapter 61 is amended by

10 striking the item relating to section 6048 and insert11 ing the following new item:

‘‘Sec. 6048. Information with respect to certain foreign trusts.’’.

12 (3) The table of sections for part I of sub13 chapter B of chapter 68 is amended by striking the

14 item relating to section 6677 and inserting the fol15 lowing new item:

‘‘Sec. 6677. Failure to file information with respect to certain foreign trusts.’’.

16 (d) EFFECTIVE DATES.—

17 (1) REPORTABLE EVENTS.—To the extent re18 lated to subsection (a) of section 6048 of the Inter19 nal Revenue Code of 1986, as amended by this sec20 tion, the amendments made by this section shall

21 apply to reportable events (as defined in such section

22 6048) occurring after the date of the enactment of

23 this Act.
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1 (2) GRANTOR TRUST REPORTING.—To the ex2 tent related to subsection (b) of such section 6048,

3 the amendments made by this section shall apply to

4 taxable years of United States persons beginning

5 after December 31, 1995.

6 (3) REPORTING BY UNITED STATES BENE7 FICIARIES.—To the extent related to subsection (c)

8 of such section 6048, the amendments made by this

9 section shall apply to distributions received after the

10 date of the enactment of this Act.

11 SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE

12 RETURN RELATING TO TRANSFERS TO FOR13 EIGN ENTITIES.

14 (a) IN GENERAL.—Section 1494 is amended by add15 ing at the end the following new subsection:

16 ‘‘(c) PENALTY.—In the case of any failure to file a

17 return required by the Secretary with respect to any trans18 fer described in section 1491, the person required to file

19 such return shall be liable for the penalties provided in

20 section 6677 in the same manner as if such failure were

21 a failure to file a notice under section 6048(a).’’.

22 (b) EFFECTIVE DATE.—The amendment made by

23 subsection (a) shall apply to transfers after the date of

24 the enactment of this Act.
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1 SEC. 413. MODIFICATIONS OF RULES RELATING TO FOR2 EIGN TRUSTS HAVING ONE OR MORE UNITED

3 STATES BENEFICIARIES.

4 (a) TREATMENT OF TRUST OBLIGATIONS, ETC.—

5 (1) Paragraph (2) of section 679(a) is amended

6 by striking subparagraph (B) and inserting the fol7 lowing:

8 ‘‘(B) TRANSFERS AT FAIR MARKET

9 VALUE.—To any transfer of property to a trust

10 in exchange for consideration of at least the fair

11 market value of the transferred property. For

12 purposes of the preceding sentence, consider13 ation other than cash shall be taken into ac14 count at its fair market value.’’.

15 (2) Subsection (a) of section 679 (relating to

16 foreign trusts having one or more United States

17 beneficiaries) is amended by adding at the end the

18 following new paragraph:

19 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO

20 ACCOUNT UNDER FAIR MARKET VALUE EXCEP21 TION.—

22 ‘‘(A) IN GENERAL.—In determining wheth23 er paragraph (2)(B) applies to any transfer by

24 a person described in clause (ii) or (iii) of sub25 paragraph (C), there shall not be taken into ac26 count—
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1 ‘‘(i) except as provided in regulations,

2 any obligation of a person described in

3 subparagraph (C), and

4 ‘‘(ii) to the extent provided in regula5 tions, any obligation which is guaranteed

6 by a person described in subparagraph (C).

7 ‘‘(B) TREATMENT OF PRINCIPAL PAY8 MENTS ON OBLIGATION.—Principal payments

9 by the trust on any obligation referred to in

10 subparagraph (A) shall be taken into account

11 on and after the date of the payment in deter12 mining the portion of the trust attributable to

13 the property transferred.

14 ‘‘(C) PERSONS DESCRIBED.—The persons

15 described in this subparagraph are—

16 ‘‘(i) the trust,

17 ‘‘(ii) any grantor or beneficiary of the

18 trust, and

19 ‘‘(iii) any person who is related (with20 in the meaning of section 643(i)(2)(B)) to

21 any grantor or beneficiary of the trust.’’.

22 (b) EXEMPTION OF TRANSFERS TO CHARITABLE

23 TRUSTS.—Subsection (a) of section 679 is amended by

24 striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘sec25 tion 6048(a)(3)(B)(ii)’’.
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1 (c) OTHER MODIFICATIONS.—Subsection (a) of sec2 tion 679 is amended by adding at the end the following

3 new paragraphs:

4 ‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN

5 GRANTOR WHO LATER BECOMES A UNITED STATES

6 PERSON.—

7 ‘‘(A) IN GENERAL.—If a nonresident alien

8 individual has a residency starting date within

9 5 years after directly or indirectly transferring

10 property to a foreign trust, this section and sec11 tion 6048 shall be applied as if such individual

12 transferred to such trust on the residency start13 ing date an amount equal to the portion of such

14 trust attributable to the property transferred by

15 such individual to such trust in such transfer.

16 ‘‘(B) TREATMENT OF UNDISTRIBUTED IN17 COME.—For purposes of this section, undistrib18 uted net income for periods before such individ19 ual’s residency starting date shall be taken into

20 account in determining the portion of the trust

21 which is attributable to property transferred by

22 such individual to such trust but shall not oth23 erwise be taken into account.

24 ‘‘(C) RESIDENCY STARTING DATE.—For

25 purposes of this paragraph, an individual’s resi-
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1 dency starting date is the residency starting

2 date determined under section 7701(b)(2)(A).

3 ‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—

4 ‘‘(A) an individual who is a citizen or resi5 dent of the United States transferred property

6 to a trust which was not a foreign trust, and

7 ‘‘(B) such trust becomes a foreign trust

8 while such individual is alive,

9 then this section and section 6048 shall be applied

10 as if such individual transferred to such trust on the

11 date such trust becomes a foreign trust an amount

12 equal to the portion of such trust attributable to the

13 property previously transferred by such individual to

14 such trust. A rule similar to the rule of paragraph

15 (4)(B) shall apply for purposes of this paragraph.’’.

16 (d) MODIFICATIONS RELATING TO WHETHER TRUST

17 HAS UNITED STATES BENEFICIARIES.—Subsection (c) of

18 section 679 is amended by adding at the end the following

19 new paragraph:

20 ‘‘(3) CERTAIN UNITED STATES BENEFICIARIES

21 DISREGARDED.—A beneficiary shall not be treated

22 as a United States person in applying this section

23 with respect to any transfer of property to foreign

24 trust if such beneficiary first became a United
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1 States person more than 5 years after the date of

2 such transfer.’’.

3 (e) TECHNICAL AMENDMENT.—Subparagraph (A) of

4 section 679(c)(2) is amended to read as follows:

5 ‘‘(A) in the case of a foreign corporation,

6 such corporation is a controlled foreign corpora7 tion (as defined in section 957(a)),’’.

8 (f) REGULATIONS.—Section 679 is amended by add9 ing at the end the following new subsection:

10 ‘‘(d) REGULATIONS.—The Secretary shall prescribe

11 such regulations as may be necessary or appropriate to

12 carry out the purposes of this section.’’.

13 (g) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to transfers of property after Feb15 ruary 6, 1995.

16 SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWN17 ERS UNDER GRANTOR TRUST RULES.

18 (a) GENERAL RULE.—

19 (1) Subsection (f) of section 672 (relating to

20 special rule where grantor is foreign person) is

21 amended to read as follows:

22 ‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER23 SHIP.—

24 ‘‘(1) IN GENERAL.—Notwithstanding any other

25 provision of this subpart, this subpart shall apply
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1 only to the extent such application results in an

2 amount (if any) being currently taken into account

3 (directly or through 1 or more entities) under this

4 chapter in computing the income of a citizen or resi5 dent of the United States or a domestic corporation.

6 ‘‘(2) EXCEPTIONS.—

7 ‘‘(A) CERTAIN REVOCABLE AND IRREV8 OCABLE TRUSTS.—Paragraph (1) shall not

9 apply to any portion of a trust if—

10 ‘‘(i) the power to revest absolutely in

11 the grantor title to the trust property to

12 which such portion is attributable is exer13 cisable solely by the grantor without the

14 approval or consent of any other person or

15 with the consent of a related or subordi16 nate party who is subservient to the grant17 or, or

18 ‘‘(ii) the only amounts distributable

19 from such portion (whether income or cor20 pus) during the lifetime of the grantor are

21 amounts distributable to the grantor or the

22 spouse of the grantor.

23 ‘‘(B) COMPENSATORY TRUSTS.—Except as

24 provided in regulations, paragraph (1) shall not

25 apply to any portion of a trust distributions
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1 from which are taxable as compensation for

2 services rendered.

3 ‘‘(3) SPECIAL RULES.—Except as otherwise

4 provided in regulations prescribed by the Sec5 retary—

6 ‘‘(A) a controlled foreign corporation (as

7 defined in section 957) shall be treated as a do8 mestic corporation for purposes of paragraph

9 (1), and

10 ‘‘(B) paragraph (1) shall not apply for

11 purposes of applying section 1296.

12 ‘‘(4) RECHARACTERIZATION OF PURPORTED

13 GIFTS.—In the case of any transfer directly or indi14 rectly from a partnership or foreign corporation

15 which the transferee treats as a gift or bequest, the

16 Secretary may recharacterize such transfer in such

17 circumstances as the Secretary determines to be ap18 propriate to prevent the avoidance of the purposes of

19 this subsection.

20 ‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR21 EIGN PERSON.—If—

22 ‘‘(A) but for this subsection, a foreign per23 son would be treated as the owner of any por24 tion of a trust, and
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1 ‘‘(B) such trust has a beneficiary who is a

2 United States person,

3 such beneficiary shall be treated as the grantor of

4 such portion to the extent such beneficiary or any

5 member of such beneficiary’s family (within the

6 meaning of section 267(c)(4)) has made (directly or

7 indirectly) transfers of property (other than in a sale

8 for full and adequate consideration) to such foreign

9 person. For purposes of the preceding sentence, any

10 gift shall not be taken into account to the extent

11 such gift would be excluded from taxable gifts under

12 section 2503(b).

13 ‘‘(6) REGULATIONS.—The Secretary shall pre14 scribe such regulations as may be necessary or ap15 propriate to carry out the purposes of this sub16 section, including regulations providing that para17 graph (1) shall not apply in appropriate cases.’’.

18 (2) The last sentence of subsection (c) of sec19 tion 672 of such Code is amended by inserting ‘‘sub20 section (f) and’’ before ‘‘sections 674’’.

21 (b) CREDIT FOR CERTAIN TAXES.—

22 (1) Paragraph (2) of section 665(d) is amended

23 by adding at the end the following new sentence:

24 ‘‘Under rules or regulations prescribed by the Sec25 retary, in the case of any foreign trust of which the
39

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1 settlor or another person would be treated as owner

2 of any portion of the trust under subpart E but for

3 section 672(f), the term ‘taxes imposed on the trust’

4 includes the allocable amount of any income, war

5 profits, and excess profits taxes imposed by any for6 eign country or possession of the United States on

7 the settlor or such other person in respect of trust

8 income.’’.

9 (2) Paragraph (5) of section 901(b) is amended

10 by adding at the end the following new sentence:

11 ‘‘Under rules or regulations prescribed by the Sec12 retary, in the case of any foreign trust of which the

13 settlor or another person would be treated as owner

14 of any portion of the trust under subpart E but for

15 section 672(f), the allocable amount of any income,

16 war profits, and excess profits taxes imposed by any

17 foreign country or possession of the United States

18 on the settlor or such other person in respect of

19 trust income.’’.

20 (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

21 THROUGH NOMINEES.—

22 (1) Section 643 is amended by adding at the

23 end the following new subsection:

24 ‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

25 THROUGH NOMINEES.—For purposes of this part, any
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1 amount paid to a United States person which is derived

2 directly or indirectly from a foreign trust of which the

3 payor is not the grantor shall be deemed in the year of

4 payment to have been directly paid by the foreign trust

5 to such United States person.’’.

6 (2) Section 665 is amended by striking sub7 section (c).

8 (d) EFFECTIVE DATE.—

9 (1) IN GENERAL.—Except as provided by para10 graph (2), the amendments made by this section

11 shall take effect on the date of the enactment of this

12 Act.

13 (2) EXCEPTION FOR CERTAIN TRUSTS.—The

14 amendments made by this section shall not apply to

15 any trust—

16 (A) which is treated as owned by the

17 grantor under section 676 or 677 (other than

18 subsection (a)(3) thereof) of the Internal Reve19 nue Code of 1986, and

20 (B) which is in existence on September 19,

21 1995.

22 The preceding sentence shall not apply to the por23 tion of any such trust attributable to any transfer to

24 such trust after September 19, 1995.

25 (e) TRANSITIONAL RULE.—If—
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1 (1) by reason of the amendments made by this

2 section, any person other than a United States per3 son ceases to be treated as the owner of a portion

4 of a domestic trust, and

5 (2) before January 1, 1997, such trust becomes

6 a foreign trust, or the assets of such trust are trans7 ferred to a foreign trust,

8 no tax shall be imposed by section 1491 of the Internal

9 Revenue Code of 1986 by reason of such trust becoming

10 a foreign trust or the assets of such trust being trans11 ferred to a foreign trust.

12 SEC. 415. INFORMATION REPORTING REGARDING FOREIGN

13 GIFTS.

14 (a) IN GENERAL.—Subpart A of part III of sub15 chapter A of chapter 61 is amended by inserting after sec16 tion 6039E the following new section:

17 ‘‘SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM

18 FOREIGN PERSONS.

19 ‘‘(a) IN GENERAL.—If the value of the aggregate for20 eign gifts received by a United States person (other than

21 an organization described in section 501(c) and exempt

22 from tax under section 501(a)) during any taxable year

23 exceeds $10,000, such United States person shall furnish

24 (at such time and in such manner as the Secretary shall

25 prescribe) such information as the Secretary may pre-
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1 scribe regarding each foreign gift received during such

2 year.

3 ‘‘(b) FOREIGN GIFT.—For purposes of this section,

4 the term ‘foreign gift’ means any amount received from

5 a person other than a United States person which the re6 cipient treats as a gift or bequest. Such term shall not

7 include any qualified transfer (within the meaning of sec8 tion 2503(e)(2)) or any distribution properly disclosed in

9 a return under section 6048(c).

10 ‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA11 TION.—

12 ‘‘(1) IN GENERAL.—If a United States person

13 fails to furnish the information required by sub14 section (a) with respect to any foreign gift within

15 the time prescribed therefor (including extensions)—

16 ‘‘(A) the tax consequences of the receipt of

17 such gift shall be determined by the Secretary,

18 and

19 ‘‘(B) such United States person shall pay

20 (upon notice and demand by the Secretary and

21 in the same manner as tax) an amount equal to

22 5 percent of the amount of such foreign gift for

23 each month for which the failure continues (not

24 to exceed 25 percent of such amount in the ag25 gregate).
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1 ‘‘(2) REASONABLE CAUSE EXCEPTION.—Para2 graph (1) shall not apply to any failure to report a

3 foreign gift if the United States person shows that

4 the failure is due to reasonable cause and not due

5 to willful neglect.

6 ‘‘(d) COST-OF-LIVING ADJUSTMENT.—In the case of

7 any taxable year beginning after December 31, 1996, the

8 $10,000 amount under subsection (a) shall be increased

9 by an amount equal to the product of such amount and

10 the cost-of-living adjustment for such taxable year under

11 section 1(f)(3), except that subparagraph (B) thereof shall

12 be applied by substituting ‘1995’ for ‘1992’.

13 ‘‘(e) REGULATIONS.—The Secretary shall prescribe

14 such regulations as may be necessary or appropriate to

15 carry out the purposes of this section.’’.

16 (b) CLERICAL AMENDMENT.—The table of sections

17 for such subpart is amended by inserting after the item

18 relating to section 6039E the following new item:

‘‘Sec. 6039F. Notice of large gifts received from foreign persons.’’.

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to amounts received after the date

21 of the enactment of this Act in taxable years ending after

22 such date.
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1 SEC. 416. MODIFICATION OF RULES RELATING TO FOREIGN

2 TRUSTS WHICH ARE NOT GRANTOR TRUSTS.

3 (a) MODIFICATION OF INTEREST CHARGE ON ACCU4 MULATION DISTRIBUTIONS.—Subsection (a) of section

5 668 (relating to interest charge on accumulation distribu6 tions from foreign trusts) is amended to read as follows:

7 ‘‘(a) GENERAL RULE.—For purposes of the tax de8 termined under section 667(a)—

9 ‘‘(1) INTEREST DETERMINED USING UNDER10 PAYMENT RATES.—The interest charge determined

11 under this section with respect to any distribution is

12 the amount of interest which would be determined

13 on the partial tax computed under section 667(b) for

14 the period described in paragraph (2) using the

15 rates and the method under section 6621 applicable

16 to underpayments of tax.

17 ‘‘(2) PERIOD.—For purposes of paragraph (1),

18 the period described in this paragraph is the period

19 which begins on the date which is the applicable

20 number of years before the date of the distribution

21 and which ends on the date of the distribution.

22 ‘‘(3) APPLICABLE NUMBER OF YEARS.—For

23 purposes of paragraph (2)—

24 ‘‘(A) IN GENERAL.—The applicable num25 ber of years with respect to a distribution is the

26 number determined by dividing—
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1 ‘‘(i) the sum of the products described

2 in subparagraph (B) with respect to each

3 undistributed income year, by

4 ‘‘(ii) the aggregate undistributed net

5 income.

6 The quotient determined under the preceding

7 sentence shall be rounded under procedures

8 prescribed by the Secretary.

9 ‘‘(B) PRODUCT DESCRIBED.—For pur10 poses of subparagraph (A), the product de11 scribed in this subparagraph with respect to

12 any undistributed income year is the product

13 of—

14 ‘‘(i) the undistributed net income for

15 such year, and

16 ‘‘(ii) the sum of the number of taxable

17 years between such year and the taxable

18 year of the distribution (counting in each

19 case the undistributed income year but not

20 counting the taxable year of the distribu21 tion).

22 ‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur23 poses of this subsection, the term ‘undistributed in24 come year’ means any prior taxable year of the trust

25 for which there is undistributed net income, other
46

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1 than a taxable year during all of which the bene2 ficiary receiving the distribution was not a citizen or

3 resident of the United States.

4 ‘‘(5) DETERMINATION OF UNDISTRIBUTED NET

5 INCOME.—Notwithstanding section 666, for pur6 poses of this subsection, an accumulation distribu7 tion from the trust shall be treated as reducing pro8 portionately the undistributed net income for undis9 tributed income years.

10 ‘‘(6) PERIODS BEFORE 1996.—Interest for the

11 portion of the period described in paragraph (2)

12 which occurs before January 1, 1996, shall be deter13 mined—

14 ‘‘(A) by using an interest rate of 6 percent,

15 and

16 ‘‘(B) without compounding until January

17 1, 1996.’’.

18 (b) ABUSIVE TRANSACTIONS.—Section 643(a) is

19 amended by inserting after paragraph (6) the following

20 new paragraph:

21 ‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary

22 shall prescribe such regulations as may be necessary

23 or appropriate to carry out the purposes of this part,

24 including regulations to prevent avoidance of such

25 purposes.’’.
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1 (c) TREATMENT OF LOANS FROM TRUSTS.—

2 (1) IN GENERAL.—Section 643 (relating to

3 definitions applicable to subparts A, B, C, and D)

4 is amended by adding at the end the following new

5 subsection:

6 ‘‘(i) LOANS FROM FOREIGN TRUSTS.—For purposes

7 of subparts B, C, and D—

8 ‘‘(1) GENERAL RULE.—Except as provided in

9 regulations, if a foreign trust makes a loan of cash

10 or marketable securities directly or indirectly to—

11 ‘‘(A) any grantor or beneficiary of such

12 trust who is a United States person, or

13 ‘‘(B) any United States person not de14 scribed in subparagraph (A) who is related to

15 such grantor or beneficiary,

16 the amount of such loan shall be treated as a dis17 tribution by such trust to such grantor or bene18 ficiary (as the case may be).

19 ‘‘(2) DEFINITIONS AND SPECIAL RULES.—For

20 purposes of this subsection—

21 ‘‘(A) CASH.—The term ‘cash’ includes for22 eign currencies and cash equivalents.

23 ‘‘(B) RELATED PERSON.—

24 ‘‘(i) IN GENERAL.—A person is relat25 ed to another person if the relationship be-
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1 tween such persons would result in a dis2 allowance of losses under section 267 or

3 707(b). In applying section 267 for pur4 poses of the preceding sentence, section

5 267(c)(4) shall be applied as if the family

6 of an individual includes the spouses of the

7 members of the family.

8 ‘‘(ii) ALLOCATION.—If any person de9 scribed in paragraph (1)(B) is related to

10 more than one person, the grantor or bene11 ficiary to whom the treatment under this

12 subsection applies shall be determined

13 under regulations prescribed by the Sec14 retary.

15 ‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The

16 term ‘United States person’ does not include

17 any entity exempt from tax under this chapter.

18 ‘‘(D) TRUST NOT TREATED AS SIMPLE

19 TRUST.—Any trust which is treated under this

20 subsection as making a distribution shall be

21 treated as not described in section 651.

22 ‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING

23 LOAN PRINCIPAL.—If any loan is taken into account

24 under paragraph (1), any subsequent transaction be25 tween the trust and the original borrower regarding
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1 the principal of the loan (by way of complete or par2 tial repayment, satisfaction, cancellation, discharge,

3 or otherwise) shall be disregarded for purposes of

4 this title.’’.

5 (2) TECHNICAL AMENDMENT.—Paragraph (8)

6 of section 7872(f) is amended by inserting ‘‘,

7 643(i),’’ before ‘‘or 1274’’ each place it appears.

8 (d) EFFECTIVE DATES.—

9 (1) INTEREST CHARGE.—The amendment made

10 by subsection (a) shall apply to distributions after

11 the date of the enactment of this Act.

12 (2) ABUSIVE TRANSACTIONS.—The amendment

13 made by subsection (b) shall take effect on the date

14 of the enactment of this Act.

15 (3) LOANS FROM TRUSTS.—The amendment

16 made by subsection (c) shall apply to loans of cash

17 or marketable securities made after September 19,

18 1995.

19 SEC. 417. RESIDENCE OF TRUSTS, ETC.

20 (a) TREATMENT AS UNITED STATES PERSON.—

21 (1) IN GENERAL.—Paragraph (30) of section

22 7701(a) is amended by striking ‘‘and’’ at the end of

23 subparagraph (C) and by striking subparagraph (D)

24 and by inserting the following new subparagraphs:
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1 ‘‘(D) any estate (other than a foreign es2 tate, within the meaning of paragraph (31)),

3 and

4 ‘‘(E) any trust if—

5 ‘‘(i) a court within the United States

6 is able to exercise primary supervision over

7 the administration of the trust, and

8 ‘‘(ii) one or more United States fidu9 ciaries have the authority to control all

10 substantial decisions of the trust.’’.

11 (2) CONFORMING AMENDMENT.—Paragraph

12 (31) of section 7701(a) is amended to read as fol13 lows:

14 ‘‘(31) FOREIGN ESTATE OR TRUST.—

15 ‘‘(A) FOREIGN ESTATE.—The term ‘for16 eign estate’ means an estate the income of

17 which, from sources without the United States

18 which is not effectively connected with the con19 duct of a trade or business within the United

20 States, is not includible in gross income under

21 subtitle A.

22 ‘‘(B) FOREIGN TRUST.—The term ‘foreign

23 trust’ means any trust other than a trust de24 scribed in subparagraph (E) of paragraph

25 (30).’’.
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1 (3) EFFECTIVE DATE.—The amendments made

2 by this subsection shall apply—

3 (A) to taxable years beginning after De4 cember 31, 1996, or

5 (B) at the election of the trustee of a

6 trust, to taxable years ending after the date of

7 the enactment of this Act.

8 Such an election, once made, shall be irrevocable.

9 (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN

10 TRUSTS.—

11 (1) IN GENERAL.—Section 1491 (relating to

12 imposition of tax on transfers to avoid income tax)

13 is amended by adding at the end the following new

14 flush sentence:

15 ‘‘If a trust which is not a foreign trust becomes a foreign

16 trust, such trust shall be treated for purposes of this sec17 tion as having transferred, immediately before becoming

18 a foreign trust, all of its assets to a foreign trust.’’.

19 (2) EFFECTIVE DATE.—The amendment made

20 by this subsection shall take effect on the date of the

21 enactment of this Act.

Æ