I

104TH CONGRESS

2D SESSION H. R. 3286

To help families defray adoption costs, and to promote the adoption of

minority children.

IN THE HOUSE OF REPRESENTATIVES

APRIL 23, 1996

Ms. MOLINARI (for herself, Mr. ARCHER, Mr. BUNNING of Kentucky, Ms.

PRYCE, Mr. SOLOMON, Mr. TIAHRT, and Mr. SHAW) introduced the following bill; which was referred to the Committee on Ways and Means for

a period ending not later than May 3, 1996, and in addition to the Committees on Resources and Economic and Educational Opportunities for

a period ending not later than April 30, 1996, in each case for consideration of such provisions as fall within the jurisdiction of the committee

concerned

A BILL

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’’.

6 SEC. 2. TABLE OF CONTENTS.

7 The table of contents of this Act is as follows:
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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. Modifications of rules relating to foreign trusts having one or more

United States beneficiaries.

Sec. 413. Foreign persons not to be treated as owners under grantor trust

rules.

Sec. 414. Information reporting regarding foreign gifts.

Sec. 415. Modification of rules relating to foreign trusts which are not grantor

trusts.

Sec. 416. Residence of estates and trusts, etc.

1 TITLE I—CREDIT FOR ADOPTION

2 EXPENSES

3 SEC. 101. CREDIT FOR ADOPTION EXPENSES.

4 (a) IN GENERAL.—Subpart A of part IV of sub5 chapter A of chapter 1 of the Internal Revenue Code of

6 1986 (relating to nonrefundable personal credits) is

7 amended by inserting after section 22 the following new

8 section:
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1 ‘‘SEC. 23. ADOPTION EXPENSES.

2 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in3 dividual, there shall be allowed as a credit against the tax

4 imposed by this chapter for the taxable year the amount

5 of the qualified adoption expenses paid or incurred by the

6 taxpayer during such taxable year.

7 ‘‘(b) LIMITATIONS.—

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

9 amount of qualified adoption expenses which may be

10 taken into account under subsection (a) with respect

11 to the adoption of a child shall not exceed $5,000.

12 ‘‘(2) INCOME LIMITATION.—The amount allow13 able as a credit under subsection (a) for any taxable

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

15 amount which bears the same ratio to the amount

16 so allowable (determined without regard to this

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

18 ‘‘(A) the amount (if any) by which the tax19 payer’s adjusted gross income (determined

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

21 exceeds $75,000, bears to

22 ‘‘(B) $40,000.

23 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

24 ‘‘(A) IN GENERAL.—No credit shall be al25 lowed under subsection (a) for any expense for
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1 which a deduction or credit is allowable under

2 any other provision of this chapter.

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

4 under subsection (a) for any expense to the ex5 tent that funds for such expense are received

6 under any Federal, State, or local program.

7 The preceding sentence shall not apply to ex8 penses for the adoption of a child with special

9 needs.

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

11 be allowed under subsection (a) for any expense

12 to the extent that such expense is reimbursed

13 and the reimbursement is excluded from gross

14 income under section 137.

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

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

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

18 taxable year reduced by the sum of the credits allowable

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

20 shall be carried to the succeeding taxable year and added

21 to the credit allowable under subsection (a) for such tax22 able year. No credit may be carried forward under this

23 subsection to any taxable year following the fifth taxable

24 year after the taxable year in which the credit arose. For
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1 purposes of the preceding sentence, credits shall be treated

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

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

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

5 term ‘qualified adoption expenses’ means reasonable

6 and necessary adoption fees, court costs, attorney

7 fees, and other expenses—

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

9 principal purpose of which is for, the legal

10 adoption of an eligible child by the taxpayer,

11 and

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

13 State or Federal law or in carrying out any sur14 rogate parenting arrangement.

15 Such term shall include expenses for a foreign adop16 tion only if the child is actually adopted.

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

18 CHILD NOT ELIGIBLE.—The term ‘qualified adoption

19 expenses’ shall not include any expenses in connec20 tion with the adoption by an individual of a child

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

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

23 child’ means any individual—

24 ‘‘(A) who has not attained age 18 as of the

25 time of the adoption, or
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1 ‘‘(B) who is physically or mentally incapa2 ble of caring for himself.

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

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

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

6 cannot or should not be returned to the home

7 of his parents, and

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

9 exists with respect to the child a specific factor

10 or condition (such as his ethnic background,

11 age, or membership in a minority or sibling

12 group, or the presence of factors such as medi13 cal conditions or physical, mental, or emotional

14 handicaps) because of which it is reasonable to

15 conclude that such child cannot be placed with

16 adoptive parents without providing adoption as17 sistance.

18 ‘‘(e) MARRIED COUPLES MUST FILE JOINT RE19 TURNS.—Rules similar to the rules of paragraphs (2), (3),

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

21 section.’’.

22 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM23 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III

24 of subchapter B of chapter 1 of such Code (relating to

25 items specifically excluded from gross income) is amended
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1 by redesignating section 137 as section 138 and by insert2 ing after section 136 the following new section:

3 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

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

5 does not include amounts paid or expenses incurred by the

6 employer for qualified adoption expenses in connection

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

8 amounts are furnished pursuant to an adoption assistance

9 program.

10 ‘‘(b) LIMITATIONS.—

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

12 amount excludable from gross income under sub13 section (a) for all taxable years with respect to the

14 adoption of any single child by the taxpayer shall

15 not exceed $5,000.

16 ‘‘(2) INCOME LIMITATION.—The amount ex17 cludable from gross income under subsection (a) for

18 any taxable year shall be reduced (but not below

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

20 the amount so excludable (determined without re21 gard to this paragraph but with regard to paragraph

22 (1)) as—

23 ‘‘(A) the amount (if any) by which the tax24 payer’s adjusted gross income (determined
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1 without regard to this section and sections 911,

2 931, and 933) exceeds $75,000, bears to

3 ‘‘(B) $40,000.

4 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For pur5 poses of this section, an adoption assistance program is

6 a plan of an employer—

7 ‘‘(1) under which the employer provides employ8 ees with adoption assistance, and

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

10 requirements of paragraphs (2), (3), and (5) of sec11 tion 127(b).

12 An adoption reimbursement program operated under sec13 tion 1052 of title 10, United States Code (relating to

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

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

16 treated as an adoption assistance program for purposes

17 of this section.

18 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For pur19 poses of this section, the term ‘qualified adoption ex20 penses’ has the meaning given such term by section

21 23(d).’’.

22 (c) CONFORMING AMENDMENTS.—

23 (1) The table of sections for subpart A of part

24 IV of subchapter A of chapter 1 of such Code is
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1 amended by inserting after the item relating to sec2 tion 22 the following new item:

‘‘Sec. 23. Adoption expenses.’’.

3 (2) The table of sections for part III of sub4 chapter B of chapter 1 of such Code is amended by

5 striking the item relating to section 137 and insert6 ing the following:

‘‘Sec. 137. Adoption assistance programs.

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

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

8 this section shall apply to taxable years beginning after

9 December 31, 1996.

10 TITLE II—INTERETHNIC

11 ADOPTION

12 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP13 TION.

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

15 of the Social Security Act (42 U.S.C 671(a)) is amend16 ed—

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

18 (16);

19 (2) by striking the period at the end of para20 graph (17) and inserting ‘‘; and’’; and

21 (3) by adding at the end the following:

22 ‘‘(18) not later than January 1, 1997, provides

23 that neither the State nor any other entity in the
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1 State that receives funds from the Federal Govern2 ment and is involved in adoption or foster care

3 placements may—

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

5 become an adoptive or a foster parent, on the

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

7 person, or of the child, involved; or

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

9 child for adoption or into foster care, or other10 wise discriminate in making a placement deci11 sion, on the basis of the race, color, or national

12 origin of the adoptive or foster parent, or the

13 child, involved.’’.

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

15 U.S.C. 674) is amended by adding at the end the follow16 ing:

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

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

19 1123, to have violated section 471(a)(18) during a quarter

20 with respect to any person, then, notwithstanding sub21 section (a) of this section and any regulations promulgated

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

23 amount otherwise payable to the State under this part,

24 for the quarter and for each subsequent quarter before

25 the 1st quarter for which the State program is found, as
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1 a result of such a review, not to have violated section

2 471(a)(18) with respect to any person, by—

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

4 amount, in the case of the 1st such finding with re5 spect to the State;

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

7 amount, in the case of the 2nd such finding with re8 spect to the State; or

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

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

11 finding with respect to the State.

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

13 funds under this part and which violates section

14 471(a)(18) during a quarter with respect to any person

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

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

17 ‘‘(3)(A) Any individual who is aggrieved by a viola18 tion of section 471(a)(18) by a State or other entity may

19 bring an action seeking relief from the State or other en20 tity in any United States district court.

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

22 brought more than 2 years after the date the alleged viola23 tion occurred.

24 ‘‘(4) This subsection shall not be construed to affect

25 the application of the Indian Child Welfare Act of 1978.’’.
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1 (c) CIVIL RIGHTS.—

2 (1) PROHIBITED CONDUCT.—A person or gov3 ernment that is involved in adoption or foster care

4 placements may not—

5 (A) deny to any individual the opportunity

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

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

8 individual, or of the child, involved; or

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

10 for adoption or into foster care, or otherwise

11 discriminate in making a placement decision, on

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

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

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 (25 U.S.C.

11 1911 et seq.) is amended by adding at the end the follow12 ing:

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 (25 U.S.C.

10 1911 et seq.), as amended by section 301 of this title, is

11 further amended by adding at the end the following:

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

13 years before becoming a member of an Indian tribe may

14 become a member of an Indian tribe only upon the per15 son’s written consent.

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

17 involving an Indian child, membership in an Indian tribe

18 shall be effective from the actual date of admission to

19 membership in the Indian tribe and shall not be given ret20 roactive effect.’’.

21 SEC. 303. EFFECTIVE DATE.

22 The amendments made by this title shall take effect

23 on the date of the enactment of this Act and shall apply

24 with respect to any child custody proceeding in which a

25 final decree has not been entered as of such date.
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1 TITLE IV—REVENUE OFFSETS

2 SEC. 400. AMENDMENT OF 1986 CODE.

3 Except as otherwise expressly provided, whenever in

4 this title an amendment or repeal is expressed in terms

5 of an amendment to, or repeal of, a section or other provi6 sion, the reference shall be considered to be made to a

7 section or other provision of the Internal Revenue Code

8 of 1986.

9 Subtitle A—Exclusion for Energy

10 Conservation Subsidies Limited

11 to Subsidies With Respect to

12 Dwelling Units

13 SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUB14 SIDIES LIMITED TO SUBSIDIES WITH RE15 SPECT TO DWELLING UNITS.

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

17 (defining energy conservation measure) is amended by

18 striking ‘‘energy demand—’’ and all that follows and in19 serting ‘‘energy demand with respect to a dwelling unit.’’

20 (b) CONFORMING AMENDMENTS.—

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

22 read as follows:

23 ‘‘(a) EXCLUSION.—Gross income shall not include

24 the value of any subsidy provided (directly or indirectly)
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1 by a public utility to a customer for the purchase or instal2 lation of any energy conservation measure.’’

3 (2) Paragraph (2) of section 136(c) is amend4 ed—

5 (A) by striking subparagraph (A) and by

6 redesignating subparagraphs (B) and (C) as

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

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

9 the paragraph heading.

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

11 this section shall apply to amounts received after Decem12 ber 31, 1996, unless received pursuant to a written bind13 ing contract in effect on September 13, 1995, and at all

14 times thereafter.

15 Subtitle B—Foreign Trust Tax

16 Compliance

17 SEC. 411. IMPROVED INFORMATION REPORTING ON FOR18 EIGN TRUSTS.

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

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

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

22 FOREIGN TRUSTS.

23 ‘‘(a) NOTICE OF CERTAIN EVENTS.—

24 ‘‘(1) GENERAL RULE.—On or before the 90th

25 day (or such later day as the Secretary may pre-
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1 scribe) after any reportable event, the responsible

2 party shall provide written notice of such event to

3 the Secretary in accordance with paragraph (2).

4 ‘‘(2) CONTENTS OF NOTICE.—The notice re5 quired by paragraph (1) shall contain such informa6 tion as the Secretary may prescribe, including—

7 ‘‘(A) the amount of money or other prop8 erty (if any) transferred to the trust in connec9 tion with the reportable event, and

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

11 trustee and beneficiary (or class of bene12 ficiaries) of the trust.

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

14 this subsection—

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

16 event’ means—

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

18 by a United States person,

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

20 property (directly or indirectly) to a for21 eign trust by a United States person, in22 cluding a transfer by reason of death, and

23 ‘‘(iii) the death of a citizen or resident

24 of the United States if—
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1 ‘‘(I) the decedent was treated as

2 the owner of any portion of a foreign

3 trust under the rules of subpart E of

4 part I of subchapter J of chapter 1,

5 or

6 ‘‘(II) any portion of a foreign

7 trust was included in the gross estate

8 of the decedent.

9 ‘‘(B) EXCEPTIONS.—

10 ‘‘(i) FAIR MARKET VALUE SALES.—

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

12 any transfer of property to a trust in ex13 change for consideration of at least the fair

14 market value of the transferred property.

15 For purposes of the preceding sentence,

16 consideration other than cash shall be

17 taken into account at its fair market value

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

19 apply.

20 ‘‘(ii) DEFERRED COMPENSATION AND

21 CHARITABLE TRUSTS.—Subparagraph (A)

22 shall not apply with respect to a trust

23 which is—

24 ‘‘(I) described in section 402(b),

25 404(a)(4), or 404A, or
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1 ‘‘(II) determined by the Sec2 retary to be described in section

3 501(c)(3).

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

5 this subsection, the term ‘responsible party’

6 means—

7 ‘‘(A) the grantor in the case of the cre8 ation of an inter vivos trust,

9 ‘‘(B) the transferor in the case of a report10 able event described in paragraph (3)(A)(ii)

11 other than a transfer by reason of death, and

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

13 in any other case.

14 ‘‘(b) UNITED STATES GRANTOR OF FOREIGN

15 TRUST.—

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

17 taxable year of a United States person, such person

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

19 trust under the rules of subpart E of part I of sub20 chapter J of chapter 1, such person shall be respon21 sible to ensure that—

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

23 year which sets forth a full and complete ac24 counting of all trust activities and operations

25 for the year, the name of the United States
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1 agent for such trust, and such other informa2 tion as the Secretary may prescribe, and

3 ‘‘(B) such trust furnishes such information

4 as the Secretary may prescribe to each United

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

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

7 (directly or indirectly) any distribution from the

8 trust.

9 ‘‘(2) TRUSTS NOT HAVING UNITED STATES

10 AGENT.—

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

12 paragraph apply to any foreign trust, the deter13 mination of amounts required to be taken into

14 account with respect to such trust by a United

15 States person under the rules of subpart E of

16 part I of subchapter J of chapter 1 shall be de17 termined by the Secretary.

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

19 The rules of this paragraph shall apply to any

20 foreign trust to which paragraph (1) applies un21 less such trust agrees (in such manner, subject

22 to such conditions, and at such time as the Sec23 retary shall prescribe) to authorize a United

24 States person to act as such trust’s limited
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1 agent solely for purposes of applying sections

2 7602, 7603, and 7604 with respect to—

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

4 examine records or produce testimony re5 lated to the proper treatment of amounts

6 required to be taken into account under

7 the rules referred to in subparagraph (A),

8 or

9 ‘‘(ii) any summons by the Secretary

10 for such records or testimony.

11 The appearance of persons or production of

12 records by reason of a United States person

13 being such an agent shall not subject such per14 sons or records to legal process for any purpose

15 other than determining the correct treatment

16 under this title of the amounts required to be

17 taken into account under the rules referred to

18 in subparagraph (A). A foreign trust which ap19 points an agent described in this subparagraph

20 shall not be considered to have an office or a

21 permanent establishment in the United States,

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

23 United States, solely because of the activities of

24 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 RECEIVES DISTRIBUTION.—For

15 purposes of this section, in determining whether a

16 United States person receives a distribution from a

17 foreign trust, the fact that a portion of such trust

18 is treated as owned by another person under the

19 rules of subpart E of part I of subchapter J of chap20 ter 1 shall be disregarded.

21 ‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI22 TIES.—To the extent provided in regulations, a trust

23 which is a United States person shall be treated as

24 a foreign trust for purposes of this section and sec25 tion 6677 if such trust has substantial activities, or
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1 holds substantial property, outside the United

2 States.

3 ‘‘(3) TIME AND MANNER OF FILING INFORMA4 TION.—Any notice or return required under this sec5 tion shall be made at such time and in such manner

6 as the Secretary shall prescribe.

7 ‘‘(4) MODIFICATION OF RETURN REQUIRE8 MENTS.—The Secretary is authorized to suspend or

9 modify any requirement of this section if the Sec10 retary determines that the United States has no sig11 nificant tax interest in obtaining the required infor12 mation.’’.

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

14 to failure to file information returns with respect to cer15 tain foreign trusts) is amended to read as follows:

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

17 TO CERTAIN FOREIGN TRUSTS.

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

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

20 to be filed by section 6048—

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

22 in such section, or

23 ‘‘(2) does not include all the information re24 quired pursuant to such section or includes incorrect

25 information,
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1 the person required to file such notice or return shall pay

2 a penalty equal to 35 percent of the gross reportable

3 amount. If any failure described in the preceding sentence

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

5 the Secretary mails notice of such failure to the person

6 required to pay such penalty, such person shall pay a pen7 alty (in addition to the amount determined under the pre8 ceding sentence) of $10,000 for each 30-day period (or

9 fraction thereof) during which such failure continues after

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

11 penalty under this subsection with respect to any failure

12 exceed the gross reportable amount.

13 ‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC14 TION 6048(b).—In the case of a return required under

15 section 6048(b)—

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

17 such section shall be liable for the penalty imposed

18 by subsection (a), and

19 ‘‘(2) subsection (a) shall be applied by sub20 stituting ‘5 percent’ for ‘35 percent’.

21 ‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes

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

23 means—
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1 ‘‘(1) the gross value of the property involved in

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

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

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

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

6 the United States person in the case of a failure re7 lating to section 6048(b)(1), and

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

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

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

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

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

13 neglect. The fact that a foreign jurisdiction would impose

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

15 person) for disclosing the required information is not rea16 sonable cause.

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

18 Subchapter B of chapter 63 (relating to deficiency proce19 dures for income, estate, gift, and certain excise taxes)

20 shall not apply in respect of the assessment or collection

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

22 (c) CONFORMING AMENDMENTS.—

23 (1) Paragraph (2) of section 6724(d) is amend24 ed by striking ‘‘or’’ at the end of subparagraph (S),

25 by striking the period at the end of subparagraph
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1 (T) and inserting ‘‘, or’’, and by inserting after sub2 paragraph (T) the following new subparagraph:

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

4 foreign trust reporting requirements).’’.

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

6 III of subchapter A of chapter 61 is amended by

7 striking the item relating to section 6048 and insert8 ing the following new item:

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

9 (3) The table of sections for part I of sub10 chapter B of chapter 68 is amended by striking the

11 item relating to section 6677 and inserting the fol12 lowing new item:

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

13 (d) EFFECTIVE DATES.—

14 (1) REPORTABLE EVENTS.—To the extent re15 lated to subsection (a) of section 6048 of the Inter16 nal Revenue Code of 1986, as amended by this sec17 tion, the amendments made by this section shall

18 apply to reportable events (as defined in such section

19 6048) occurring after the date of the enactment of

20 this Act.

21 (2) GRANTOR TRUST REPORTING.—To the ex22 tent related to subsection (b) of such section 6048,

23 the amendments made by this section shall apply to
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1 taxable years of United States persons beginning

2 after the date of the enactment of this Act.

3 (3) REPORTING BY UNITED STATES BENE4 FICIARIES.—To the extent related to subsection (c)

5 of such section 6048, the amendments made by this

6 section shall apply to distributions received after the

7 date of the enactment of this Act.

8 SEC. 412. MODIFICATIONS OF RULES RELATING TO FOR9 EIGN TRUSTS HAVING ONE OR MORE UNITED

10 STATES BENEFICIARIES.

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

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

13 by striking subparagraph (B) and inserting the fol14 lowing:

15 ‘‘(B) TRANSFERS AT FAIR MARKET

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

17 in exchange for consideration of at least the fair

18 market value of the transferred property. For

19 purposes of the preceding sentence, consider20 ation other than cash shall be taken into ac21 count at its fair market value.’’.

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

23 foreign trusts having one or more United States

24 beneficiaries) is amended by adding at the end the

25 following new paragraph:
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1 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO

2 ACCOUNT UNDER FAIR MARKET VALUE EXCEP3 TION.—

4 ‘‘(A) IN GENERAL.—In determining wheth5 er paragraph (2)(B) applies to any transfer by

6 a person described in clause (ii) or (iii) of sub7 paragraph (C), there shall not be taken into ac8 count—

9 ‘‘(i) except as provided in regulations,

10 any obligation of a person described in

11 subparagraph (C), and

12 ‘‘(ii) to the extent provided in regula13 tions, any obligation which is guaranteed

14 by a person described in subparagraph (C).

15 ‘‘(B) TREATMENT OF PRINCIPAL PAY16 MENTS ON OBLIGATION.—Principal payments

17 by the trust on any obligation referred to in

18 subparagraph (A) shall be taken into account

19 on and after the date of the payment in deter20 mining the portion of the trust attributable to

21 the property transferred.

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

23 described in this subparagraph are—

24 ‘‘(i) the trust,
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1 ‘‘(ii) any grantor or beneficiary of the

2 trust, and

3 ‘‘(iii) any person who is related (with4 in the meaning of section 643(i)(2)(B)) to

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

6 (b) EXEMPTION OF TRANSFERS TO CHARITABLE

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

8 striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘sec9 tion 6048(a)(3)(B)(ii)’’.

10 (c) OTHER MODIFICATIONS.—Subsection (a) of sec11 tion 679 is amended by adding at the end the following

12 new paragraphs:

13 ‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN

14 GRANTOR WHO LATER BECOMES A UNITED STATES

15 PERSON.—

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

17 individual has a residency starting date within

18 5 years after directly or indirectly transferring

19 property to a foreign trust, this section and sec20 tion 6048 shall be applied as if such individual

21 transferred to such trust on the residency start22 ing date an amount equal to the portion of such

23 trust attributable to the property transferred by

24 such individual to such trust in such transfer.
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1 ‘‘(B) TREATMENT OF UNDISTRIBUTED IN2 COME.—For purposes of this section, undistrib3 uted net income for periods before such individ4 ual’s residency starting date shall be taken into

5 account in determining the portion of the trust

6 which is attributable to property transferred by

7 such individual to such trust but shall not oth8 erwise be taken into account.

9 ‘‘(C) RESIDENCY STARTING DATE.—For

10 purposes of this paragraph, an individual’s resi11 dency starting date is the residency starting

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

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

14 ‘‘(A) an individual who is a citizen or resi15 dent of the United States transferred property

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

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

18 while such individual is alive,

19 then this section and section 6048 shall be applied

20 as if such individual transferred to such trust on the

21 date such trust becomes a foreign trust an amount

22 equal to the portion of such trust attributable to the

23 property previously transferred by such individual to

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

25 (4)(B) shall apply for purposes of this paragraph.’’.
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1 (d) MODIFICATIONS RELATING TO WHETHER TRUST

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

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

4 new paragraph:

5 ‘‘(3) CERTAIN UNITED STATES BENEFICIARIES

6 DISREGARDED.—A beneficiary shall not be treated

7 as a United States person in applying this section

8 with respect to any transfer of property to foreign

9 trust if such beneficiary first became a United

10 States person more than 5 years after the date of

11 such transfer.’’.

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

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

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

15 such corporation is a controlled foreign corpora16 tion (as defined in section 957(a)),’’.

17 (f) REGULATIONS.—Section 679 is amended by add18 ing at the end the following new subsection:

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

20 such regulations as may be necessary or appropriate to

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

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

23 this section shall apply to transfers of property after Feb24 ruary 6, 1995.
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1 SEC. 413. FOREIGN PERSONS NOT TO BE TREATED AS OWN2 ERS UNDER GRANTOR TRUST RULES.

3 (a) GENERAL RULE.—

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

5 special rule where grantor is foreign person) is

6 amended to read as follows:

7 ‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER8 SHIP.—

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

10 provision of this subpart, this subpart shall apply

11 only to the extent such application results in an

12 amount being currently taken into account (directly

13 or through 1 or more entities) under this chapter in

14 computing the income of a citizen or resident of the

15 United States or a domestic corporation.

16 ‘‘(2) EXCEPTIONS.—

17 ‘‘(A) CERTAIN REVOCABLE AND IRREV18 OCABLE TRUSTS.—Paragraph (1) shall not

19 apply to any trust if—

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

21 the grantor title to the trust property is

22 exercisable solely by the grantor without

23 the approval or consent of any other per24 son or with the consent of a related or sub25 ordinate party who is subservient to the

26 grantor, or
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1 ‘‘(ii) the only amounts distributable

2 from such trust (whether income or cor3 pus) during the lifetime of the grantor are

4 amounts distributable to the grantor or the

5 spouse of the grantor.

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

7 provided in regulations, paragraph (1) shall not

8 apply to any portion of a trust distributions

9 from which are taxable as compensation for

10 services rendered.

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

12 provided in regulations prescribed by the Sec13 retary—

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

15 defined in section 957) shall be treated as a do16 mestic corporation for purposes of paragraph

17 (1), and

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

19 purposes of applying section 1296.

20 ‘‘(4) RECHARACTERIZATION OF PURPORTED

21 GIFTS.—In the case of any transfer directly or indi22 rectly from a partnership or foreign corporation

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

24 Secretary may recharacterize such transfer in such

25 circumstances as the Secretary determines to be ap-
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1 propriate to prevent the avoidance of the purposes of

2 this subsection.

3 ‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR4 EIGN PERSON.—If—

5 ‘‘(A) but for this subsection, a foreign per6 son would be treated as the owner of any por7 tion of a trust, and

8 ‘‘(B) such trust has a beneficiary who is a

9 United States person,

10 such beneficiary shall be treated as the grantor of

11 such portion to the extent such beneficiary has made

12 transfers of property by gift (directly or indirectly)

13 to such foreign person. For purposes of the preced14 ing sentence, any gift shall not be taken into account

15 to the extent such gift would be excluded from tax16 able gifts under section 2503(b).

17 ‘‘(6) REGULATIONS.—The Secretary shall pre18 scribe such regulations as may be necessary or ap19 propriate to carry out the purposes of this sub20 section, including regulations providing that para21 graph (1) shall not apply in appropriate cases.’’.

22 (2) The last sentence of subsection (c) of sec23 tion 672 of such Code is amended by inserting ‘‘sub24 section (f) and’’ before ‘‘sections 674’’.
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1 (b) CREDIT FOR CERTAIN TAXES.—Paragraph (2) of

2 section 665(d) is amended by adding at the end the follow3 ing new sentence: ‘‘Under rules or regulations prescribed

4 by the Secretary, in the case of any foreign trust of which

5 the settlor or another person would be treated as owner

6 of any portion of the trust under subpart E but for section

7 672(f), the term ‘taxes imposed on the trust’ includes the

8 allocable amount of any income, war profits, and excess

9 profits taxes imposed by any foreign country or possession

10 of the United States on the settlor or such other person

11 in respect of trust gross income.’’.

12 (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

13 THROUGH NOMINEES.—

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

15 end the following new subsection:

16 ‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

17 THROUGH NOMINEES.—For purposes of this part, any

18 amount paid to a United States person which is derived

19 directly or indirectly from a foreign trust of which the

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

21 payment to have been directly paid by the foreign trust

22 to such United States person.’’.

23 (2) Section 665 is amended by striking sub24 section (c).

25 (d) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—Except as provided by para2 graph (2), the amendments made by this section

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

4 Act.

5 (2) EXCEPTION FOR CERTAIN TRUSTS.—The

6 amendments made by this section shall not apply to

7 any trust—

8 (A) which is treated as owned by the

9 grantor or another person under section 676 or

10 677 (other than subsection (a)(3) thereof) of

11 the Internal Revenue Code of 1986, and

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

13 1995.

14 The preceding sentence shall not apply to the por15 tion of any such trust attributable to any transfer to

16 such trust after September 19, 1995.

17 (e) TRANSITIONAL RULE.—If—

18 (1) by reason of the amendments made by this

19 section, any person other than a United States per20 son ceases to be treated as the owner of a portion

21 of a domestic trust, and

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

23 a foreign trust, or the assets of such trust are trans24 ferred to a foreign trust,
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1 no tax shall be imposed by section 1491 of the Internal

2 Revenue Code of 1986 by reason of such trust becoming

3 a foreign trust or the assets of such trust being trans4 ferred to a foreign trust.

5 SEC. 414. INFORMATION REPORTING REGARDING FOREIGN

6 GIFTS.

7 (a) IN GENERAL.—Subpart A of part III of sub8 chapter A of chapter 61 is amended by inserting after sec9 tion 6039E the following new section:

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

11 FOREIGN PERSONS.

12 ‘‘(a) IN GENERAL.—If the value of the aggregate for13 eign gifts received by a United States person (other than

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

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

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

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

18 prescribe) such information as the Secretary may pre19 scribe regarding each foreign gift received during such

20 year.

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

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

23 a person other than a United States person which the re24 cipient treats as a gift or bequest. Such term shall not
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1 include any qualified transfer (within the meaning of sec2 tion 2503(e)(2)).

3 ‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA4 TION.—

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

6 fails to furnish the information required by sub7 section (a) with respect to any foreign gift within

8 the time prescribed therefor (including extensions)—

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

10 such gift shall be determined by the Secretary

11 in the Secretary’s sole discretion from the Sec12 retary’s own knowledge or from such informa13 tion as the Secretary may obtain through testi14 mony or otherwise, and

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

16 (upon notice and demand by the Secretary and

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

18 5 percent of the amount of such foreign gift for

19 each month for which the failure continues (not

20 to exceed 25 percent of such amount in the ag21 gregate).

22 ‘‘(2) REASONABLE CAUSE EXCEPTION.—Para23 graph (1) shall not apply to any failure to report a

24 foreign gift if the United States person shows that
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1 the failure is due to reasonable cause and not due

2 to willful neglect.

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

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

5 $10,000 amount under subsection (a) shall be increased

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

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

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

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

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

11 such regulations as may be necessary or appropriate to

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

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

14 for such subpart is amended by inserting after the item

15 relating to section 6039E the following new item:

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

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

17 this section shall apply to amounts received after the date

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

19 such date.

20 SEC. 415. MODIFICATION OF RULES RELATING TO FOREIGN

21 TRUSTS WHICH ARE NOT GRANTOR TRUSTS.

22 (a) MODIFICATION OF INTEREST CHARGE ON ACCU23 MULATION DISTRIBUTIONS.—Subsection (a) of section
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1 668 (relating to interest charge on accumulation distribu2 tions from foreign trusts) is amended to read as follows:

3 ‘‘(a) GENERAL RULE.—For purposes of the tax de4 termined under section 667(a)—

5 ‘‘(1) INTEREST DETERMINED USING UNDER6 PAYMENT RATES.—The interest charge determined

7 under this section with respect to any distribution is

8 the amount of interest which would be determined

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

10 the period described in paragraph (2) using the

11 rates and the method under section 6621 applicable

12 to underpayments of tax.

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

14 the period described in this paragraph is the period

15 which begins on the date which is the applicable

16 number of years before the date of the distribution

17 and which ends on the date of the distribution.

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

19 purposes of paragraph (2)—

20 ‘‘(A) IN GENERAL.—The applicable num21 ber of years with respect to a distribution is the

22 number determined by dividing—

23 ‘‘(i) the sum of the products described

24 in subparagraph (B) with respect to each

25 undistributed income year, by
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1 ‘‘(ii) the aggregate undistributed net

2 income.

3 The quotient determined under the preceding

4 sentence shall be rounded under procedures

5 prescribed by the Secretary.

6 ‘‘(B) PRODUCT DESCRIBED.—For pur7 poses of subparagraph (A), the product de8 scribed in this subparagraph with respect to

9 any undistributed income year is the product

10 of—

11 ‘‘(i) the undistributed net income for

12 such year, and

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

14 years between such year and the taxable

15 year of the distribution (counting in each

16 case the undistributed income year but not

17 counting the taxable year of the distribu18 tion).

19 ‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur20 poses of this subsection, the term ‘undistributed in21 come year’ means any prior taxable year of the trust

22 for which there is undistributed net income, other

23 than a taxable year during all of which the bene24 ficiary receiving the distribution was not a citizen or

25 resident of the United States.
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1 ‘‘(5) DETERMINATION OF UNDISTRIBUTED NET

2 INCOME.—Notwithstanding section 666, for pur3 poses of this subsection, an accumulation distribu4 tion from the trust shall be treated as reducing pro5 portionately the undistributed net income for undis6 tributed income years.

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

8 portion of the period described in paragraph (2)

9 which occurs before January 1, 1996, shall be deter10 mined—

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

12 and

13 ‘‘(B) without compounding until January

14 1, 1996.’’.

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

16 amended by inserting after paragraph (6) the following

17 new paragraph:

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

19 shall prescribe such regulations as may be necessary

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

21 including regulations to prevent avoidance of such

22 purposes.’’.

23 (c) TREATMENT OF LOANS FROM TRUSTS.—

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

25 definitions applicable to subparts A, B, C, and D)
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1 is amended by adding at the end the following new

2 subsection:

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

4 of subparts B, C, and D—

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

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

7 or marketable securities directly or indirectly to—

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

9 trust who is a United States person, or

10 ‘‘(B) any United States person not de11 scribed in subparagraph (A) who is related to

12 such grantor or beneficiary,

13 the amount of such loan shall be treated as a dis14 tribution by such trust to such grantor or bene15 ficiary (as the case may be).

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

17 purposes of this subsection—

18 ‘‘(A) CASH.—The term ‘cash’ includes for19 eign currencies and cash equivalents.

20 ‘‘(B) RELATED PERSON.—

21 ‘‘(i) IN GENERAL.—A person is relat22 ed to another person if the relationship be23 tween such persons would result in a dis24 allowance of losses under section 267 or

25 707(b). In applying section 267 for pur-
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1 poses of the preceding sentence, section

2 267(c)(4) shall be applied as if the family

3 of an individual includes the spouses of the

4 members of the family.

5 ‘‘(ii) ALLOCATION.—If any person de6 scribed in paragraph (1)(B) is related to

7 more than one person, the grantor or bene8 ficiary to whom the treatment under this

9 subsection applies shall be determined

10 under regulations prescribed by the Sec11 retary.

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

13 term ‘United States person’ does not include

14 any entity exempt from tax under this chapter.

15 ‘‘(D) TRUST NOT TREATED AS SIMPLE

16 TRUST.—Any trust which is treated under this

17 subsection as making a distribution shall be

18 treated as not described in section 651.

19 ‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING

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

21 under paragraph (1), any subsequent transaction be22 tween the trust and the original borrower regarding

23 the principal of the loan (by way of complete or par24 tial repayment, satisfaction, cancellation, discharge,
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1 or otherwise) shall be disregarded for purposes of

2 this title.’’.

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

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

5 643(i),’’ before ‘‘or 1274’’ each place it appears.

6 (d) EFFECTIVE DATES.—

7 (1) INTEREST CHARGE.—The amendment made

8 by subsection (a) shall apply to distributions after

9 the date of the enactment of this Act.

10 (2) ABUSIVE TRANSACTIONS.—The amendment

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

12 of the enactment of this Act.

13 (3) LOANS FROM TRUSTS.—The amendment

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

15 or marketable securities after September 19, 1995.

16 SEC. 416. RESIDENCE OF ESTATES AND TRUSTS, ETC.

17 (a) TREATMENT AS UNITED STATES PERSON.—

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

19 7701(a) is amended by striking subparagraph (D)

20 and by inserting after subparagraph (C) the follow21 ing:

22 ‘‘(D) any estate or trust if—

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

24 is able to exercise primary supervision over
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1 the administration of the estate or trust,

2 and

3 ‘‘(ii) in the case of a trust, one or

4 more United States fiduciaries have the

5 authority to control all substantial deci6 sions of the trust.’’.

7 (2) CONFORMING AMENDMENT.—Paragraph

8 (31) of section 7701(a) is amended to read as fol9 lows:

10 ‘‘(31) FOREIGN ESTATE OR TRUST.—The term

11 ‘foreign estate’ or ‘foreign trust’ means any estate or

12 trust other than an estate or trust described in sec13 tion 7701(a)(30)(D).’’.

14 (3) EFFECTIVE DATE.—The amendments made

15 by this subsection shall apply—

16 (A) to taxable years beginning after De17 cember 31, 1996, or

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

19 trust, to taxable years ending after the date of

20 the enactment of this Act.

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

22 (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN

23 TRUSTS.—

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

25 imposition of tax on transfers to avoid income tax)
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1 is amended by adding at the end the following new

2 flush sentence:

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

4 trust, such trust shall be treated for purposes of this sec5 tion as having transferred, immediately before becoming

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

7 (2) PENALTY.—Section 1494 is amended by

8 adding at the end the following new subsection:

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

10 return required by the Secretary with respect to any trans11 fer described in section 1491 with respect to a trust, the

12 person required to file such return shall be liable for the

13 penalties provided in section 6677 in the same manner as

14 if such failure were a failure to file a return under section

15 6048(a).’’.

16 (3) EFFECTIVE DATE.—The amendments made

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

18 enactment of this Act.

Æ