Union Calendar No. 267

104TH CONGRESS

2D SESSION H. R. 3286

[Report No. 104–542, Parts I and II]

A BILL

To help families defray adoption costs, and to

promote the adoption of minority children.

MAY 3, 1996

Reported from the Committee on Ways and Means with

M

an amendment

AY 3, 1996

Committed to the Committee of the Whole House on the

State of the Union and ordered to be printed
IB

Union Calendar No. 267

104TH CONGRESS

2D SESSION H. R. 3286

[Report No. 104–542, Parts I and II]

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

APRIL 30, 1996

Reported from the Committee on Resources with an amendment

[Omit the part in bold brackets]

APRIL 30, 1996

The Committee on Economic and Educational Opportunities discharged

MAY 3, 1996

Additional sponsors: Mr. BLUTE, Mr. RAMSTAD, Mr. INGLIS of South Carolina, Mr. TRAFICANT, Mr. SMITH of New Jersey, Mr. MCCOLLUM, Mr.

KLINK, Mr. FAWELL, Mr. DORNAN, Mr. BOEHNER, and Mr. HUTCHINSON

MAY 3, 1996

Reported from the Committee on Ways and Means with an amendment
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[Strike out all after the enacting clause and insert the part printed in italic]

MAY 3, 1996

Committed to the Committee of the Whole House on the State of the Union

and ordered to be printed

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:

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.

øTITLE III—CHILD CUSTODY PROCEEDINGS AFFECTED BY THE

INDIAN CHILD WELFARE ACT OF 1978

øSec. 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.

øSec. 302. Membership and child custody proceedings.

øSec. 303. Effective date.¿

TITLE IV—REVENUE OFFSETS

Sec. 400. Amendment of 1986 Code.
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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:

9 ‘‘SEC. 23. ADOPTION EXPENSES.

10 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in11 dividual, there shall be allowed as a credit against the tax

12 imposed by this chapter for the taxable year the amount

13 of the qualified adoption expenses paid or incurred by the

14 taxpayer during such taxable year.

15 ‘‘(b) LIMITATIONS.—

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

17 amount of qualified adoption expenses which may be
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1 taken into account under subsection (a) with respect

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

3 ‘‘(2) INCOME LIMITATION.—The amount allow4 able as a credit under subsection (a) for any taxable

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

6 amount which bears the same ratio to the amount

7 so allowable (determined without regard to this

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

9 ‘‘(A) the amount (if any) by which the tax10 payer’s adjusted gross income (determined

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

12 exceeds $75,000, bears to

13 ‘‘(B) $40,000.

14 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

15 ‘‘(A) IN GENERAL.—No credit shall be al16 lowed under subsection (a) for any expense for

17 which a deduction or credit is allowable under

18 any other provision of this chapter.

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

20 under subsection (a) for any expense to the ex21 tent that funds for such expense are received

22 under any Federal, State, or local program.

23 The preceding sentence shall not apply to ex24 penses for the adoption of a child with special

25 needs.
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1 ‘‘(C) REIMBURSEMENT.—No credit shall

2 be allowed under subsection (a) for any expense

3 to the extent that such expense is reimbursed

4 and the reimbursement is excluded from gross

5 income under section 137.

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

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

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

9 taxable year reduced by the sum of the credits allowable

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

11 shall be carried to the succeeding taxable year and added

12 to the credit allowable under subsection (a) for such tax13 able year. No credit may be carried forward under this

14 subsection to any taxable year following the fifth taxable

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

16 purposes of the preceding sentence, credits shall be treated

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

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

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

20 term ‘qualified adoption expenses’ means reasonable

21 and necessary adoption fees, court costs, attorney

22 fees, and other expenses—

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

24 principal purpose of which is for, the legal
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1 adoption of an eligible child by the taxpayer,

2 and

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

4 State or Federal law or in carrying out any sur5 rogate parenting arrangement.

6 Such term shall include expenses for a foreign adop7 tion only if the child is actually adopted.

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

9 CHILD NOT ELIGIBLE.—The term ‘qualified adoption

10 expenses’ shall not include any expenses in connec11 tion with the adoption by an individual of a child

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

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

14 child’ means any individual—

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

16 time of the adoption, or

17 ‘‘(B) who is physically or mentally incapa18 ble of caring for himself.

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

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

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

22 cannot or should not be returned to the home

23 of his parents, and

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

25 exists with respect to the child a specific factor
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1 or condition (such as his ethnic background,

2 age, or membership in a minority or sibling

3 group, or the presence of factors such as medi4 cal conditions or physical, mental, or emotional

5 handicaps) because of which it is reasonable to

6 conclude that such child cannot be placed with

7 adoptive parents without providing adoption as8 sistance.

9 ‘‘(e) MARRIED COUPLES MUST FILE JOINT RE10 TURNS.—Rules similar to the rules of paragraphs (2), (3),

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

12 section.’’.

13 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM14 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III

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

16 items specifically excluded from gross income) is amended

17 by redesignating section 137 as section 138 and by insert18 ing after section 136 the following new section:

19 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

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

21 does not include amounts paid or expenses incurred by the

22 employer for qualified adoption expenses in connection

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

24 amounts are furnished pursuant to an adoption assistance

25 program.
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1 ‘‘(b) LIMITATIONS.—

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

3 amount excludable from gross income under sub4 section (a) for all taxable years with respect to the

5 adoption of any single child by the taxpayer shall

6 not exceed $5,000.

7 ‘‘(2) INCOME LIMITATION.—The amount ex8 cludable from gross income under subsection (a) for

9 any taxable year shall be reduced (but not below

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

11 the amount so excludable (determined without re12 gard to this paragraph but with regard to paragraph

13 (1)) as—

14 ‘‘(A) the amount (if any) by which the tax15 payer’s adjusted gross income (determined

16 without regard to this section and sections 911,

17 931, and 933) exceeds $75,000, bears to

18 ‘‘(B) $40,000.

19 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For pur20 poses of this section, an adoption assistance program is

21 a plan of an employer—

22 ‘‘(1) under which the employer provides employ23 ees with adoption assistance, and
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1 ‘‘(2) which meets requirements similar to the

2 requirements of paragraphs (2), (3), and (5) of sec3 tion 127(b).

4 An adoption reimbursement program operated under sec5 tion 1052 of title 10, United States Code (relating to

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

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

8 treated as an adoption assistance program for purposes

9 of this section.

10 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For pur11 poses of this section, the term ‘qualified adoption ex12 penses’ has the meaning given such term by section

13 23(d).’’.

14 (c) CONFORMING AMENDMENTS.—

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

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

17 amended by inserting after the item relating to sec18 tion 22 the following new item:

‘‘Sec. 23. Adoption expenses.’’.

19 (2) The table of sections for part III of sub20 chapter B of chapter 1 of such Code is amended by

21 striking the item relating to section 137 and insert22 ing the following:

‘‘Sec. 137. Adoption assistance programs.

‘‘Sec. 138. Cross reference to other Acts.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1996.

4 TITLE II—INTERETHNIC

5 ADOPTION

6 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP7 TION.

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

9 of the Social Security Act (42 U.S.C 671(a)) is amend10 ed—

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

12 (16);

13 (2) by striking the period at the end of para14 graph (17) and inserting ‘‘; and’’; and

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

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

17 that neither the State nor any other entity in the

18 State that receives funds from the Federal Govern19 ment and is involved in adoption or foster care

20 placements may—

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

22 become an adoptive or a foster parent, on the

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

24 person, or of the child, involved; or
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1 ‘‘(B) delay or deny the placement of a

2 child for adoption or into foster care, or other3 wise discriminate in making a placement deci4 sion, on the basis of the race, color, or national

5 origin of the adoptive or foster parent, or the

6 child, involved.’’.

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

8 U.S.C. 674) is amended by adding at the end the follow9 ing:

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

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

12 1123, to have violated section 471(a)(18) during a quarter

13 with respect to any person, then, notwithstanding sub14 section (a) of this section and any regulations promulgated

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

16 amount otherwise payable to the State under this part,

17 for the quarter and for each subsequent quarter before

18 the 1st quarter for which the State program is found, as

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

20 471(a)(18) with respect to any person, by—

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

22 amount, in the case of the 1st such finding with re23 spect to the State;
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1 ‘‘(B) 5 percent of such otherwise payable

2 amount, in the case of the 2nd such finding with re3 spect to the State; or

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

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

6 finding with respect to the State.

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

8 funds under this part and which violates section

9 471(a)(18) during a quarter with respect to any person

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

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

12 ‘‘(3)(A) Any individual who is aggrieved by a viola13 tion of section 471(a)(18) by a State or other entity may

14 bring an action seeking relief from the State or other en15 tity in any United States district court.

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

17 brought more than 2 years after the date the alleged viola18 tion occurred.

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

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

21 (c) CIVIL RIGHTS.—

22 (1) PROHIBITED CONDUCT.—A person or gov23 ernment that is involved in adoption or foster care

24 placements may not—
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1 (A) deny to any individual the opportunity

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

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

4 individual, or of the child, involved; or

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

6 for adoption or into foster care, or otherwise

7 discriminate in making a placement decision, on

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

9 of the adoptive or foster parent, or the child, in10 volved.

11 (2) ENFORCEMENT.—Noncompliance with para12 graph (1) is deemed a violation of title VI of the

13 Civil Rights Act of 1964.

14 (3) NO EFFECT ON THE INDIAN CHILD WEL15 FARE ACT OF 1978.—This subsection shall not be

16 construed to affect the application of the Indian

17 Child Welfare Act of 1978.

18 (d) CONFORMING REPEAL.—Section 553 of the How19 ard M. Metzenbaum Multiethnic Placement Act of 1994

20 (42 U.S.C. 5115a) is repealed.
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1 øTITLE III—CHILD CUSTODY

2 PROCEEDINGS AFFECTED BY

3 THE INDIAN CHILD WELFARE

4 ACT OF 1978

5 øSEC. 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 øTitle 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 ø‘‘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 ø‘‘(1) at least one of the child’s biological par17 ents is of Indian descent; and

18 ø‘‘(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 ø‘‘(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 ø‘‘(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 øSEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEED8 INGS.

9 øTitle 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 ø‘‘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 ø‘‘(b) For the purposes of any child custody proceed17 ing involving an Indian child, membership in an Indian

18 tribe shall be effective from the actual date of admission

19 to membership in the Indian tribe and shall not be given

20 retroactive effect.’’.

21 øSEC. 303. EFFECTIVE DATE.

22 øThe 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.

19 SECTION 1. SHORT TITLE.

20 This Act may be cited as the ‘‘Adoption Promotion and

21 Stability Act of 1996’’.

22 SEC. 2. TABLE OF CONTENTS.

23 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.
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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.

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 subchapter

5 A of chapter 1 of the Internal Revenue Code of 1986 (relat6 ing to nonrefundable personal credits) is amended by insert7 ing after section 22 the following new section:

8 ‘‘SEC. 23. ADOPTION EXPENSES.

9 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an indi10 vidual, there shall be allowed as a credit against the tax
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1 imposed by this chapter for the taxable year the amount

2 of the qualified adoption expenses paid or incurred by the

3 taxpayer during such taxable year.

4 ‘‘(b) LIMITATIONS.—

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

6 amount of qualified adoption expenses which may be

7 taken into account under subsection (a) for all taxable

8 years with respect to the adoption of a child by the

9 taxpayer shall not exceed $5,000.

10 ‘‘(2) INCOME LIMITATION.—The amount allow11 able as a credit under subsection (a) for any taxable

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

13 amount which bears the same ratio to the amount so

14 allowable (determined without regard to this para15 graph but with regard to paragraph (1)) as—

16 ‘‘(A) the amount (if any) by which the tax17 payer’s adjusted gross income (determined with18 out regard to sections 911, 931, and 933) exceeds

19 $75,000, bears to

20 ‘‘(B) $40,000.

21 ‘‘(3) DENIAL OF DOUBLE BENEFIT.—

22 ‘‘(A) IN GENERAL.—No credit shall be al23 lowed under subsection (a) for any expense for

24 which a deduction or credit is allowable under

25 any other provision of this chapter.
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1 ‘‘(B) GRANTS.—No credit shall be allowed

2 under subsection (a) for any expense to the ex3 tent that funds for such expense are received

4 under any Federal, State, or local program. The

5 preceding sentence shall not apply to expenses for

6 the adoption of a child with special needs.

7 ‘‘(C) REIMBURSEMENT.—No credit shall be

8 allowed under subsection (a) for any expense to

9 the extent that such expense is reimbursed and

10 the reimbursement is excluded from gross income

11 under section 137.

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

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

14 exceeds the limitation imposed by section 26(a) for such tax15 able year reduced by the sum of the credits allowable under

16 this subpart (other than this section), such excess shall be

17 carried to the succeeding taxable year and added to the

18 credit allowable under subsection (a) for such taxable year.

19 No credit may be carried forward under this subsection to

20 any taxable year following the fifth taxable year after the

21 taxable year in which the credit arose. For purposes of the

22 preceding sentence, credits shall be treated as used on a

23 first-in first-out basis.

24 ‘‘(d) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) QUALIFIED ADOPTION EXPENSES.—The

2 term ‘qualified adoption expenses’ means reasonable

3 and necessary adoption fees, court costs, attorney fees,

4 and other expenses—

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

6 principal purpose of which is for, the legal adop7 tion of an eligible child by the taxpayer, and

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

9 State or Federal law or in carrying out any sur10 rogate parenting arrangement.

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

12 CHILD NOT ELIGIBLE.—The term ‘qualified adoption

13 expenses’ shall not include any expenses in connection

14 with the adoption by an individual of a child who is

15 the child of such individual’s spouse.

16 ‘‘(3) ELIGIBLE CHILD.—The term ‘eligible child’

17 means any individual—

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

19 time of the adoption, or

20 ‘‘(B) who is physically or mentally incapa21 ble of caring for himself.

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

23 ‘child with special needs’ means any child if—
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1 ‘‘(A) a State has determined that the child

2 cannot or should not be returned to the home of

3 his parents, and

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

5 exists with respect to the child a specific factor

6 or condition (such as his ethnic background, age,

7 or membership in a minority or sibling group,

8 or the presence of factors such as medical condi9 tions or physical, mental, or emotional handi10 caps) because of which it is reasonable to con11 clude that such child cannot be placed with

12 adoptive parents without providing adoption as13 sistance.

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

15 the case of a foreign adoption—

16 ‘‘(1) subsection (a) shall not apply to any quali17 fied adoption expense with respect to such adoption

18 unless such adoption becomes final, and

19 ‘‘(2) any such expense which is paid or incurred

20 before the taxable year in which such adoption be21 comes final shall be taken into account under this sec22 tion as if such expense were paid or incurred during

23 such year.

24 ‘‘(f) MARRIED COUPLES MUST FILE JOINT RE25 TURNS.—Rules similar to the rules of paragraphs (2), (3),
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1 and (4) of section 21(e) shall apply for purposes of this sec2 tion.

3 ‘‘(g) BASIS ADJUSTMENTS.—For purposes of this sub4 title, if a credit is allowed under this section for any ex5 penditure with respect to any property, the increase in the

6 basis of such property which would (but for this subsection)

7 result from such expenditure shall be reduced by the amount

8 of the credit so allowed.

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

10 such regulations as may be appropriate to carry out this

11 section and section 137, including regulations which treat

12 unmarried individuals who pay or incur qualified adoption

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

14 purposes of applying the dollar limitation in subsection

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

16 (b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM17 PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III of

18 subchapter B of chapter 1 of such Code (relating to items

19 specifically excluded from gross income) is amended by re20 designating section 137 as section 138 and by inserting

21 after section 136 the following new section:

22 ‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

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

24 not include amounts paid or expenses incurred by the em25 ployer for qualified adoption expenses in connection with
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1 the adoption of a child by an employee if such amounts

2 are furnished pursuant to an adoption assistance program.

3 ‘‘(b) LIMITATIONS.—

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

5 amount excludable from gross income under sub6 section (a) for all taxable years with respect to the

7 adoption of a child by the taxpayer shall not exceed

8 $5,000.

9 ‘‘(2) INCOME LIMITATION.—The amount exclud10 able from gross income under subsection (a) for any

11 taxable year shall be reduced (but not below zero) by

12 an amount which bears the same ratio to the amount

13 so excludable (determined without regard to this

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

15 ‘‘(A) the amount (if any) by which the tax16 payer’s adjusted gross income exceeds $75,000,

17 bears to

18 ‘‘(B) $40,000.

19 ‘‘(3) DETERMINATION OF ADJUSTED GROSS IN20 COME.—For purposes of paragraph (2), adjusted gross

21 income shall be determined—

22 ‘‘(A) without regard to this section and sec23 tions 911, 931, and 933, and

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

25 135, 219, and 469.
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1 ‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For purposes

2 of this section, an adoption assistance program is a plan

3 of an employer—

4 ‘‘(1) under which the employer provides employ5 ees with adoption assistance, and

6 ‘‘(2) which meets requirements similar to the re7 quirements of paragraphs (2), (3), and (5) of section

8 127(b).

9 An adoption reimbursement program operated under sec10 tion 1052 of title 10, United States Code (relating to armed

11 forces) or section 514 of title 14, United States Code (relat12 ing to members of the Coast Guard) shall be treated as an

13 adoption assistance program for purposes of this section.

14 ‘‘(d) QUALIFIED ADOPTION EXPENSES.—For purposes

15 of this section, the term ‘qualified adoption expenses’ has

16 the meaning given such term by section 23(d).

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

18 rules of subsections (e) and (g) of section 23 shall apply

19 for purposes of this section.’’.

20 (c) CONFORMING AMENDMENTS.—

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

22 such Code are each amended by inserting ‘‘137,’’ be23 fore ‘‘911’’.
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1 (2) Clause (i) of section 219(g)(3)(A) of such

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

3 911’’.

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

5 Code is amended to read as follows:

6 ‘‘(ii) the amounts excludable from gross

7 income under sections 135 and 137,’’.

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

9 is amended by striking ‘‘and’’ at the end of para10 graph (24), by striking the period at the end of para11 graph (25) and inserting ‘‘, and’’, and by adding at

12 the end the following new paragraph:

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

14 and 137(e).’’

15 (5) The table of sections for subpart A of part IV

16 of subchapter A of chapter 1 of such Code is amended

17 by inserting after the item relating to section 22 the

18 following new item:

‘‘Sec. 23. Adoption expenses.’’.

19 (6) The table of sections for part III of sub20 chapter B of chapter 1 of such Code is amended by

21 striking the item relating to section 137 and inserting

22 the following:

‘‘Sec. 137. Adoption assistance programs.

‘‘Sec. 138. Cross reference to other Acts.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to taxable years beginning after Decem3 ber 31, 1996.

4 TITLE II—INTERETHNIC

5 ADOPTION

6 SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP7 TION.

8 (a) STATE PLAN REQUIREMENTS.—Section 471(a) of

9 the Social Security Act (42 U.S.C 671(a)) is amended—

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

11 (16);

12 (2) by striking the period at the end of para13 graph (17) and inserting ‘‘; and’’; and

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

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

16 that neither the State nor any other entity in the

17 State that receives funds from the Federal Govern18 ment and is involved in adoption or foster care place19 ments may—

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

21 become an adoptive or a foster parent, on the

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

23 person, or of the child, involved; or

24 ‘‘(B) delay or deny the placement of a child

25 for adoption or into foster care, on the basis of
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1 the race, color, or national origin of the adoptive

2 or foster parent, or the child, involved.’’.

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

4 U.S.C. 674) is amended by adding at the end the following:

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

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

7 1123, to have violated section 471(a)(18) during a quarter

8 with respect to any person, then, notwithstanding sub9 section (a) of this section and any regulations promulgated

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

11 amount otherwise payable to the State under this part, for

12 the quarter and for each subsequent quarter before the 1st

13 quarter for which the State program is found, as a result

14 of such a review, not to have violated section 471(a)(18)

15 with respect to any person, by—

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

17 amount, in the case of the 1st such finding with re18 spect to the State;

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

20 amount, in the case of the 2nd such finding with re21 spect to the State; or

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

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

24 finding with respect to the State.
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1 ‘‘(2) Any other entity which is in a State that receives

2 funds under this part and which violates section 471(a)(18)

3 during a quarter with respect to any person shall remit

4 to the Secretary all funds that were paid by the State to

5 the entity during the quarter from such funds.

6 ‘‘(3)(A) Any individual who is aggrieved by a viola7 tion of section 471(a)(18) by a State or other entity may

8 bring an action seeking relief from the State or other entity

9 in any United States district court.

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

11 brought more than 2 years after the date the alleged viola12 tion occurred.

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

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

15 (c) CIVIL RIGHTS.—

16 (1) PROHIBITED CONDUCT.—A person or govern17 ment that is involved in adoption or foster care place18 ments may not—

19 (A) deny to any individual the opportunity

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

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

22 individual, or of the child, involved; or

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

24 for adoption or into foster care, on the basis of
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1 the race, color, or national origin of the adoptive

2 or foster parent, or the child, involved.

3 (2) ENFORCEMENT.—Noncompliance with para4 graph (1) is deemed a violation of title VI of the Civil

5 Rights Act of 1964.

6 (3) NO EFFECT ON THE INDIAN CHILD WELFARE

7 ACT OF 1978.—This subsection shall not be construed

8 to affect the application of the Indian Child Welfare

9 Act of 1978.

10 (d) CONFORMING REPEAL.—Section 553 of the How11 ard M. Metzenbaum Multiethnic Placement Act of 1994 (42

12 U.S.C. 5115a) is repealed.

13 TITLE III—CHILD CUSTODY PRO14 CEEDINGS AFFECTED BY THE

15 INDIAN CHILD WELFARE ACT

16 OF 1978

17 SEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WEL18 FARE ACT OF 1978 TO CHILD CUSTODY PRO19 CEEDINGS INVOLVING A CHILD WHOSE PAR20 ENTS DO NOT MAINTAIN AFFILIATION WITH

21 THEIR INDIAN TRIBE.

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

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

24 following:
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1 ‘‘SEC. 114. (a) This title does not apply to any child

2 custody proceeding involving a child who does not reside

3 or is not domiciled within a reservation unless—

4 ‘‘(1) at least one of the child’s biological parents

5 is of Indian descent; and

6 ‘‘(2) at least one of the child’s biological parents

7 maintains significant social, cultural, or political af8 filiation with the Indian tribe of which either parent

9 is a member.

10 ‘‘(b) The factual determination as to whether a biologi11 cal parent maintains significant social, cultural, or politi12 cal affiliation with the Indian tribe of which either parent

13 is a member shall be based on such affiliation as of the

14 time of the child custody proceeding.

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

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

17 shall not be the basis for determining jurisdiction over any

18 child custody proceeding involving the child.’’.

19 SEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEED20 INGS.

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

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

23 is further amended by adding at the end the following:

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

25 years before becoming a member of an Indian tribe may
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1 become a member of an Indian tribe only upon the person’s

2 written consent.

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

4 involving an Indian child, membership in an Indian tribe

5 shall be effective from the actual date of admission to mem6 bership in the Indian tribe and shall not be given retro7 active effect.’’.

8 SEC. 303. EFFECTIVE DATE.

9 The amendments made by this title shall take effect

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

11 with respect to any child custody proceeding in which a

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

13 TITLE IV—REVENUE OFFSETS

14 SEC. 400. AMENDMENT OF 1986 CODE.

15 Except as otherwise expressly provided, whenever in

16 this title an amendment or repeal is expressed in terms of

17 an amendment to, or repeal of, a section or other provision,

18 the reference shall be considered to be made to a section or

19 other provision of the Internal Revenue Code of 1986.
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1 Subtitle A—Exclusion for Energy

2 Conservation Subsidies Limited

3 to Subsidies With Respect to

4 Dwelling Units

5 SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUB6 SIDIES LIMITED TO SUBSIDIES WITH RE7 SPECT TO DWELLING UNITS.

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

9 (defining energy conservation measure) is amended by

10 striking ‘‘energy demand—’’ and all that follows and in11 serting ‘‘energy demand with respect to a dwelling unit.’’

12 (b) CONFORMING AMENDMENTS.—

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

14 read as follows:

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

16 value of any subsidy provided (directly or indirectly) by

17 a public utility to a customer for the purchase or installa18 tion of any energy conservation measure.’’

19 (2) Paragraph (2) of section 136(c) is amend20 ed—

21 (A) by striking subparagraph (A) and by

22 redesignating subparagraphs (B) and (C) as sub23 paragraphs (A) and (B), respectively, and

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

25 the paragraph heading.
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1 (c) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to amounts received after December 31,

3 1996, unless received pursuant to a written binding con4 tract in effect on September 13, 1995, and at all times there5 after.

6 Subtitle B—Foreign Trust Tax

7 Compliance

8 SEC. 411. IMPROVED INFORMATION REPORTING ON FOR9 EIGN TRUSTS.

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

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

12 ‘‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOR13 EIGN TRUSTS.

14 ‘‘(a) NOTICE OF CERTAIN EVENTS.—

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

16 (or such later day as the Secretary may prescribe)

17 after any reportable event, the responsible party shall

18 provide written notice of such event to the Secretary

19 in accordance with paragraph (2).

20 ‘‘(2) CONTENTS OF NOTICE.—The notice required

21 by paragraph (1) shall contain such information as

22 the Secretary may prescribe, including—

23 ‘‘(A) the amount of money or other property

24 (if any) transferred to the trust in connection

25 with the reportable event, and
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1 ‘‘(B) the identity of the trust and of each

2 trustee and beneficiary (or class of beneficiaries)

3 of the trust.

4 ‘‘(3) REPORTABLE EVENT.—For purposes of this

5 subsection—

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

7 event’ means—

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

9 by a United States person,

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

11 property (directly or indirectly) to a foreign

12 trust by a United States person, including

13 a transfer by reason of death, and

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

15 of the United States if—

16 ‘‘(I) the decedent was treated as

17 the owner of any portion of a foreign

18 trust under the rules of subpart E of

19 part I of subchapter J of chapter 1, or

20 ‘‘(II) any portion of a foreign

21 trust was included in the gross estate

22 of the decedent.

23 ‘‘(B) EXCEPTIONS.—

24 ‘‘(i) FAIR MARKET VALUE SALES.—

25 Subparagraph (A)(ii) shall not apply to
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1 any transfer of property to a trust in ex2 change for consideration of at least the fair

3 market value of the transferred property.

4 For purposes of the preceding sentence, con5 sideration other than cash shall be taken

6 into account at its fair market value and

7 the rules of section 679(a)(3) shall apply.

8 ‘‘(ii) DEFERRED COMPENSATION AND

9 CHARITABLE TRUSTS.—Subparagraph (A)

10 shall not apply with respect to a trust

11 which is—

12 ‘‘(I) described in section 402(b),

13 404(a)(4), or 404A, or

14 ‘‘(II) determined by the Secretary

15 to be described in section 501(c)(3).

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

17 subsection, the term ‘responsible party’ means—

18 ‘‘(A) the grantor in the case of the creation

19 of an inter vivos trust,

20 ‘‘(B) the transferor in the case of a report21 able event described in paragraph (3)(A)(ii)

22 other than a transfer by reason of death, and

23 ‘‘(C) the executor of the decedent’s estate in

24 any other case.

25 ‘‘(b) UNITED STATES GRANTOR OF FOREIGN TRUST.—
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1 ‘‘(1) IN GENERAL.—If, at any time during any

2 taxable year of a United States person, such person

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

4 trust under the rules of subpart E of part I of sub5 chapter J of chapter 1, such person shall be respon6 sible to ensure that—

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

8 year which sets forth a full and complete ac9 counting of all trust activities and operations for

10 the year, the name of the United States agent for

11 such trust, and such other information as the

12 Secretary may prescribe, and

13 ‘‘(B) such trust furnishes such information

14 as the Secretary may prescribe to each United

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

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

17 (directly or indirectly) any distribution from the

18 trust.

19 ‘‘(2) TRUSTS NOT HAVING UNITED STATES

20 AGENT.—

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

22 paragraph apply to any foreign trust, the deter23 mination of amounts required to be taken into

24 account with respect to such trust by a United

25 States person under the rules of subpart E of
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1 part I of subchapter J of chapter 1 shall be de2 termined by the Secretary.

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

4 The rules of this paragraph shall apply to any

5 foreign trust to which paragraph (1) applies un6 less such trust agrees (in such manner, subject to

7 such conditions, and at such time as the Sec8 retary shall prescribe) to authorize a United

9 States person to act as such trust’s limited agent

10 solely for purposes of applying sections 7602,

11 7603, and 7604 with respect to—

12 ‘‘(i) any request by the Secretary to ex13 amine records or produce testimony related

14 to the proper treatment of amounts required

15 to be taken into account under the rules re16 ferred to in subparagraph (A), or

17 ‘‘(ii) any summons by the Secretary

18 for such records or testimony.

19 The appearance of persons or production of

20 records by reason of a United States person

21 being such an agent shall not subject such per22 sons or records to legal process for any purpose

23 other than determining the correct treatment

24 under this title of the amounts required to be

25 taken into account under the rules referred to in
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1 subparagraph (A). A foreign trust which ap2 points an agent described in this subparagraph

3 shall not be considered to have an office or a per4 manent establishment in the United States, or to

5 be engaged in a trade or business in the United

6 States, solely because of the activities of such

7 agent pursuant to this subsection.

8 ‘‘(C) OTHER RULES TO APPLY.—Rules simi9 lar to the rules of paragraphs (2) and (4) of sec10 tion 6038A(e) shall apply for purposes of this

11 paragraph.

12 ‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES

13 OF FOREIGN TRUSTS.—

14 ‘‘(1) IN GENERAL.—If any United States person

15 receives (directly or indirectly) during any taxable

16 year of such person any distribution from a foreign

17 trust, such person shall make a return with respect

18 to such trust for such year which includes—

19 ‘‘(A) the name of such trust,

20 ‘‘(B) the aggregate amount of the distribu21 tions so received from such trust during such

22 taxable year, and

23 ‘‘(C) such other information as the Sec24 retary may prescribe.
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1 ‘‘(2) INCLUSION IN INCOME IF RECORDS NOT

2 PROVIDED.—

3 ‘‘(A) IN GENERAL.—If adequate records are

4 not provided to the Secretary to determine the

5 proper treatment of any distribution from a for6 eign trust, such distribution shall be treated as

7 an accumulation distribution includible in the

8 gross income of the distributee under chapter 1.

9 To the extent provided in regulations, the preced10 ing sentence shall not apply if the foreign trust

11 elects to be subject to rules similar to the rules

12 of subsection (b)(2)(B).

13 ‘‘(B) APPLICATION OF ACCUMULATION DIS14 TRIBUTION RULES.—For purposes of applying

15 section 668 in a case to which subparagraph (A)

16 applies, the applicable number of years for purposes of section 668(a) shall be 1 17 ⁄2 of the number

18 of years the trust has been in existence.

19 ‘‘(d) SPECIAL RULES.—

20 ‘‘(1) DETERMINATION OF WHETHER UNITED

21 STATES PERSON MAKES TRANSFER OR RECEIVES DIS22 TRIBUTION.—For purposes of this section, in deter23 mining whether a United States person makes a

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

25 trust, the fact that a portion of such trust is treated
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1 as owned by another person under the rules of sub2 part E of part I of subchapter J of chapter 1 shall

3 be disregarded.

4 ‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI5 TIES.—To the extent provided in regulations, a trust

6 which is a United States person shall be treated as

7 a foreign trust for purposes of this section and section

8 6677 if such trust has substantial activities, or holds

9 substantial property, outside the United States.

10 ‘‘(3) TIME AND MANNER OF FILING INFORMA11 TION.—Any notice or return required under this sec12 tion shall be made at such time and in such manner

13 as the Secretary shall prescribe.

14 ‘‘(4) MODIFICATION OF RETURN REQUIRE15 MENTS.—The Secretary is authorized to suspend or

16 modify any requirement of this section if the Sec17 retary determines that the United States has no sig18 nificant tax interest in obtaining the required infor19 mation.’’.

20 (b) INCREASED PENALTIES.—Section 6677 (relating to

21 failure to file information returns with respect to certain

22 foreign trusts) is amended to read as follows:
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1 ‘‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT

2 TO CERTAIN FOREIGN TRUSTS.

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

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

5 to be filed by section 6048—

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

7 in such section, or

8 ‘‘(2) does not include all the information re9 quired pursuant to such section or includes incorrect

10 information,

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

12 a penalty equal to 35 percent of the gross reportable

13 amount. If any failure described in the preceding sentence

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

15 the Secretary mails notice of such failure to the person re16 quired to pay such penalty, such person shall pay a penalty

17 (in addition to the amount determined under the preceding

18 sentence) of $10,000 for each 30-day period (or fraction

19 thereof) during which such failure continues after the expi20 ration of such 90-day period. In no event shall the penalty

21 under this subsection with respect to any failure exceed the

22 gross reportable amount.

23 ‘‘(b) SPECIAL RULES FOR RETURNS UNDER SECTION

24 6048(b).—In the case of a return required under section

25 6048(b)—
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1 ‘‘(1) the United States person referred to in such

2 section shall be liable for the penalty imposed by sub3 section (a), and

4 ‘‘(2) subsection (a) shall be applied by substitut5 ing ‘5 percent’ for ‘35 percent’.

6 ‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes of

7 subsection (a), the term ‘gross reportable amount’ means—

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

9 the event (determined as of the date of the event) in

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

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

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

13 United States person in the case of a failure relating

14 to section 6048(b)(1), and

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

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

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

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

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

20 neglect. The fact that a foreign jurisdiction would impose

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

22 person) for disclosing the required information is not rea23 sonable cause.

24 ‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—Sub25 chapter B of chapter 63 (relating to deficiency procedures
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1 for income, estate, gift, and certain excise taxes) shall not

2 apply in respect of the assessment or collection of any pen3 alty imposed by subsection (a).’’.

4 (c) CONFORMING AMENDMENTS.—

5 (1) Paragraph (2) of section 6724(d) is amended

6 by striking ‘‘or’’ at the end of subparagraph (S), by

7 striking the period at the end of subparagraph (T)

8 and inserting ‘‘, or’’, and by inserting after subpara9 graph (T) the following new subparagraph:

10 ‘‘(U) section 6048(b)(1)(B) (relating to for11 eign trust reporting requirements).’’.

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

13 III of subchapter A of chapter 61 is amended by strik14 ing the item relating to section 6048 and inserting

15 the following new item:

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

16 (3) The table of sections for part I of subchapter

17 B of chapter 68 is amended by striking the item relat18 ing to section 6677 and inserting the following new

19 item:

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

20 (d) EFFECTIVE DATES.—

21 (1) REPORTABLE EVENTS.—To the extent related

22 to subsection (a) of section 6048 of the Internal Reve23 nue Code of 1986, as amended by this section, the
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1 amendments made by this section shall apply to re2 portable events (as defined in such section 6048) oc3 curring after the date of the enactment of this Act.

4 (2) GRANTOR TRUST REPORTING.—To the extent

5 related to subsection (b) of such section 6048, the

6 amendments made by this section shall apply to tax7 able years of United States persons beginning after

8 December 31, 1995.

9 (3) REPORTING BY UNITED STATES BENE10 FICIARIES.—To the extent related to subsection (c) of

11 such section 6048, the amendments made by this sec12 tion shall apply to distributions received after the

13 date of the enactment of this Act.

14 SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE

15 RETURN RELATING TO TRANSFERS TO FOR16 EIGN ENTITIES.

17 (a) IN GENERAL.—Section 1494 is amended by adding

18 at the end the following new subsection:

19 ‘‘(c) PENALTY.—In the case of any failure to file a re20 turn required by the Secretary with respect to any transfer

21 described in section 1491, the person required to file such

22 return shall be liable for the penalties provided in section

23 6677 in the same manner as if such failure were a failure

24 to file a notice under section 6048(a).’’.
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1 (b) EFFECTIVE DATE.—The amendment made by sub2 section (a) shall apply to transfers after the date of the en3 actment of this Act.

4 SEC. 413. MODIFICATIONS OF RULES RELATING TO FOR5 EIGN TRUSTS HAVING ONE OR MORE UNITED

6 STATES BENEFICIARIES.

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

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

9 by striking subparagraph (B) and inserting the fol10 lowing:

11 ‘‘(B) TRANSFERS AT FAIR MARKET

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

13 in exchange for consideration of at least the fair

14 market value of the transferred property. For

15 purposes of the preceding sentence, consideration

16 other than cash shall be taken into account at its

17 fair market value.’’.

18 (2) Subsection (a) of section 679 (relating to for19 eign trusts having one or more United States bene20 ficiaries) is amended by adding at the end the follow21 ing new paragraph:

22 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO AC23 COUNT UNDER FAIR MARKET VALUE EXCEPTION.—

24 ‘‘(A) IN GENERAL.—In determining whether

25 paragraph (2)(B) applies to any transfer by a
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1 person described in clause (ii) or (iii) of sub2 paragraph (C), there shall not be taken into ac3 count—

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

5 any obligation of a person described in sub6 paragraph (C), and

7 ‘‘(ii) to the extent provided in regula8 tions, any obligation which is guaranteed

9 by a person described in subparagraph (C).

10 ‘‘(B) TREATMENT OF PRINCIPAL PAYMENTS

11 ON OBLIGATION.—Principal payments by the

12 trust on any obligation referred to in subpara13 graph (A) shall be taken into account on and

14 after the date of the payment in determining the

15 portion of the trust attributable to the property

16 transferred.

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

18 described in this subparagraph are—

19 ‘‘(i) the trust,

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

21 trust, and

22 ‘‘(iii) any person who is related (with23 in the meaning of section 643(i)(2)(B)) to

24 any grantor or beneficiary of the trust.’’.
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1 (b) EXEMPTION OF TRANSFERS TO CHARITABLE

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

3 striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘section

4 6048(a)(3)(B)(ii)’’.

5 (c) OTHER MODIFICATIONS.—Subsection (a) of section

6 679 is amended by adding at the end the following new

7 paragraphs:

8 ‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN

9 GRANTOR WHO LATER BECOMES A UNITED STATES

10 PERSON.—

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

12 individual has a residency starting date within

13 5 years after directly or indirectly transferring

14 property to a foreign trust, this section and sec15 tion 6048 shall be applied as if such individual

16 transferred to such trust on the residency start17 ing date an amount equal to the portion of such

18 trust attributable to the property transferred by

19 such individual to such trust in such transfer.

20 ‘‘(B) TREATMENT OF UNDISTRIBUTED IN21 COME.—For purposes of this section, undistrib22 uted net income for periods before such individ23 ual’s residency starting date shall be taken into

24 account in determining the portion of the trust

25 which is attributable to property transferred by
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1 such individual to such trust but shall not other2 wise be taken into account.

3 ‘‘(C) RESIDENCY STARTING DATE.—For

4 purposes of this paragraph, an individual’s resi5 dency starting date is the residency starting date

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

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

8 ‘‘(A) an individual who is a citizen or resi9 dent of the United States transferred property to

10 a trust which was not a foreign trust, and

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

12 while such individual is alive,

13 then this section and section 6048 shall be applied as

14 if such individual transferred to such trust on the

15 date such trust becomes a foreign trust an amount

16 equal to the portion of such trust attributable to the

17 property previously transferred by such individual to

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

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

20 (d) MODIFICATIONS RELATING TO WHETHER TRUST

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

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

23 new paragraph:

24 ‘‘(3) CERTAIN UNITED STATES BENEFICIARIES

25 DISREGARDED.—A beneficiary shall not be treated as
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1 a United States person in applying this section with

2 respect to any transfer of property to foreign trust if

3 such beneficiary first became a United States person

4 more than 5 years after the date of such transfer.’’.

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

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

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

8 such corporation is a controlled foreign corpora9 tion (as defined in section 957(a)),’’.

10 (f) REGULATIONS.—Section 679 is amended by adding

11 at the end the following new subsection:

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

13 such regulations as may be necessary or appropriate to

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

15 (g) EFFECTIVE DATE.—The amendments made by this

16 section shall apply to transfers of property after February

17 6, 1995.

18 SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWN19 ERS UNDER GRANTOR TRUST RULES.

20 (a) GENERAL RULE.—

21 (1) Subsection (f) of section 672 (relating to spe22 cial rule where grantor is foreign person) is amended

23 to read as follows:

24 ‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER25 SHIP.—
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1 ‘‘(1) IN GENERAL.—Notwithstanding any other

2 provision of this subpart, this subpart shall apply

3 only to the extent such application results in an

4 amount (if any) being currently taken into account

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

6 chapter in computing the income of a citizen or resi7 dent of the United States or a domestic corporation.

8 ‘‘(2) EXCEPTIONS.—

9 ‘‘(A) CERTAIN REVOCABLE AND IRREV10 OCABLE TRUSTS.—Paragraph (1) shall not

11 apply to any portion of a trust if—

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

13 the grantor title to the trust property to

14 which such portion is attributable is exer15 cisable solely by the grantor without the ap16 proval or consent of any other person or

17 with the consent of a related or subordinate

18 party who is subservient to the grantor, or

19 ‘‘(ii) the only amounts distributable

20 from such portion (whether income or cor21 pus) during the lifetime of the grantor are

22 amounts distributable to the grantor or the

23 spouse of the grantor.

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

25 provided in regulations, paragraph (1) shall not
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1 apply to any portion of a trust distributions

2 from which are taxable as compensation for serv3 ices rendered.

4 ‘‘(3) SPECIAL RULES.—Except as otherwise pro5 vided in regulations prescribed by the Secretary—

6 ‘‘(A) a controlled foreign corporation (as de7 fined in section 957) shall be treated as a domes8 tic corporation for purposes of paragraph (1),

9 and

10 ‘‘(B) paragraph (1) shall not apply for pur11 poses 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 portion

24 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 such

11 gift would be excluded from taxable gifts under section

12 2503(b).

13 ‘‘(6) REGULATIONS.—The Secretary shall pre14 scribe such regulations as may be necessary or appro15 priate to carry out the purposes of this subsection, in16 cluding regulations providing that paragraph (1)

17 shall not apply in appropriate cases.’’.

18 (2) The last sentence of subsection (c) of section

19 672 of such Code is amended by inserting ‘‘subsection

20 (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
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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 the

7 settlor or such other person in respect of trust in8 come.’’.

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 on

18 the settlor or such other person in respect of trust in19 come.’’.

20 (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

21 THROUGH NOMINEES.—

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

23 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 pay4 ment to have been directly paid by the foreign trust to such

5 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 shall

11 take effect on the date of the enactment of this Act.

12 (2) EXCEPTION FOR CERTAIN TRUSTS.—The

13 amendments made by this section shall not apply to

14 any trust—

15 (A) which is treated as owned by the grant16 or under section 676 or 677 (other than sub17 section (a)(3) thereof) of the Internal Revenue

18 Code of 1986, and

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

20 1995.

21 The preceding sentence shall not apply to the portion

22 of any such trust attributable to any transfer to such

23 trust after September 19, 1995.

24 (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 person

3 ceases to be treated as the owner of a portion of a do4 mestic 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 Rev9 enue Code of 1986 by reason of such trust becoming a for10 eign trust or the assets of such trust being transferred to

11 a foreign trust.

12 SEC. 415. INFORMATION REPORTING REGARDING FOREIGN

13 GIFTS.

14 (a) IN GENERAL.—Subpart A of part III of subchapter

15 A of chapter 61 is amended by inserting after section 6039E

16 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 ex23 ceeds $10,000, such United States person shall furnish (at

24 such time and in such manner as the Secretary shall pre-
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1 scribe) such information as the Secretary may prescribe re2 garding each foreign gift received during such year.

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

4 term ‘foreign gift’ means any amount received from a per5 son other than a United States person which the recipient

6 treats as a gift or bequest. Such term shall not include any

7 qualified transfer (within the meaning of section

8 2503(e)(2)) or any distribution properly disclosed in a re9 turn under section 6048(c).

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

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

12 fails to furnish the information required by subsection

13 (a) with respect to any foreign gift within the time

14 prescribed therefor (including extensions)—

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

16 such gift shall be determined by the Secretary,

17 and

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

19 (upon notice and demand by the Secretary and

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

21 5 percent of the amount of such foreign gift for

22 each month for which the failure continues (not

23 to exceed 25 percent of such amount in the aggre24 gate).
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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 the

4 failure is due to reasonable cause and not due to will5 ful 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 by

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

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

11 1(f)(3), except that subparagraph (B) thereof shall be ap12 plied 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 for

17 such subpart is amended by inserting after the item relating

18 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 this

20 section shall apply to amounts received after the date of

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

22 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 ACCUMU4 LATION DISTRIBUTIONS.—Subsection (a) of section 668 (re5 lating to interest charge on accumulation distributions from

6 foreign trusts) is amended to read as follows:

7 ‘‘(a) GENERAL RULE.—For purposes of the tax deter8 mined under section 667(a)—

9 ‘‘(1) INTEREST DETERMINED USING UNDERPAY10 MENT RATES.—The interest charge determined under

11 this section with respect to any distribution is the

12 amount of interest which would be determined on the

13 partial tax computed under section 667(b) for the pe14 riod described in paragraph (2) using the rates and

15 the method under section 6621 applicable to under16 payments 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 num20 ber of years before the date of the distribution and

21 which ends on the date of the distribution.

22 ‘‘(3) APPLICABLE NUMBER OF YEARS.—For pur23 poses of paragraph (2)—

24 ‘‘(A) IN GENERAL.—The applicable number

25 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 pre8 scribed by the Secretary.

9 ‘‘(B) PRODUCT DESCRIBED.—For purposes

10 of subparagraph (A), the product described in

11 this subparagraph with respect to any undistrib12 uted income year is the product of—

13 ‘‘(i) the undistributed net income for

14 such year, and

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

16 years between such year and the taxable

17 year of the distribution (counting in each

18 case the undistributed income year but not

19 counting the taxable year of the distribu20 tion).

21 ‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur22 poses of this subsection, the term ‘undistributed in23 come year’ means any prior taxable year of the trust

24 for which there is undistributed net income, other

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

2 resident of the United States.

3 ‘‘(5) DETERMINATION OF UNDISTRIBUTED NET

4 INCOME.—Notwithstanding section 666, for purposes

5 of this subsection, an accumulation distribution from

6 the trust shall be treated as reducing proportionately

7 the undistributed net income for undistributed income

8 years.

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

10 portion of the period described in paragraph (2)

11 which occurs before January 1, 1996, shall be deter12 mined—

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

14 and

15 ‘‘(B) without compounding until January

16 1, 1996.’’.

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

18 amended by inserting after paragraph (6) the following new

19 paragraph:

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

21 shall prescribe such regulations as may be necessary

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

23 including regulations to prevent avoidance of such

24 purposes.’’.

25 (c) TREATMENT OF LOANS FROM TRUSTS.—
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1 (1) IN GENERAL.—Section 643 (relating to defi2 nitions applicable to subparts A, B, C, and D) is

3 amended by adding at the end the following new sub4 section:

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

6 subparts B, C, and D—

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

8 regulations, if a foreign trust makes a loan of cash or

9 marketable securities directly or indirectly to—

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

11 trust who is a United States person, or

12 ‘‘(B) any United States person not de13 scribed in subparagraph (A) who is related to

14 such grantor or beneficiary,

15 the amount of such loan shall be treated as a distribu16 tion by such trust to such grantor or beneficiary (as

17 the case may be).

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

19 purposes of this subsection—

20 ‘‘(A) CASH.—The term ‘cash’ includes for21 eign currencies and cash equivalents.

22 ‘‘(B) RELATED PERSON.—

23 ‘‘(i) IN GENERAL.—A person is related

24 to another person if the relationship between

25 such persons would result in a disallowance
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1 of losses under section 267 or 707(b). In ap2 plying section 267 for purposes of the pre3 ceding sentence, section 267(c)(4) shall be

4 applied as if the family of an individual

5 includes the spouses of the members of the

6 family.

7 ‘‘(ii) ALLOCATION.—If any person de8 scribed in paragraph (1)(B) is related to

9 more than one person, the grantor or bene10 ficiary to whom the treatment under this

11 subsection applies shall be determined under

12 regulations prescribed by the Secretary.

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

14 term ‘United States person’ does not include any

15 entity exempt from tax under this chapter.

16 ‘‘(D) TRUST NOT TREATED AS SIMPLE

17 TRUST.—Any trust which is treated under this

18 subsection as making a distribution shall be

19 treated as not described in section 651.

20 ‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING

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

22 under paragraph (1), any subsequent transaction be23 tween the trust and the original borrower regarding

24 the principal of the loan (by way of complete or par25 tial repayment, satisfaction, cancellation, discharge,
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1 or otherwise) shall be disregarded for purposes of this

2 title.’’.

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

4 section 7872(f) is amended by inserting ‘‘, 643(i),’’ be5 fore ‘‘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 the

9 date of the enactment of this Act.

10 (2) ABUSIVE TRANSACTIONS.—The amendment

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

12 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 made after September 19,

16 1995.

17 SEC. 417. RESIDENCE OF TRUSTS, ETC.

18 (a) TREATMENT AS UNITED STATES PERSON.—

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

20 7701(a) is amended by striking ‘‘and’’ at the end of

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

22 and by inserting the following new subparagraphs:

23 ‘‘(D) any estate (other than a foreign estate,

24 within the meaning of paragraph (31)), and

25 ‘‘(E) any trust if—
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1 ‘‘(i) a court within the United States

2 is able to exercise primary supervision over

3 the administration of the trust, and

4 ‘‘(ii) one or more United States fidu5 ciaries have the authority to control all sub6 stantial decisions of the trust.’’.

7 (2) CONFORMING AMENDMENT.—Paragraph (31)

8 of section 7701(a) is amended to read as follows:

9 ‘‘(31) FOREIGN ESTATE OR TRUST.—

10 ‘‘(A) FOREIGN ESTATE.—The term ‘foreign

11 estate’ means an estate the income of which, from

12 sources without the United States which is not

13 effectively connected with the conduct of a trade

14 or business within the United States, is not in15 cludible in gross income under subtitle A.

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

17 trust’ means any trust other than a trust de18 scribed in subparagraph (E) of paragraph

19 (30).’’.

20 (3) EFFECTIVE DATE.—The amendments made

21 by this subsection shall apply—

22 (A) to taxable years beginning after Decem23 ber 31, 1996, or
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1 (B) at the election of the trustee of a trust,

2 to taxable years ending after the date of the en3 actment of this Act.

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

5 (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN

6 TRUSTS.—

7 (1) IN GENERAL.—Section 1491 (relating to im8 position of tax on transfers to avoid income tax) is

9 amended by adding at the end the following new flush

10 sentence:

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

12 trust, such trust shall be treated for purposes of this section

13 as having transferred, immediately before becoming a for14 eign trust, all of its assets to a foreign trust.’’.

15 (2) EFFECTIVE DATE.—The amendment made by

16 this subsection shall take effect on the date of the en17 actment of this Act.