I

104TH CONGRESS

1ST SESSION H. R. 2356

To amend the Internal Revenue Code of 1986 to prevent the avoidance

of tax through the use of foreign trusts.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 19, 1995

Mr. GIBBONS (for himself, Mr. GEPHARDT, Mr. STARK, Mr. JACOBS, Mr.

FORD, Mr. MATSUI, Mrs. KENNELLY, Mr. COYNE, Mr. LEVIN, Mr.

MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of Georgia, Mr. PAYNE of Virginia, Mr. NEAL of Massachusetts, and Mr. WARD) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to prevent

the avoidance of tax through the use of foreign trusts.

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 ‘‘Foreign Trust Tax

5 Compliance Act of 1995’’.
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1 SEC. 2. IMPROVED INFORMATION REPORTING ON FOREIGN

2 TRUSTS.

3 (a) IN GENERAL.—Section 6048 of the Internal Rev4 enue Code of 1986 (relating to returns as to certain for5 eign trusts) is amended to read as follows:

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

7 FOREIGN TRUSTS.

8 ‘‘(a) NOTICE OF CERTAIN EVENTS.—

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

10 day (or such later day as the Secretary may pre11 scribe) after any reportable event, the responsible

12 party shall provide written notice of such event to

13 the Secretary in accordance with paragraph (2).

14 ‘‘(2) CONTENTS OF NOTICE.—The notice re15 quired by paragraph (1) shall contain such informa16 tion as the Secretary may prescribe, including—

17 ‘‘(A) the amount of money or other prop18 erty (if any) transferred to the trust in connec19 tion with the reportable event, and

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

21 trustee and beneficiary (or class of bene22 ficiaries) of the trust.

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

24 this subsection—

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

26 event’ means—
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1 ‘‘(i) the creation of any foreign trust

2 by a United States person,

3 ‘‘(ii) the transfer of any money or

4 property (directly or indirectly) to a for5 eign trust by a United States person, in6 cluding a transfer by reason of death, and

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

8 of the United States if—

9 ‘‘(I) the decedent was treated as

10 the owner of any portion of a foreign

11 trust under the rules of subpart E of

12 part I of subchapter J of chapter 1,

13 or

14 ‘‘(II) any portion of a foreign

15 trust was included in the gross estate

16 of the decedent.

17 ‘‘(B) EXCEPTIONS.—

18 ‘‘(i) FAIR MARKET VALUE SALES.—

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

20 any transfer of property to a trust in ex21 change for consideration of at least the fair

22 market value of the transferred property.

23 For purposes of the preceding sentence,

24 consideration other than cash shall be

25 taken into account at its fair market value
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1 and the rules of section 679(a)(3) shall

2 apply.

3 ‘‘(ii) PENSION AND CHARITABLE

4 TRUSTS.—Subparagraph (A) shall not

5 apply with respect to a trust which is—

6 ‘‘(I) described in section

7 404(a)(4) or 404A, or

8 ‘‘(II) determined by the Sec9 retary to be described in section

10 501(c)(3).

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

12 this subsection, the term ‘responsible party’

13 means—

14 ‘‘(A) the grantor in the case of the cre15 ation of an inter vivos trust,

16 ‘‘(B) the transferor in the case of a report17 able event described in paragraph (3)(A)(ii)

18 other than a transfer by reason of death, and

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

20 in any other case.

21 ‘‘(b) UNITED STATES GRANTOR OF FOREIGN

22 TRUST.—

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

24 taxable year of a United States person, such person

25 is treated as the owner of any portion of a foreign
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1 trust under the rules of subpart E of part I of sub2 chapter J of chapter 1, such person shall be respon3 sible to ensure that—

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

5 year which sets forth a full and complete ac6 counting of all trust activities and operations

7 for the year, the name of the United States

8 agent for such trust, and such other informa9 tion as the Secretary may prescribe, and

10 ‘‘(B) such trust furnishes such information

11 as the Secretary may prescribe to each United

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

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

14 (directly or indirectly) any distribution from the

15 trust.

16 ‘‘(2) TRUSTS NOT HAVING UNITED STATES

17 AGENT.—

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

19 subsection apply to any foreign trust, the deter20 mination of amounts required to be taken into

21 account with respect to such trust by a United

22 States person under the rules of subpart E of

23 part I of subchapter J of chapter 1 shall be de24 termined by the Secretary in the Secretary’s

25 sole discretion from the Secretary’s own knowl-
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1 edge or from such information as the Secretary

2 may obtain through testimony or otherwise.

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

4 The rules of this subsection shall apply to any

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

7 to 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

10 agent solely for purposes of applying sections

11 7602, 7603, and 7604 with respect to—

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

13 examine records or produce testimony re14 lated to the proper treatment of amounts

15 required to be taken into account under

16 the rules referred to in subparagraph (A),

17 or

18 ‘‘(ii) any summons by the Secretary

19 for such records or testimony.

20 The appearance of persons or production of

21 records by reason of a United States person

22 being such an agent shall not subject such per23 sons or records to legal process for any purpose

24 other than determining the correct treatment

25 under this title of the amounts required to be
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1 taken into account under the rules referred to

2 in subparagraph (A). A foreign trust which ap3 points an agent described in this subparagraph

4 shall not be considered to have an office or a

5 permanent establishment in the United States,

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

7 United States, solely because of the activities of

8 such agent pursuant to this subsection.

9 ‘‘(C) OTHER RULES TO APPLY.—Rules

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

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

12 this paragraph.

13 ‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES

14 OF FOREIGN TRUSTS.—

15 ‘‘(1) IN GENERAL.—If any United States per16 son receives (directly or indirectly) during any tax17 able year of such person any distribution from a for18 eign trust, such person shall make a return with re19 spect to such trust for such year which includes—

20 ‘‘(A) the name of such trust,

21 ‘‘(B) the aggregate amount of the distribu22 tions so received from such trust during such

23 taxable year, and

24 ‘‘(C) such other information as the Sec25 retary may prescribe.
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1 ‘‘(2) INCLUSION IN INCOME IF RECORDS NOT

2 PROVIDED.—If adequate records are not provided to

3 the Secretary to determine the proper treatment of

4 any distribution from a foreign trust, such distribu5 tion shall be treated as an accumulation distribution

6 includible in the gross income of the distributee

7 under chapter 1. To the extent provided in regula8 tions, the preceding sentence shall not apply if the

9 foreign trust elects to be subject to rules similar to

10 the rules of subsection (b)(2)(B).

11 ‘‘(d) SPECIAL RULES.—

12 ‘‘(1) DETERMINATION OF WHETHER UNITED

13 STATES PERSON RECEIVES DISTRIBUTION.—For

14 purposes of this section, in determining whether a

15 United States person receives a distribution from a

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

17 is treated as owned by another person under the

18 rules of subpart E of part I of subchapter J of chap19 ter 1 shall be disregarded.

20 ‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI21 TIES.—To the extent provided in regulations, a trust

22 which is a United States person shall be treated as

23 a foreign trust for purposes of this section and sec24 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 of such

14 Code (relating to failure to file information returns with

15 respect to certain foreign trusts) is amended to read as

16 follows:

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

18 TO CERTAIN FOREIGN TRUSTS.

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

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

21 to be filed by section 6048—

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

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

3 information,

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

5 a penalty equal to 35 percent of the gross reportable

6 amount. If any failure described in the preceding sentence

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

8 the Secretary mails notice of such failure to the person

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

12 fraction thereof) during which such failure continues after

13 the expiration of such 90-day period.

14 ‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC15 TION 6048(b).—In the case of a return required under

16 section 6048(b)—

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

18 such section shall be liable for the penalty imposed

19 by subsection (a), and

20 ‘‘(2) subsection (a) shall be applied by sub21 stituting ‘5 percent’ for ‘35 percent’.

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

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

24 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) of such

24 Code is amended by striking ‘‘or’’ at the end of sub25 paragraph (S), by striking the period at the end of
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1 subparagraph (T) and inserting ‘‘, or’’, and by in2 serting after subparagraph (T) the following new

3 subparagraph:

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

5 foreign trust reporting requirements).’’

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

7 III of subchapter A of chapter 61 is of such Code

8 amended by striking the item relating to section

9 6048 and inserting the following new item:

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

10 (3) The table of sections for part I of sub11 chapter B of chapter 68 of such Code is amended

12 by striking the item relating to section 6677 and in13 serting the following new item:

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

14 (d) EFFECTIVE DATES.—

15 (1) REPORTABLE EVENTS.—To the extent re16 lated to subsection (a) of section 6048 of the Inter17 nal Revenue Code of 1986, as amended by this sec18 tion, the amendments made by this section shall

19 apply to reportable events (as defined in such section

20 6048) occurring after the date of the enactment of

21 this Act.

22 (2) GRANTOR TRUST REPORTING.—To the ex23 tent related to subsection (b) of such section 6048,
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1 the amendments made by this section shall apply to

2 taxable years of United States persons beginning

3 after the date of the enactment of this Act.

4 (3) REPORTING BY UNITED STATES BENE5 FICIARIES.—To the extent related to subsection (c)

6 of such section 6048, the amendments made by this

7 section shall apply to distributions received after the

8 date of the enactment of this Act.

9 SEC. 3. MODIFICATIONS OF RULES RELATING TO FOREIGN

10 TRUSTS HAVING ONE OR MORE UNITED

11 STATES BENEFICIARIES.

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

13 (1) Paragraph (2) of section 679(a) of the In14 ternal Revenue Code of 1986 is amended by striking

15 subparagraph (B) and inserting the following:

16 ‘‘(B) TRANSFERS AT FAIR MARKET

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

18 in exchange for consideration of at least the fair

19 market value of the transferred property. For

20 purposes of the preceding sentence, consider21 ation other than cash shall be taken into ac22 count at its fair market value.’’

23 (2) Subsection (a) of section 679 of such Code

24 (relating to foreign trusts having one or more Unit-
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1 ed States beneficiaries) is amended by adding at the

2 end the following new paragraph:

3 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO

4 ACCOUNT UNDER FAIR MARKET VALUE EXCEP5 TION.—

6 ‘‘(A) IN GENERAL.—In determining wheth7 er paragraph (2)(B) applies to any transfer by

8 a person described in clause (ii) or (iii) of sub9 paragraph (C), there shall not be taken into ac10 count—

11 ‘‘(i) any obligation of a person de12 scribed in subparagraph (C), and

13 ‘‘(ii) to the extent provided in regula14 tions, any obligation which is guaranteed

15 by a person described in subparagraph (C).

16 ‘‘(B) TREATMENT OF PRINCIPAL PAY17 MENTS ON OBLIGATION.—Principal payments

18 by the trust on any obligation referred to in

19 subparagraph (A) shall be taken into account

20 on and after the date of the payment in deter21 mining the portion of the trust attributable to

22 the property transferred.

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

24 described in this subparagraph are—

25 ‘‘(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)(3)) to any

5 grantor or beneficiary of the trust.’’

6 (b) EXEMPTION OF TRANSFERS TO CHARITABLE

7 TRUSTS.—Subsection (a) of section 679 of such Code is

8 amended by striking ‘‘section 404(a)(4) or 404A’’ and in9 serting ‘‘section 6048(a)(3)(B)(ii)’’.

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

12 the following 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 of such Code is amended by adding at the

4 end the following new paragraphs:

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 ‘‘(4) TREATMENT OF FORMER UNITED STATES

13 PERSONS.—To the extent provided by the Secretary,

14 for purposes of this subsection, the term ‘United

15 States person’ includes any person who was a

16 United States person at any time during the exist17 ence of the trust.’’

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

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

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

21 such corporation is a controlled foreign corpora22 tion (as defined in section 957(a)),’’.

23 (f) REGULATIONS.—Section 679 is amended by add24 ing at the end the following new subsection:
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1 ‘‘(d) REGULATIONS.—The Secretary shall prescribe

2 such regulations as may be necessary or appropriate to

3 carry out the purposes of this section.’’

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

5 this section shall apply to transfers of property after Feb6 ruary 6, 1995.

7 SEC. 4. FOREIGN PERSONS NOT TO BE TREATED AS OWN8 ERS UNDER GRANTOR TRUST RULES.

9 (a) GENERAL RULE.—

10 (1) Subsection (f) of section 672 of the Internal

11 Revenue Code of 1986 (relating to special rule where

12 grantor is foreign person) is amended to read as fol13 lows:

14 ‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER15 SHIP.—

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

17 provision of this subpart, this subpart shall apply

18 only to the extent such application results in an

19 amount being currently taken into account (directly

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

21 computing the income of a citizen or resident of the

22 United States or a domestic corporation.

23 ‘‘(2) EXCEPTIONS.—

24 ‘‘(A) CERTAIN REVOCABLE AND IR-REV25 OCABLE TRUSTS.—
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1 ‘‘(i) IN GENERAL.—Except as pro2 vided in clause (ii), paragraph (1) shall not

3 apply to any trust if—

4 ‘‘(I) the power to revest abso5 lutely in the grantor title to the trust

6 property is exercisable solely by the

7 grantor without the approval or con8 sent of any other person or with the

9 consent of a related or subordinate

10 party who is subservient to the grant11 or, or

12 ‘‘(II) the only amounts distribut13 able from such trust (whether income

14 or corpus) during the lifetime of the

15 grantor are amounts distributable to

16 the grantor or the spouse of the

17 grantor.

18 ‘‘(ii) EXCEPTION.—Clause (i) shall

19 not apply to any trust which has a bene20 ficiary who is a United States person to

21 the extent such beneficiary has made

22 transfers of property by gift (directly or in23 directly) to a foreign person who is the

24 grantor of such trust. For purposes of the

25 preceding sentence, any gift shall not be
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1 taken into account to the extent such gift

2 is excluded from taxable gifts under sec3 tion 2503(b).

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

5 provided in regulations, paragraph (1) shall not

6 apply to any portion of a trust distributions

7 from which are taxable as compensation for

8 services rendered.

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

10 provided in regulations prescribed by the Sec11 retary—

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

13 defined in section 957) shall be treated as a do14 mestic corporation for purposes of paragraph

15 (1), and

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

17 purposes of applying part III of subchapter G

18 (relating to foreign personal holding companies)

19 and part VI of subchapter P (relating to treat20 ment of certain passive foreign investment com21 panies).

22 ‘‘(4) RECHARACTERIZATION OF PURPORTED

23 GIFTS.—In the case of any transfer directly or indi24 rectly from a partnership or foreign corporation

25 which the transferee treats as a gift or bequest, the
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1 Secretary may recharacterize such transfer in such

2 circumstances as the Secretary determines to be ap3 propriate to prevent the avoidance of the purposes of

4 this subsection.

5 ‘‘(5) REGULATIONS.—The Secretary shall pre6 scribe such regulations as may be necessary or ap7 propriate to carry out the purposes of this sub8 section, including regulations providing that para9 graph (1) shall not apply in appropriate cases.’’

10 (2) The last sentence of subsection (c) of sec11 tion 672 of such Code is amended by inserting ‘‘sub12 section (f) and’’ before ‘‘sections 674’’.

13 (b) CREDIT FOR CERTAIN TAXES.—Paragraph (2) of

14 section 665(d) of such Code is amended by adding at the

15 end the following new sentence: ‘‘Under rules or regula16 tions prescribed by the Secretary, in the case of any for17 eign trust of which the settlor or another person would

18 be treated as owner of any portion of the trust under sub19 part E but for section 672(f), the term ‘taxes imposed on

20 the trust’ includes the allocable amount of any income,

21 war profits, and excess profits taxes imposed by any for22 eign country or possession of the United States on the

23 settlor or such other person in respect of trust gross in24 come.’’
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1 (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

2 THROUGH NOMINEES.—

3 (1) Section 643 of such Code is amended by

4 adding at the end the following new subsection:

5 ‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS

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

7 amount paid to a United States person which is derived

8 directly or indirectly from a foreign trust of which the

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

10 payment to have been directly paid by the foreign trust

11 to such United States person.’’

12 (2) Section 665 of such Code is amended by

13 striking subsection (c).

14 (d) EFFECTIVE DATE.—

15 (1) IN GENERAL.—Except as provided by para16 graph (2), the amendments made by this section

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

18 Act.

19 (2) EXCEPTION FOR CERTAIN TRUSTS.—The

20 amendments made by this section shall not apply to

21 any trust—

22 (A) which is treated as owned by the

23 grantor or another person under section 676 or

24 677 (other than subsection (a)(3) thereof) of

25 the Internal Revenue Code of 1986, and
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1 (B) which is in existence on September 19,

2 1995.

3 The preceding sentence shall not apply to the por4 tion of any such trust attributable to any transfer to

5 such trust after September 19, 1995.

6 (e) TRANSITIONAL RULE.—If—

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

8 section, any person other than a United States per9 son ceases to be treated as the owner of a portion

10 of a domestic trust, and

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

12 a foreign trust, or the assets of such trust are trans13 ferred to a foreign trust,

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

15 Revenue Code of 1986 by reason of such trust becoming

16 a foreign trust or the assets of such trust being trans17 ferred to a foreign trust.

18 SEC. 5. INFORMATION REPORTING REGARDING FOREIGN

19 GIFTS.

20 (a) IN GENERAL.—Subpart A of part III of sub21 chapter A of chapter 61 of the Internal Revenue Code of

22 1986 is amended by inserting after section 6039E the fol23 lowing new section:
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1 ‘‘SEC. 6039F. NOTICE OF GIFTS RECEIVED FROM FOREIGN

2 PERSONS.

3 ‘‘(a) IN GENERAL.—If the value of the aggregate for4 eign gifts received by a United States person (other than

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

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

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

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

9 prescribe) such information as the Secretary may pre10 scribe regarding each foreign gift received during such

11 year.

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

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

14 a person other than a United States person which the re15 cipient treats as a gift or bequest. Such term shall not

16 include any qualified transfer (within the meaning of sec17 tion 2503(e)(2)).

18 ‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA19 TION.—

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

21 fails to furnish the information required by sub22 section (a) with respect to any foreign gift within

23 the time prescribed therefor (including extensions)—

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

25 such gift shall be determined by the Secretary

26 in the Secretary’s sole discretion from the Sec-
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1 retary’s own knowledge or from such informa2 tion as the Secretary may obtain through testi3 mony or otherwise, and

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

5 (upon notice and demand by the Secretary and

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

7 5 percent of the amount of such foreign gift for

8 each month for which the failure continues (not

9 to exceed 25 percent of such amount in the ag10 gregate).

11 ‘‘(2) REASONABLE CAUSE EXCEPTION.— Para12 graph (1) shall not apply to any failure to report a

13 foreign gift if the United States person shows that

14 the failure is due to reasonable cause and not due

15 to willful neglect.

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

17 such regulations as may be necessary or appropriate to

18 carry out the purposes of this section.’’

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

20 for such subpart is amended by inserting after the item

21 relating to section 6039E the following new item:

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

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

23 this section shall apply to amounts received after the date

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

25 such date.
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1 SEC. 6. MODIFICATION OF RULES RELATING TO FOREIGN

2 TRUSTS WHICH ARE NOT GRANTOR TRUSTS.

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

5 668 of the Internal Revenue Code of 1986 (relating to

6 interest charge on accumulation distributions from foreign

7 trusts) is amended to read as follows:

8 ‘‘(a) GENERAL RULE.—For purposes of the tax de9 termined under section 667(a)—

10 ‘‘(1) INTEREST DETERMINED USING

11 UNDERPAYMENT RATES.—The interest charge deter12 mined under this section with respect to any dis13 tribution is the amount of interest which would be

14 determined on the partial tax computed under sec15 tion 667(b) for the period described in paragraph

16 (2) using the rates and the method under section

17 6621 applicable to underpayments of tax.

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

19 the period described in this paragraph is the period

20 which begins on the date which is the applicable

21 number of years before the date of the distribution

22 and which ends on the date of the distribution.

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

24 purposes of paragraph (2)—
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1 ‘‘(A) IN GENERAL.—The applicable num2 ber of years with respect to a distribution is the

3 number determined by dividing—

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

5 in subparagraph (B) with respect to each

6 undistributed income year, by

7 ‘‘(ii) the aggregate undistributed net

8 income.

9 The quotient determined under the preceding

10 sentence shall be rounded under procedures

11 prescribed by the Secretary.

12 ‘‘(B) PRODUCT DESCRIBED.—For pur13 poses of subparagraph (A), the product de14 scribed in this subparagraph with respect to

15 any undistributed income year is the product

16 of—

17 ‘‘(i) the undistributed net income for

18 such year, and

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

20 years between such year and the taxable

21 year of the distribution (counting in each

22 case the undistributed income year but not

23 counting the taxable year of the distribu24 tion).
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1 ‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur2 poses of this subsection, the term ‘undistributed in3 come year’ means any prior taxable year of the trust

4 for which there is undistributed net income, other

5 than a taxable year during all of which the bene6 ficiary receiving the distribution was not a citizen or

7 resident of the United States.

8 ‘‘(5) DETERMINATION OF UNDISTRIBUTED NET

9 INCOME.—Notwithstanding section 666, for pur10 poses of this subsection, an accumulation distribu11 tion from the trust shall be treated as reducing pro12 portionately the undistributed net income for prior

13 taxable years.

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

15 portion of the period described in paragraph (2)

16 which occurs before January 1, 1996, shall be deter17 mined—

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

19 and

20 ‘‘(B) without compounding until January

21 1, 1996.’’

22 (b) ABUSIVE TRANSACTIONS.—Section 643(a) of

23 such Code is amended by inserting after paragraph (6)

24 the following new paragraph:
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1 ‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary

2 shall prescribe such regulations as may be necessary

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

4 including regulations to prevent avoidance of such

5 purposes.’’

6 (c) TREATMENT OF USE OF TRUST PROPERTY.—

7 (1) IN GENERAL.—Section 643 of such Code

8 (relating to definitions applicable to subparts A, B,

9 C, and D) is amended by adding at the end the fol10 lowing new subsection:

11 ‘‘(i) USE OF FOREIGN TRUST PROPERTY.—For pur12 poses of subparts B, C, and D—

13 ‘‘(1) GENERAL RULE.—If a foreign trust makes

14 a loan of cash or marketable securities directly or in15 directly to—

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

17 trust who is a United States person, or

18 ‘‘(B) any United States person not de19 scribed in subparagraph (A) who is related to

20 such grantor or beneficiary,

21 the amount of such loan shall be treated as a dis22 tribution by such trust to such grantor or bene23 ficiary (as the case may be).

24 ‘‘(2) USE OF OTHER PROPERTY.—Except as

25 provided in regulations prescribed by the Secretary,
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1 any direct or indirect use of trust property (other

2 than cash or marketable securities) by a person re3 ferred to in subparagraph (A) or (B) of paragraph

4 (1) shall be treated as a distribution to the grantor

5 or beneficiary (as the case may be) equal to the fair

6 market value of the use of such property. The Sec7 retary may prescribe regulations treating a loan

8 guarantee by the trust as a use of trust property

9 equal to the value of the guarantee.

10 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—For

11 purposes of this subsection—

12 ‘‘(A) CASH.—The term ‘cash’ includes for13 eign currencies and cash equivalents.

14 ‘‘(B) RELATED PERSON.—

15 ‘‘(i) IN GENERAL.—A person is relat16 ed to another person if the relationship be17 tween such persons would result in a dis18 allowance of losses under section 267 or

19 707(b). In applying section 267 for pur20 poses of the preceding sentence, section

21 267(c)(4) shall be applied as if the family

22 of an individual includes the spouses of the

23 members of the family.

24 ‘‘(ii) ALLOCATION OF USE.—If any

25 person described in paragraph (1)(B) is re-
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1 lated to more than one person, the grantor

2 or beneficiary to whom the treatment

3 under this subsection applies shall be de4 termined under regulations prescribed by

5 the Secretary.

6 ‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The

7 term ‘United States person’ does not include

8 any entity exempt from tax under this chapter.

9 ‘‘(D) TRUST NOT TREATED AS SIMPLE

10 TRUST.—Any trust which is treated under this

11 subsection as making a distribution shall be

12 treated as not described in section 651.

13 ‘‘(4) SUBSEQUENT TRANSACTIONS REGARDING

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

15 under paragraph (1), any subsequent transaction be16 tween the trust and the original borrower regarding

17 the principal of the loan (by way of complete or par18 tial repayment, satisfaction, cancellation, discharge,

19 or otherwise) shall be disregarded for purposes of

20 this title.’’

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

22 of section 7872(f) is amended by inserting

23 ‘‘, 643(i),’’ before ‘‘or 1274’’ each place it appears.

24 (d) EFFECTIVE DATES.—
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1 (1) INTEREST CHARGE.—The amendment made

2 by subsection (a) shall apply to distributions after

3 the date of the enactment of this Act.

4 (2) ABUSIVE TRANSACTIONS.—The amendment

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

6 of the enactment of this Act.

7 (3) USE OF TRUST PROPERTY.—The amend8 ment made by subsection (c) shall apply to—

9 (A) loans of cash or marketable securities

10 after September 19, 1995, and

11 (B) uses of other trust property after De12 cember 31, 1995.

13 SEC. 7. RESIDENCE OF ESTATES AND TRUSTS, ETC.

14 (a) TREATMENT AS UNITED STATES PERSON.—

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

16 7701(a) of the Internal Revenue Code of 1986 is

17 amended by striking subparagraph (D) and by in18 serting after subparagraph (C) the following:

19 ‘‘(D) any estate or trust if—

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

21 is able to exercise primary supervision over

22 the administration of the estate or trust,

23 and

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

25 more United States fiduciaries have the
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1 authority to control all substantial deci2 sions of the trust.’’

3 (2) CONFORMING AMENDMENT.—Paragraph

4 (31) of section 7701(a) of such Code is amended to

5 read as follows:

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

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

8 trust other than an estate or trust described in sec9 tion 7701(a)(30)(D).’’

10 (3) EFFECTIVE DATE.—The amendments made

11 by this subsection shall apply—

12 (A) to taxable years beginning after De13 cember 31, 1996, or

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

15 trust, to taxable years ending after the date of

16 the enactment of this Act.

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

18 (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN

19 TRUSTS.—

20 (1) IN GENERAL.—Section 1491 of such Code

21 (relating to imposition of tax on transfers to avoid

22 income tax) is amended by adding at the end the fol23 lowing new flush sentence:

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

25 trust, such trust shall be treated for purposes of this sec-
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1 tion as having transferred, immediately before becoming

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

3 (2) PENALTY.—Section 1494 of the Internal

4 Revenue Code of 1986 is amended by adding at the

5 end the following new subsection:

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

7 return required by the Secretary with respect to any trans8 fer described in section 1491, the person required to file

9 such return shall be liable for the penalties provided in

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

11 a failure to file a return under section 6048(a).’’

12 (3) EFFECTIVE DATE.—The amendments made

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

14 enactment of this Act.

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