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ter 1. To the extent provided in regulations, the
preceding sentence shall not apply if the foreign
trust elects to be subject to rules similar to the
rules of subsection (b)(2)(B).
‘‘(B) APPLICATION
OF
ACCUMULATION
DISTRIBUTION RULES.—For purposes of apply-
ing section 668 in a case to which subpara-
graph (A) applies, the applicable number of
years for purposes of section 668(a) shall be 1⁄2
of the number of years the trust has been in ex-
istence.
‘‘(d) SPECIAL RULES.—
‘‘(1) DETERMINATION
OF
WHETHER
UNITED
STATES
PERSON
MAKES
TRANSFER
OR
RECEIVES
DISTRIBUTION.—For purposes of this section, in de-
termining whether a United States person makes a
transfer to, or receives a distribution from, a foreign
trust, the fact that a portion of such trust is treated
as owned by another person under the rules of sub-
part E of part I of subchapter J of chapter 1 shall
be disregarded.
‘‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVI-
TIES.—To the extent provided in regulations, a trust
which is a United States person shall be treated as
a foreign trust for purposes of this section and sec-
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tion 6677 if such trust has substantial activities, or
holds substantial property, outside the United
States.
‘‘(3) TIME AND MANNER OF FILING INFORMA-
TION.—Any notice or return required under this sec-
tion shall be made at such time and in such manner
as the Secretary shall prescribe.
‘‘(4) MODIFICATION
OF
RETURN
REQUIRE-
MENTS.—The Secretary is authorized to suspend or
modify any requirement of this section if the Sec-
retary determines that the United States has no sig-
nificant tax interest in obtaining the required infor-
mation.’’.
(b) INCREASED PENALTIES.—Section 6677 (relating
to failure to file information returns with respect to cer-
tain foreign trusts) is amended to read as follows:
‘‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT
TO CERTAIN FOREIGN TRUSTS.
‘‘(a) CIVIL PENALTY.—In addition to any criminal
penalty provided by law, if any notice or return required
to be filed by section 6048—
‘‘(1) is not filed on or before the time provided
in such section, or
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‘‘(2) does not include all the information re-
quired pursuant to such section or includes incorrect
information,
the person required to file such notice or return shall pay
a penalty equal to 35 percent of the gross reportable
amount. If any failure described in the preceding sentence
continues for more than 90 days after the day on which
the Secretary mails notice of such failure to the person
required to pay such penalty, such person shall pay a pen-
alty (in addition to the amount determined under the pre-
ceding sentence) of $10,000 for each 30-day period (or
fraction thereof) during which such failure continues after
the expiration of such 90-day period. In no event shall the
penalty under this subsection with respect to any failure
exceed the gross reportable amount.
‘‘(b) SPECIAL RULES FOR RETURNS UNDER SEC-
TION 6048(b).—In the case of a return required under
section 6048(b)—
‘‘(1) the United States person referred to in
such section shall be liable for the penalty imposed
by subsection (a), and
‘‘(2) subsection (a) shall be applied by sub-
stituting ‘5 percent’ for ‘35 percent’.
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‘‘(c) GROSS REPORTABLE AMOUNT.—For purposes
of subsection (a), the term ‘gross reportable amount’
means—
‘‘(1) the gross value of the property involved in
the event (determined as of the date of the event)
in the case of a failure relating to section 6048(a),
‘‘(2) the gross value of the portion of the trust’s
assets at the close of the year treated as owned by
the United States person in the case of a failure re-
lating to section 6048(b)(1), and
‘‘(3) the gross amount of the distributions in
the case of a failure relating to section 6048(c).
‘‘(d) REASONABLE CAUSE EXCEPTION.—No penalty
shall be imposed by this section on any failure which is
shown to be due to reasonable cause and not due to willful
neglect. The fact that a foreign jurisdiction would impose
a civil or criminal penalty on the taxpayer (or any other
person) for disclosing the required information is not rea-
sonable cause.
‘‘(e) DEFICIENCY PROCEDURES NOT TO APPLY.—
Subchapter B of chapter 63 (relating to deficiency proce-
dures for income, estate, gift, and certain excise taxes)
shall not apply in respect of the assessment or collection
of any penalty imposed by subsection (a).’’.
(c) CONFORMING AMENDMENTS.—
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(1) Paragraph (2) of section 6724(d) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (S),
by striking the period at the end of subparagraph
(T) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (T) the following new subparagraph:
‘‘(U) section 6048(b)(1)(B) (relating to
foreign trust reporting requirements).’’.
(2) The table of sections for subpart B of part
III of subchapter A of chapter 61 is amended by
striking the item relating to section 6048 and insert-
ing the following new item:
‘‘Sec. 6048. Information with respect to certain foreign trusts.’’.
(3) The table of sections for part I of sub-
chapter B of chapter 68 is amended by striking the
item relating to section 6677 and inserting the fol-
lowing new item:
‘‘Sec. 6677. Failure to file information with respect to certain foreign trusts.’’.
(d) EFFECTIVE DATES.—
(1) REPORTABLE EVENTS.—To the extent re-
lated to subsection (a) of section 6048 of the Inter-
nal Revenue Code of 1986, as amended by this sec-
tion, the amendments made by this section shall
apply to reportable events (as defined in such section
6048) occurring after the date of the enactment of
this Act.
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(2) GRANTOR TRUST REPORTING.—To the ex-
tent related to subsection (b) of such section 6048,
the amendments made by this section shall apply to
taxable years of United States persons beginning
after December 31, 1995.
(3) REPORTING
BY
UNITED
STATES
BENE-
FICIARIES.—To the extent related to subsection (c)
of such section 6048, the amendments made by this
section shall apply to distributions received after the
date of the enactment of this Act.
SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE
RETURN RELATING TO TRANSFERS TO FOR-
EIGN ENTITIES.
(a) IN GENERAL.—Section 1494 is amended by add-
ing at the end the following new subsection:
‘‘(c) PENALTY.—In the case of any failure to file a
return required by the Secretary with respect to any trans-
fer described in section 1491, the person required to file
such return shall be liable for the penalties provided in
section 6677 in the same manner as if such failure were
a failure to file a notice under section 6048(a).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after the date of
the enactment of this Act.
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SEC. 413. MODIFICATIONS OF RULES RELATING TO FOR-
EIGN TRUSTS HAVING ONE OR MORE UNITED
STATES BENEFICIARIES.
(a) TREATMENT OF TRUST OBLIGATIONS, ETC.—
(1) Paragraph (2) of section 679(a) is amended
by striking subparagraph (B) and inserting the fol-
lowing:
‘‘(B) 
TRANSFERS
AT
FAIR
MARKET
VALUE.—To any transfer of property to a trust
in exchange for consideration of at least the fair
market value of the transferred property. For
purposes of the preceding sentence, consider-
ation other than cash shall be taken into ac-
count at its fair market value.’’.
(2) Subsection (a) of section 679 (relating to
foreign trusts having one or more United States
beneficiaries) is amended by adding at the end the
following new paragraph:
‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO
ACCOUNT
UNDER
FAIR
MARKET
VALUE
EXCEP-
TION.—
‘‘(A) IN GENERAL.—In determining wheth-
er paragraph (2)(B) applies to any transfer by
a person described in clause (ii) or (iii) of sub-
paragraph (C), there shall not be taken into ac-
count—
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‘‘(i) except as provided in regulations,
any obligation of a person described in
subparagraph (C), and
‘‘(ii) to the extent provided in regula-
tions, any obligation which is guaranteed
by a person described in subparagraph (C).
‘‘(B) TREATMENT
OF
PRINCIPAL
PAY-
MENTS
ON
OBLIGATION.—Principal payments
by the trust on any obligation referred to in
subparagraph (A) shall be taken into account
on and after the date of the payment in deter-
mining the portion of the trust attributable to
the property transferred.
‘‘(C) PERSONS DESCRIBED.—The persons
described in this subparagraph are—
‘‘(i) the trust,
‘‘(ii) any grantor or beneficiary of the
trust, and
‘‘(iii) any person who is related (with-
in the meaning of section 643(i)(2)(B)) to
any grantor or beneficiary of the trust.’’.
(b) EXEMPTION
OF TRANSFERS
TO CHARITABLE
TRUSTS.—Subsection (a) of section 679 is amended by
striking ‘‘section 404(a)(4) or 404A’’ and inserting ‘‘sec-
tion 6048(a)(3)(B)(ii)’’.
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(c) OTHER MODIFICATIONS.—Subsection (a) of sec-
tion 679 is amended by adding at the end the following
new paragraphs:
‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN
GRANTOR WHO LATER BECOMES A UNITED STATES
PERSON.—
‘‘(A) IN GENERAL.—If a nonresident alien
individual has a residency starting date within
5 years after directly or indirectly transferring
property to a foreign trust, this section and sec-
tion 6048 shall be applied as if such individual
transferred to such trust on the residency start-
ing date an amount equal to the portion of such
trust attributable to the property transferred by
such individual to such trust in such transfer.
‘‘(B) TREATMENT OF UNDISTRIBUTED IN-
COME.—For purposes of this section, undistrib-
uted net income for periods before such individ-
ual’s residency starting date shall be taken into
account in determining the portion of the trust
which is attributable to property transferred by
such individual to such trust but shall not oth-
erwise be taken into account.
‘‘(C) RESIDENCY
STARTING
DATE.—For
purposes of this paragraph, an individual’s resi-
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dency starting date is the residency starting
date determined under section 7701(b)(2)(A).
‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—
‘‘(A) an individual who is a citizen or resi-
dent of the United States transferred property
to a trust which was not a foreign trust, and
‘‘(B) such trust becomes a foreign trust
while such individual is alive,
then this section and section 6048 shall be applied
as if such individual transferred to such trust on the
date such trust becomes a foreign trust an amount
equal to the portion of such trust attributable to the
property previously transferred by such individual to
such trust. A rule similar to the rule of paragraph
(4)(B) shall apply for purposes of this paragraph.’’.
(d) MODIFICATIONS RELATING TO WHETHER TRUST
HAS UNITED STATES BENEFICIARIES.—Subsection (c) of
section 679 is amended by adding at the end the following
new paragraph:
‘‘(3) CERTAIN UNITED STATES BENEFICIARIES
DISREGARDED.—A beneficiary shall not be treated
as a United States person in applying this section
with respect to any transfer of property to foreign
trust if such beneficiary first became a United
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States person more than 5 years after the date of
such transfer.’’.
(e) TECHNICAL AMENDMENT.—Subparagraph (A) of
section 679(c)(2) is amended to read as follows:
‘‘(A) in the case of a foreign corporation,
such corporation is a controlled foreign corpora-
tion (as defined in section 957(a)),’’.
(f) REGULATIONS.—Section 679 is amended by add-
ing at the end the following new subsection:
‘‘(d) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(g) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers of property after Feb-
ruary 6, 1995.
SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) GENERAL RULE.—
(1) Subsection (f) of section 672 (relating to
special rule where grantor is foreign person) is
amended to read as follows:
‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER-
SHIP.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of this subpart, this subpart shall apply
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only to the extent such application results in an
amount (if any) being currently taken into account
(directly or through 1 or more entities) under this
chapter in computing the income of a citizen or resi-
dent of the United States or a domestic corporation.
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN
REVOCABLE
AND
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not
apply to any portion of a trust if—
‘‘(i) the power to revest absolutely in
the grantor title to the trust property to
which such portion is attributable is exer-
cisable solely by the grantor without the
approval or consent of any other person or
with the consent of a related or subordi-
nate party who is subservient to the grant-
or, or
‘‘(ii) the only amounts distributable
from such portion (whether income or cor-
pus) during the lifetime of the grantor are
amounts distributable to the grantor or the
spouse of the grantor.
‘‘(B) COMPENSATORY TRUSTS.—Except as
provided in regulations, paragraph (1) shall not
apply to any portion of a trust distributions
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from which are taxable as compensation for
services rendered.
‘‘(3) SPECIAL
RULES.—Except as otherwise
provided in regulations prescribed by the Sec-
retary—
‘‘(A) a controlled foreign corporation (as
defined in section 957) shall be treated as a do-
mestic corporation for purposes of paragraph
(1), and
‘‘(B) paragraph (1) shall not apply for
purposes of applying section 1296.
‘‘(4) RECHARACTERIZATION
OF
PURPORTED
GIFTS.—In the case of any transfer directly or indi-
rectly from a partnership or foreign corporation
which the transferee treats as a gift or bequest, the
Secretary may recharacterize such transfer in such
circumstances as the Secretary determines to be ap-
propriate to prevent the avoidance of the purposes of
this subsection.
‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR-
EIGN PERSON.—If—
‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any por-
tion of a trust, and
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‘‘(B) such trust has a beneficiary who is a
United States person,
such beneficiary shall be treated as the grantor of
such portion to the extent such beneficiary or any
member of such beneficiary’s family (within the
meaning of section 267(c)(4)) has made (directly or
indirectly) transfers of property (other than in a sale
for full and adequate consideration) to such foreign
person. For purposes of the preceding sentence, any
gift shall not be taken into account to the extent
such gift would be excluded from taxable gifts under
section 2503(b).
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations providing that para-
graph (1) shall not apply in appropriate cases.’’.
(2) The last sentence of subsection (c) of sec-
tion 672 of such Code is amended by inserting ‘‘sub-
section (f) and’’ before ‘‘sections 674’’.
(b) CREDIT FOR CERTAIN TAXES.—
(1) Paragraph (2) of section 665(d) is amended
by adding at the end the following new sentence:
‘‘Under rules or regulations prescribed by the Sec-
retary, in the case of any foreign trust of which the
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settlor or another person would be treated as owner
of any portion of the trust under subpart E but for
section 672(f), the term ‘taxes imposed on the trust’
includes the allocable amount of any income, war
profits, and excess profits taxes imposed by any for-
eign country or possession of the United States on
the settlor or such other person in respect of trust
income.’’.
(2) Paragraph (5) of section 901(b) is amended
by adding at the end the following new sentence:
‘‘Under rules or regulations prescribed by the Sec-
retary, in the case of any foreign trust of which the
settlor or another person would be treated as owner
of any portion of the trust under subpart E but for
section 672(f), the allocable amount of any income,
war profits, and excess profits taxes imposed by any
foreign country or possession of the United States
on the settlor or such other person in respect of
trust income.’’.
(c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS
THROUGH NOMINEES.—
(1) Section 643 is amended by adding at the
end the following new subsection:
‘‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS
THROUGH NOMINEES.—For purposes of this part, any
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amount paid to a United States person which is derived
directly or indirectly from a foreign trust of which the
payor is not the grantor shall be deemed in the year of
payment to have been directly paid by the foreign trust
to such United States person.’’.
(2) Section 665 is amended by striking sub-
section (c).
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section
shall take effect on the date of the enactment of this
Act.
(2) EXCEPTION
FOR
CERTAIN
TRUSTS.—The
amendments made by this section shall not apply to
any trust—
(A) which is treated as owned by the
grantor under section 676 or 677 (other than
subsection (a)(3) thereof) of the Internal Reve-
nue Code of 1986, and
(B) which is in existence on September 19,
1995.
The preceding sentence shall not apply to the por-
tion of any such trust attributable to any transfer to
such trust after September 19, 1995.
(e) TRANSITIONAL RULE.—If—
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(1) by reason of the amendments made by this
section, any person other than a United States per-
son ceases to be treated as the owner of a portion
of a domestic trust, and
(2) before January 1, 1997, such trust becomes
a foreign trust, or the assets of such trust are trans-
ferred to a foreign trust,
no tax shall be imposed by section 1491 of the Internal
Revenue Code of 1986 by reason of such trust becoming
a foreign trust or the assets of such trust being trans-
ferred to a foreign trust.
SEC. 415. INFORMATION REPORTING REGARDING FOREIGN
GIFTS.
(a) IN GENERAL.—Subpart A of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6039E the following new section:
‘‘SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM
FOREIGN PERSONS.
‘‘(a) IN GENERAL.—If the value of the aggregate for-
eign gifts received by a United States person (other than
an organization described in section 501(c) and exempt
from tax under section 501(a)) during any taxable year
exceeds $10,000, such United States person shall furnish
(at such time and in such manner as the Secretary shall
prescribe) such information as the Secretary may pre-
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scribe regarding each foreign gift received during such
year.
‘‘(b) FOREIGN GIFT.—For purposes of this section,
the term ‘foreign gift’ means any amount received from
a person other than a United States person which the re-
cipient treats as a gift or bequest. Such term shall not
include any qualified transfer (within the meaning of sec-
tion 2503(e)(2)) or any distribution properly disclosed in
a return under section 6048(c).
‘‘(c) PENALTY FOR FAILURE TO FILE INFORMA-
TION.—
‘‘(1) IN GENERAL.—If a United States person
fails to furnish the information required by sub-
section (a) with respect to any foreign gift within
the time prescribed therefor (including extensions)—
‘‘(A) the tax consequences of the receipt of
such gift shall be determined by the Secretary,
and
‘‘(B) such United States person shall pay
(upon notice and demand by the Secretary and
in the same manner as tax) an amount equal to
5 percent of the amount of such foreign gift for
each month for which the failure continues (not
to exceed 25 percent of such amount in the ag-
gregate).
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‘‘(2) REASONABLE CAUSE EXCEPTION.—Para-
graph (1) shall not apply to any failure to report a
foreign gift if the United States person shows that
the failure is due to reasonable cause and not due
to willful neglect.
‘‘(d) COST-OF-LIVING ADJUSTMENT.—In the case of
any taxable year beginning after December 31, 1996, the
$10,000 amount under subsection (a) shall be increased
by an amount equal to the product of such amount and
the cost-of-living adjustment for such taxable year under
section 1(f)(3), except that subparagraph (B) thereof shall
be applied by substituting ‘1995’ for ‘1992’.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for such subpart is amended by inserting after the item
relating to section 6039E the following new item:
‘‘Sec. 6039F. Notice of large gifts received from foreign persons.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received after the date
of the enactment of this Act in taxable years ending after
such date.
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SEC. 416. MODIFICATION OF RULES RELATING TO FOREIGN
TRUSTS WHICH ARE NOT GRANTOR TRUSTS.
(a) MODIFICATION OF INTEREST CHARGE ON ACCU-
MULATION DISTRIBUTIONS.—Subsection (a) of section
668 (relating to interest charge on accumulation distribu-
tions from foreign trusts) is amended to read as follows:
‘‘(a) GENERAL RULE.—For purposes of the tax de-
termined under section 667(a)—
‘‘(1) INTEREST
DETERMINED
USING
UNDER-
PAYMENT RATES.—The interest charge determined
under this section with respect to any distribution is
the amount of interest which would be determined
on the partial tax computed under section 667(b) for
the period described in paragraph (2) using the
rates and the method under section 6621 applicable
to underpayments of tax.
‘‘(2) PERIOD.—For purposes of paragraph (1),
the period described in this paragraph is the period
which begins on the date which is the applicable
number of years before the date of the distribution
and which ends on the date of the distribution.
‘‘(3) APPLICABLE
NUMBER
OF
YEARS.—For
purposes of paragraph (2)—
‘‘(A) IN GENERAL.—The applicable num-
ber of years with respect to a distribution is the
number determined by dividing—
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‘‘(i) the sum of the products described
in subparagraph (B) with respect to each
undistributed income year, by
‘‘(ii) the aggregate undistributed net
income.
The quotient determined under the preceding
sentence shall be rounded under procedures
prescribed by the Secretary.
‘‘(B) PRODUCT
DESCRIBED.—For pur-
poses of subparagraph (A), the product de-
scribed in this subparagraph with respect to
any undistributed income year is the product
of—
‘‘(i) the undistributed net income for
such year, and
‘‘(ii) the sum of the number of taxable
years between such year and the taxable
year of the distribution (counting in each
case the undistributed income year but not
counting the taxable year of the distribu-
tion).
‘‘(4) UNDISTRIBUTED INCOME YEAR.—For pur-
poses of this subsection, the term ‘undistributed in-
come year’ means any prior taxable year of the trust
for which there is undistributed net income, other
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than a taxable year during all of which the bene-
ficiary receiving the distribution was not a citizen or
resident of the United States.
‘‘(5) DETERMINATION OF UNDISTRIBUTED NET
INCOME.—Notwithstanding section 666, for pur-
poses of this subsection, an accumulation distribu-
tion from the trust shall be treated as reducing pro-
portionately the undistributed net income for undis-
tributed income years.
‘‘(6) PERIODS BEFORE 1996.—Interest for the
portion of the period described in paragraph (2)
which occurs before January 1, 1996, shall be deter-
mined—
‘‘(A) by using an interest rate of 6 percent,
and
‘‘(B) without compounding until January
1, 1996.’’.
(b) ABUSIVE TRANSACTIONS.—Section 643(a) is
amended by inserting after paragraph (6) the following
new paragraph:
‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary
shall prescribe such regulations as may be necessary
or appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such
purposes.’’.
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(c) TREATMENT OF LOANS FROM TRUSTS.—
(1) IN
GENERAL.—Section 643 (relating to
definitions applicable to subparts A, B, C, and D)
is amended by adding at the end the following new
subsection:
‘‘(i) LOANS FROM FOREIGN TRUSTS.—For purposes
of subparts B, C, and D—
‘‘(1) GENERAL RULE.—Except as provided in
regulations, if a foreign trust makes a loan of cash
or marketable securities directly or indirectly to—
‘‘(A) any grantor or beneficiary of such
trust who is a United States person, or
‘‘(B) any United States person not de-
scribed in subparagraph (A) who is related to
such grantor or beneficiary,
the amount of such loan shall be treated as a dis-
tribution by such trust to such grantor or bene-
ficiary (as the case may be).
‘‘(2) DEFINITIONS AND SPECIAL RULES.—For
purposes of this subsection—
‘‘(A) CASH.—The term ‘cash’ includes for-
eign currencies and cash equivalents.
‘‘(B) RELATED PERSON.—
‘‘(i) IN GENERAL.—A person is relat-
ed to another person if the relationship be-
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tween such persons would result in a dis-
allowance of losses under section 267 or
707(b). In applying section 267 for pur-
poses of the preceding sentence, section
267(c)(4) shall be applied as if the family
of an individual includes the spouses of the
members of the family.
‘‘(ii) ALLOCATION.—If any person de-
scribed in paragraph (1)(B) is related to
more than one person, the grantor or bene-
ficiary to whom the treatment under this
subsection applies shall be determined
under regulations prescribed by the Sec-
retary.
‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The
term ‘United States person’ does not include
any entity exempt from tax under this chapter.
‘‘(D) TRUST
NOT
TREATED
AS
SIMPLE
TRUST.—Any trust which is treated under this
subsection as making a distribution shall be
treated as not described in section 651.
‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING
LOAN PRINCIPAL.—If any loan is taken into account
under paragraph (1), any subsequent transaction be-
tween the trust and the original borrower regarding
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the principal of the loan (by way of complete or par-
tial repayment, satisfaction, cancellation, discharge,
or otherwise) shall be disregarded for purposes of
this title.’’.
(2) TECHNICAL AMENDMENT.—Paragraph (8)
of section 7872(f) is amended by inserting ‘‘,
643(i),’’ before ‘‘or 1274’’ each place it appears.
(d) EFFECTIVE DATES.—
(1) INTEREST CHARGE.—The amendment made
by subsection (a) shall apply to distributions after
the date of the enactment of this Act.
(2) ABUSIVE TRANSACTIONS.—The amendment
made by subsection (b) shall take effect on the date
of the enactment of this Act.
(3) LOANS
FROM
TRUSTS.—The amendment
made by subsection (c) shall apply to loans of cash
or marketable securities made after September 19,
1995.
SEC. 417. RESIDENCE OF TRUSTS, ETC.
(a) TREATMENT AS UNITED STATES PERSON.—
(1) IN GENERAL.—Paragraph (30) of section
7701(a) is amended by striking ‘‘and’’ at the end of
subparagraph (C) and by striking subparagraph (D)
and by inserting the following new subparagraphs:
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‘‘(D) any estate (other than a foreign es-
tate, within the meaning of paragraph (31)),
and
‘‘(E) any trust if—
‘‘(i) a court within the United States
is able to exercise primary supervision over
the administration of the trust, and
‘‘(ii) one or more United States fidu-
ciaries have the authority to control all
substantial decisions of the trust.’’.
(2) 
CONFORMING
AMENDMENT.—Paragraph
(31) of section 7701(a) is amended to read as fol-
lows:
‘‘(31) FOREIGN ESTATE OR TRUST.—
‘‘(A) FOREIGN
ESTATE.—The term ‘for-
eign estate’ means an estate the income of
which, from sources without the United States
which is not effectively connected with the con-
duct of a trade or business within the United
States, is not includible in gross income under
subtitle A.
‘‘(B) FOREIGN TRUST.—The term ‘foreign
trust’ means any trust other than a trust de-
scribed in subparagraph (E) of paragraph
(30).’’.
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(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply—
(A) to taxable years beginning after De-
cember 31, 1996, or
(B) at the election of the trustee of a
trust, to taxable years ending after the date of
the enactment of this Act.
Such an election, once made, shall be irrevocable.
(b) DOMESTIC TRUSTS WHICH BECOME FOREIGN
TRUSTS.—
(1) IN
GENERAL.—Section 1491 (relating to
imposition of tax on transfers to avoid income tax)
is amended by adding at the end the following new
flush sentence:
‘‘If a trust which is not a foreign trust becomes a foreign
trust, such trust shall be treated for purposes of this sec-
tion as having transferred, immediately before becoming
a foreign trust, all of its assets to a foreign trust.’’.
(2) EFFECTIVE DATE.—The amendment made
by this subsection shall take effect on the date of the
enactment of this Act.
Attest:
ROBIN H. CARLE,
Clerk.