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 Vir-
ginia, Mr. NEAL of Massachusetts, and Mr. WARD) introduced the follow-
ing 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Foreign Trust Tax
Compliance Act of 1995’’.
SEC. 2. IMPROVED INFORMATION REPORTING ON FOREIGN
TRUSTS.
(a) IN GENERAL.—Section 6048 of the Internal Rev-
enue Code of 1986 (relating to returns as to certain for-
eign trusts) is amended to read as follows:
‘‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN
FOREIGN TRUSTS.
‘‘(a) NOTICE OF CERTAIN EVENTS.—
‘‘(1) GENERAL RULE.—On or before the 90th
day (or such later day as the Secretary may pre-
scribe) after any reportable event, the responsible
party shall provide written notice of such event to
the Secretary in accordance with paragraph (2).
‘‘(2) CONTENTS
OF
NOTICE.—The notice re-
quired by paragraph (1) shall contain such informa-
tion as the Secretary may prescribe, including—
‘‘(A) the amount of money or other prop-
erty (if any) transferred to the trust in connec-
tion with the reportable event, and
‘‘(B) the identity of the trust and of each
trustee and beneficiary (or class of bene-
ficiaries) of the trust.
‘‘(3) REPORTABLE
EVENT.—For purposes of
this subsection—
‘‘(A) IN GENERAL.—The term ‘reportable
event’ means—
‘‘(i) the creation of any foreign trust
by a United States person,
‘‘(ii) the transfer of any money or
property (directly or indirectly) to a for-
eign trust by a United States person, in-
cluding a transfer by reason of death, and
‘‘(iii) the death of a citizen or resident
of the United States if—
‘‘(I) the decedent was treated as
the owner of any portion of a foreign
trust under the rules of subpart E of
part I of subchapter J of chapter 1,
or
‘‘(II) any portion of a foreign
trust was included in the gross estate
of the decedent.
‘‘(B) EXCEPTIONS.—
‘‘(i) FAIR
MARKET
VALUE
SALES.—
Subparagraph (A)(ii) shall not apply to
any transfer of property to a trust in ex-
change for consideration of at least the fair
market value of the transferred property.
For purposes of the preceding sentence,
consideration other than cash shall be
taken into account at its fair market value
and the rules of section 679(a)(3) shall
apply.
‘‘(ii) 
PENSION
AND
CHARITABLE
TRUSTS.—Subparagraph 
(A) 
shall 
not
apply with respect to a trust which is—
‘‘(I) 
described 
in 
section
404(a)(4) or 404A, or
‘‘(II) determined by the Sec-
retary to be described in section
501(c)(3).
‘‘(4) RESPONSIBLE
PARTY.—For purposes of
this 
subsection, 
the 
term 
‘responsible 
party’
means—
‘‘(A) the grantor in the case of the cre-
ation of an inter vivos trust,
‘‘(B) the transferor in the case of a report-
able event described in paragraph (3)(A)(ii)
other than a transfer by reason of death, and
‘‘(C) the executor of the decedent’s estate
in any other case.
‘‘(b) UNITED
STATES
GRANTOR
OF
FOREIGN
TRUST.—
‘‘(1) IN GENERAL.—If, at any time during any
taxable year of a United States person, such person
is treated as the owner of any portion of a foreign
edge or from such information as the Secretary
may obtain through testimony or otherwise.
‘‘(B) UNITED STATES AGENT REQUIRED.—
The rules of this subsection shall apply to any
foreign trust to which paragraph (1) applies un-
less such trust agrees (in such manner, subject
to such conditions, and at such time as the Sec-
retary shall prescribe) to authorize a United
States person to act as such trust’s limited
agent solely for purposes of applying sections
7602, 7603, and 7604 with respect to—
‘‘(i) any request by the Secretary to
examine records or produce testimony re-
lated to the proper treatment of amounts
required to be taken into account under
the rules referred to in subparagraph (A),
or
‘‘(ii) any summons by the Secretary
for such records or testimony.
The appearance of persons or production of
records by reason of a United States person
being such an agent shall not subject such per-
sons or records to legal process for any purpose
other than determining the correct treatment
under this title of the amounts required to be
taken into account under the rules referred to
in subparagraph (A). A foreign trust which ap-
points an agent described in this subparagraph
shall not be considered to have an office or a
permanent establishment in the United States,
or to be engaged in a trade or business in the
United States, solely because of the activities of
such agent pursuant to this subsection.
‘‘(C) OTHER
RULES
TO
APPLY.—Rules
similar to the rules of paragraphs (2) and (4)
of section 6038A(e) shall apply for purposes of
this paragraph.
‘‘(c) REPORTING BY UNITED STATES BENEFICIARIES
OF FOREIGN TRUSTS.—
‘‘(1) IN GENERAL.—If any United States per-
son receives (directly or indirectly) during any tax-
able year of such person any distribution from a for-
eign trust, such person shall make a return with re-
spect to such trust for such year which includes—
‘‘(A) the name of such trust,
‘‘(B) the aggregate amount of the distribu-
tions so received from such trust during such
taxable year, and
‘‘(C) such other information as the Sec-
retary may prescribe.
‘‘(2) INCLUSION IN INCOME IF RECORDS NOT
PROVIDED.—If adequate records are not provided to
the Secretary to determine the proper treatment of
any distribution from a foreign trust, such distribu-
tion shall be treated as an accumulation distribution
includible in the gross income of the distributee
under chapter 1. To the extent provided in regula-
tions, 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).
‘‘(d) SPECIAL RULES.—
‘‘(1) DETERMINATION
OF
WHETHER
UNITED
STATES
PERSON
RECEIVES
DISTRIBUTION.—For
purposes of this section, in determining whether a
United States person 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 subpart E of part I of subchapter J of chap-
ter 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-
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 of such
Code (relating to failure to file information returns with
respect to certain 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
‘‘(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.
‘‘(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’.
‘‘(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.—
(1) Paragraph (2) of section 6724(d) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (S), by striking the period at the end of
subparagraph (T) and inserting ‘‘, or’’, and by in-
serting after subparagraph (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 of such Code
amended by striking the item relating to section
6048 and inserting 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 of such Code is amended
by striking the item relating to section 6677 and in-
serting the following new item:
‘‘Sec. 6677. Failure to file information with respect to certain for-
eign 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.
(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 the date of the enactment of this Act.
(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. 3. MODIFICATIONS OF RULES RELATING TO FOREIGN
TRUSTS HAVING ONE OR MORE UNITED
STATES BENEFICIARIES.
(a) TREATMENT OF TRUST OBLIGATIONS, ETC.—
(1) Paragraph (2) of section 679(a) of the In-
ternal Revenue Code of 1986 is amended by striking
subparagraph (B) and inserting the following:
‘‘(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 of such Code
(relating to foreign trusts having one or more Unit-
ed 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—
‘‘(i) any obligation of a person de-
scribed 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)(3)) to any
grantor or beneficiary of the trust.’’
(b) EXEMPTION
OF TRANSFERS
TO CHARITABLE
TRUSTS.—Subsection (a) of section 679 of such Code is
amended by striking ‘‘section 404(a)(4) or 404A’’ and in-
serting ‘‘section 6048(a)(3)(B)(ii)’’.
(c) OTHER MODIFICATIONS.—Subsection (a) of sec-
tion 679 of such Code 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-
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 of such Code is amended by adding at the
end the following new paragraphs:
‘‘(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
States person more than 5 years after the date of
such transfer.
‘‘(4) TREATMENT OF FORMER UNITED STATES
PERSONS.—To the extent provided by the Secretary,
for purposes of this subsection, the term ‘United
States person’ includes any person who was a
United States person at any time during the exist-
ence of the trust.’’
(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. 4. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) GENERAL RULE.—
(1) Subsection (f) of section 672 of the Internal
Revenue Code of 1986 (relating to special rule where
grantor is foreign person) is amended to read as fol-
lows:
‘‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNER-
SHIP.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of this subpart, this subpart shall apply
only to the extent such application results in an
amount being currently taken into account (directly
or through 1 or more entities) under this chapter in
computing the income of a citizen or resident of the
United States or a domestic corporation.
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN
REVOCABLE
AND
IR-REV-
OCABLE TRUSTS.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), paragraph (1) shall not
apply to any trust if—
‘‘(I) the power to revest abso-
lutely in the grantor title to the trust
property is exercisable solely by the
grantor without the approval or con-
sent of any other person or with the
consent of a related or subordinate
party who is subservient to the grant-
or, or
‘‘(II) the only amounts distribut-
able from such trust (whether income
or corpus) during the lifetime of the
grantor are amounts distributable to
the grantor or the spouse of the
grantor.
‘‘(ii) EXCEPTION.—Clause (i) shall
not apply to any trust which has a bene-
ficiary who is a United States person to
the extent such beneficiary has made
transfers of property by gift (directly or in-
directly) to a foreign person who is the
grantor of such trust. For purposes of the
preceding sentence, any gift shall not be
taken into account to the extent such gift
is excluded from taxable gifts under sec-
tion 2503(b).
‘‘(B) COMPENSATORY TRUSTS.—Except as
provided in regulations, paragraph (1) shall not
apply to any portion of a trust distributions
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 part III of subchapter G
(relating to foreign personal holding companies)
and part VI of subchapter P (relating to treat-
ment of certain passive foreign investment com-
panies).
‘‘(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) 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.—Paragraph (2) of
section 665(d) of such Code is amended by adding at the
end the following new sentence: ‘‘Under rules or regula-
tions prescribed by the Secretary, in the case of any for-
eign trust of which the settlor or another person would
be treated as owner of any portion of the trust under sub-
part 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 gross in-
come.’’
(c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS
THROUGH NOMINEES.—
(1) Section 643 of such Code 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
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 of such Code is amended by
striking subsection (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 or another person under section 676 or
677 (other than subsection (a)(3) thereof) of
the Internal Revenue 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—
(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. 5. INFORMATION REPORTING REGARDING FOREIGN
GIFTS.
(a) IN GENERAL.—Subpart A of part III of sub-
chapter A of chapter 61 of the Internal Revenue Code of
1986 is amended by inserting after section 6039E the fol-
lowing new section:
‘‘SEC. 6039F. NOTICE OF 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-
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)).
‘‘(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
in the Secretary’s sole discretion from the Sec-
retary’s own knowledge or from such informa-
tion as the Secretary may obtain through testi-
mony or otherwise, 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).
‘‘(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) 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.
SEC. 6. 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 of the Internal Revenue Code of 1986 (relating to
interest charge on accumulation distributions 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
UNDERPAYMENT RATES.—The interest charge deter-
mined under this section with respect to any dis-
tribution is the amount of interest which would be
determined on the partial tax computed under sec-
tion 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—
‘‘(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
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 prior
taxable 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) of
such Code 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.’’
(c) TREATMENT OF USE OF TRUST PROPERTY.—
(1) IN GENERAL.—Section 643 of such Code
(relating to definitions applicable to subparts A, B,
C, and D) is amended by adding at the end the fol-
lowing new subsection:
‘‘(i) USE OF FOREIGN TRUST PROPERTY.—For pur-
poses of subparts B, C, and D—
‘‘(1) GENERAL RULE.—If a foreign trust makes
a loan of cash or marketable securities directly or in-
directly 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) USE
OF
OTHER
PROPERTY.—Except as
provided in regulations prescribed by the Secretary,
any direct or indirect use of trust property (other
than cash or marketable securities) by a person re-
ferred to in subparagraph (A) or (B) of paragraph
(1) shall be treated as a distribution to the grantor
or beneficiary (as the case may be) equal to the fair
market value of the use of such property. The Sec-
retary may prescribe regulations treating a loan
guarantee by the trust as a use of trust property
equal to the value of the guarantee.
‘‘(3) 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-
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
OF
USE.—If any
person described in paragraph (1)(B) is re-
lated to more than one person, the grantor
or beneficiary to whom the treatment
under this subsection applies shall be de-
termined under regulations prescribed by
the Secretary.
‘‘(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.
‘‘(4) 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
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) USE OF TRUST PROPERTY.—The amend-
ment made by subsection (c) shall apply to—
(A) loans of cash or marketable securities
after September 19, 1995, and
(B) uses of other trust property after De-
cember 31, 1995.
SEC. 7. RESIDENCE OF ESTATES AND TRUSTS, ETC.
(a) TREATMENT AS UNITED STATES PERSON.—
(1) IN GENERAL.—Paragraph (30) of section
7701(a) of the Internal Revenue Code of 1986 is
amended by striking subparagraph (D) and by in-
serting after subparagraph (C) the following:
‘‘(D) any estate or trust if—
‘‘(i) a court within the United States
is able to exercise primary supervision over
the administration of the estate or trust,
and
‘‘(ii) in the case of a trust, one or
more United States fiduciaries have the
authority to control all substantial deci-
sions of the trust.’’
(2) 
CONFORMING
AMENDMENT.—Paragraph
(31) of section 7701(a) of such Code is amended to
read as follows:
‘‘(31) FOREIGN ESTATE OR TRUST.—The term
‘foreign estate’ or ‘foreign trust’ means any estate or
trust other than an estate or trust described in sec-
tion 7701(a)(30)(D).’’
(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 of such Code
(relating to imposition of tax on transfers to avoid
income tax) is amended by adding at the end the fol-
lowing 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) PENALTY.—Section 1494 of the Internal
Revenue Code of 1986 is amended by adding 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 return under section 6048(a).’’
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall take effect on the date of the
enactment of this Act.
Æ
HR 2356 IH——2
HR 2356 IH——3