I
104TH CONGRESS
1ST SESSION
H. R. 981
To amend the Internal Revenue Code of 1986 to modify the eligibility criteria
for the earned income tax credit, to improve tax compliance by United
States persons establishing or benefiting from foreign trusts, and for
other purposes.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 16, 1995
Mr. GEPHARDT (for himself and Mr. GIBBONS) (both by request) 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 modify
the eligibility criteria for the earned income tax credit,
to improve tax compliance by United States persons es-
tablishing or benefiting from foreign trusts, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Tax Compliance Act of 1995’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; amendment of 1986 Code.
TITLE I—PROVISIONS RELATING TO THE EARNED INCOME
CREDIT
Sec. 101. Earned income tax credit denied to individuals not authorized to be
employed in the United States.
Sec. 102. Earned income tax credit denied to individuals with substantial un-
earned income.
TITLE II—PROVISIONS RELATING TO INTERNATIONAL TAXATION
Sec. 201. Revision of tax rules on expatriation.
Sec. 202. Improved information reporting on foreign trusts.
Sec. 203. Modification of rules relating to foreign trusts having one or more
United States beneficiaries.
Sec. 204. Foreign persons not to be treated as owners under grantor trust
rules.
Sec. 205. Gratuitous transfers by partnerships and foreign corporations.
Sec. 206. Information reporting regarding large foreign gifts.
Sec. 207. Modification of rules relating to foreign trusts which are not grantor
trusts.
Sec. 208. Residence of estates and trusts.
TITLE III—ADDITIONAL EMPOWERMENT ZONES
Sec. 301. Additional empowerment zones.
TITLE I—PROVISIONS RELATING
TO 
THE 
EARNED 
INCOME
CREDIT
SEC. 101. EARNED INCOME TAX CREDIT DENIED TO INDI-
VIDUALS 
NOT 
AUTHORIZED 
TO 
BE 
EM-
PLOYED IN THE UNITED STATES.
(a) IN GENERAL.—Section 32(c)(1) (relating to indi-
viduals eligible to claim the earned income tax credit) is
6213(g)(2) (relating to the definition of mathematical or
clerical errors) is amended by striking ‘‘and’ at the end
of subparagraph (D), by striking the period at the end
of subparagraph (E) and inserting ‘‘, and’’, and by insert-
ing after subparagraph (E) the following new subpara-
graph:
‘‘(F) an omission of a correct taxpayer
identification number required under section 23
(relating to credit for families with younger
children) or section 32 (relating to the earned
income tax credit) to be included on a return.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 102. EARNED INCOME TAX CREDIT DENIED TO INDI-
VIDUALS WITH SUBSTANTIAL UNEARNED IN-
COME.
(a) IN GENERAL.—Paragraph (1) of section 32(c)
(relating to individuals eligible to claim the earned income
tax credit) is amended by adding at the end the following
new subparagraph:
‘‘(G) EXCEPTION
FOR
INDIVIDUAL
WITH
SUBSTANTIAL
INTEREST
AND
DIVIDEND
IN-
COME.—The term ‘eligible individual’ shall not
include any individual if the aggregate amount
of interest and dividends includible in the gross
income of the taxpayer for the taxable year ex-
ceeds $2,500.’’
(b) CONFORMING AMENDMENT.—
(1) Paragraph (2) of section 32(i) (relating to
inflation adjustments) is amended to read as follows:
‘‘(2) UNEARNED INCOME LIMITATION.—In the
case of a taxable year beginning in a calendar year
after 1996, the dollar amount contained in sub-
section (c)(1)(G) shall be increased by an amount
equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 1995’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $50, such dollar amount
shall be rounded to the nearest multiple of $50.’’
(2) Paragraph (1) of section 32(i) is amended
by adding at the end the following new flush sen-
tence:
‘‘If any amount as adjusted under the preceding
sentence is not a multiple of $10, such dollar
amount shall be rounded to the nearest multiple of
$10.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
TITLE 
II—PROVISIONS 
RELAT-
ING TO INTERNATIONAL TAX-
ATION
SEC. 201. REVISION OF TAX RULES ON EXPATRIATION.
(a) IN GENERAL.—Subpart A of part II of sub-
chapter N of chapter 1 is amended by inserting after sec-
tion 877 the following new section:
‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
‘‘(a) GENERAL RULES.—For purposes of this sub-
title—
‘‘(1) CITIZENS.—If any United States citizen
relinquishes his citizenship during a taxable year, all
property held by such citizen at the time imme-
diately before such relinquishment shall be treated
as sold at such time for its fair market value and
any gain or loss shall be taken into account for such
taxable year.
‘‘(2) CERTAIN
RESIDENTS.—If any long-term
resident of the United States ceases to be subject to
tax as a resident of the United States for any por-
tion of any taxable year, all property held by such
resident at the time of such cessation shall be treat-
ed as sold at such time for its fair market value and
any gain or loss shall be taken into account for the
taxable year which includes the date of such ces-
sation.
‘‘(b) EXCLUSION FOR CERTAIN GAIN.—The amount
which would (but for this subsection) be includible in the
gross income of any taxpayer by reason of subsection (a)
shall be reduced (but not below zero) by $600,000.
‘‘(c) PROPERTY TREATED AS HELD.—For purposes
of this section, except as otherwise provided by the Sec-
retary, an individual shall be treated as holding—
‘‘(1) all property which would be includible in
his gross estate under chapter 11 were such individ-
ual to die at the time the property is treated as sold,
‘‘(2) any other interest in a trust which the in-
dividual is treated as holding under the rules of sec-
tion 679(e) (determined by treating such section as
applying to foreign and domestic trusts), and
‘‘(3) any other interest in property specified by
the Secretary as necessary or appropriate to carry
out the purposes of this section.
‘‘(d) EXCEPTIONS.—The following property shall not
be treated as sold for purposes of this section:
‘‘(1) UNITED STATES REAL PROPERTY INTER-
ESTS.—Any United States real property interest (as
defined in section 897(c)(1)), other than stock of a
United States real property holding corporation
which does not, on the date the individual relin-
quishes his citizenship or ceases to be subject to tax
as a resident, meet the requirements of section
897(c)(2).
‘‘(2) INTEREST
IN
CERTAIN
RETIREMENT
PLANS.—
‘‘(A) IN
GENERAL.—Any interest in a
qualified retirement plan (as defined in section
4974(d)), other than any interest attributable
to contributions which are in excess of any limi-
tation or which violate any condition for tax-fa-
vored treatment.
‘‘(B) FOREIGN PENSION PLANS.—
‘‘(i) IN GENERAL.—Under regulations
prescribed by the Secretary, interests in
foreign pension plans or similar retirement
arrangements or programs.
‘‘(ii) LIMITATION.—The value of prop-
erty which is treated as not sold by reason
of this subparagraph shall not exceed
$500,000.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) RELINQUISHMENT
OF
CITIZENSHIP.—A
citizen shall be treated as relinquishing his United
States citizenship on the date the United States De-
partment of State issues to the individual a certifi-
cate of loss of nationality or on the date a court of
the United States cancels a naturalized citizen’s cer-
tificate of naturalization.
‘‘(2) LONG-TERM RESIDENT.—
‘‘(A) IN GENERAL.—The term ‘long-term
resident’ means any individual (other than a
citizen of the United States) who is a lawful
permanent resident of the United States and,
as a result of such status, has been subject to
tax as a resident in at least 10 taxable years
during the period of 15 taxable years ending
with the taxable year during which the sale
under subsection (a) is treated as occurring.
‘‘(B) SPECIAL
RULE.—For purposes of
subparagraph (A), there shall not be taken into
account—
‘‘(i) any taxable year during which
any prior sale is treated under subsection
(a) as occurring, or
‘‘(ii) any taxable year prior to the tax-
able year referred to in clause (i).
‘‘(f) TERMINATION OF DEFERRALS, ETC.—On the
date any property held by an individual is treated as sold
under subsection (a)—
‘‘(1) any period deferring recognition of income
or gain shall terminate, and
‘‘(2) any extension of time for payment of tax
shall cease to apply and the unpaid portion of such
tax shall be due and payable.
‘‘(g) ELECTION
BY EXPATRIATING RESIDENTS.—
Solely for purposes of determining gain under subsection
(a)—
‘‘(1) IN GENERAL.—At the election of a resi-
dent not a citizen of the United States, property—
‘‘(A) which was held by such resident on
the date the individual first became a resident
of the United States during the period of long-
term residency to which the treatment under
subsection (a) relates, and
‘‘(B) which is treated as sold under sub-
section (a),
shall be treated as having a basis on such date of
not less than the fair market value of such property
on such date.
‘‘(2) ELECTION.—Such an election shall apply
to all property described in paragraph (1), and, once
made, shall be irrevocable.
‘‘(h) DEFERRAL OF TAX ON CLOSELY HELD BUSI-
NESS INTERESTS.—The District Director may enter into
an agreement with any individual which permits such indi-
vidual to defer payment for not more than 5 years of any
tax imposed by subsection (a) by reason of holding any
interest in a closely held business (as defined in section
6166(b)) other than a United States real property interest
described in subsection (d)(1).
‘‘(i) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.
‘‘(j) CROSS REFERENCE.—
‘‘For termination of United States citizenship for
tax purposes, see section 7701(a)(47).’’
(b) DEFINITION
OF
TERMINATION
OF
UNITED
STATES CITIZENSHIP.—Section 7701(a) is amended by
adding at the end the following new paragraph:
‘‘(47) TERMINATION OF UNITED STATES CITI-
ZENSHIP.—An individual shall not cease to be treat-
ed as a United States citizen before the date on
which the individual’s citizenship is treated as relin-
quished under section 877A(e)(1).’’
(c) CONFORMING AMENDMENTS.—
(1) Section 877 is amended by adding at the
end the following new subsection:
‘‘(f) TERMINATION.—This section shall not apply to
any individual who is subject to the provisions of section
877A.’’
(2) Paragraph (10) of section 7701(b) is
amended by adding at the end the following new
sentence: ‘‘This paragraph shall not apply to any in-
dividual who is subject to the provisions of section
877A.’’
(d) CLERICAL AMENDMENT.—The table of sections
for subpart A of part II of subchapter N of chapter 1
is amended by inserting after the item relating to section
877 the following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to—
(1) United States citizens who relinquish (with-
in the meaning of section 877A(e)(1) of the Internal
Revenue Code of 1986, as added by this section)
United States citizenship on or after February 6,
1995, and
(2) long-term residents (as defined in such sec-
tion) who cease to be subject to tax as residents of
the United States on or after such date.
SEC. 202. IMPROVED INFORMATION REPORTING ON FOR-
EIGN TRUSTS.
(a) IN GENERAL.—Section 6048 (relating to returns
as to certain foreign 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—
‘‘(A) notify each trustee of the trust of the
requirements of subsection (b), and
‘‘(B) 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)(B) shall contain such infor-
mation 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,
‘‘(B) the identity of the trust and of each
trustee and beneficiary (or class of bene-
ficiaries) of the trust, and
‘‘(C) a statement that each trustee of the
trust has been informed of the requirements of
subsection (b).
‘‘(3) REPORTABLE
EVENT.—For purposes of
this subsection, the term ‘reportable event’ means—
‘‘(A) the creation of any foreign trust by a
United States person,
‘‘(B) the transfer of any money or property
to a foreign trust by a United States person, in-
cluding a transfer by reason of death,
‘‘(C) a domestic trust becoming a foreign
trust,
‘‘(D) the death of a citizen or resident of
the United States who is a grantor of a foreign
trust, and
‘‘(E) the residency starting date (within
the meaning of section 7701(b)(2)(A)) of a
grantor of a foreign trust subject to tax under
section 679(a)(3).
Subparagraphs (A) and (B) shall not apply with re-
spect to a trust described in section 404(a)(4) or
404A.
‘‘(4) RESPONSIBLE
PARTY.—For purposes of
this 
subsection, 
the 
term 
‘responsible 
party’
means—
‘‘(A) the grantor in the case of a report-
able event described in subparagraph (A) or (E)
of paragraph (3),
‘‘(B) the transferor in the case of a report-
able event described in paragraph (3)(B) other
than a transfer by reason of death,
‘‘(C) the trustee of the domestic trust in
the case of a reportable event described in para-
graph (3)(C), and
‘‘(D) the executor of the decedent’s estate
in the case of a transfer by reason of death.
‘‘(b) TRUST REPORTING REQUIREMENTS.—If a for-
eign trust, at any time during a taxable year of such
trust—
‘‘(1) has a grantor who is a United States per-
son and—
‘‘(A) such grantor is treated as the owner
of any portion of such trust under the rules of
subpart E of part I of subchapter J of chapter
1, or
‘‘(B) any portion of such trust would be in-
cluded in the gross estate of such grantor if the
grantor were to die at such time, or
‘‘(2) directly or indirectly distributes, credits, or
allocates money or property to any United States
person (whether or not the trust has a grantor de-
scribed in paragraph (1)),
then such trust shall meet the requirements of subsection
(c) (relating to trust information and agent) and sub-
section (d) (relating to annual return).
‘‘(c) CONTENTS OF SECTION 6048 STATEMENT.—
‘‘(1) IN GENERAL.—The requirements of this
subsection are met if the trust files with the Sec-
retary a statement which contains such information
as the Secretary may prescribe and which—
‘‘(A) identifies a United States person who
is the trust’s limited agent to provide the Sec-
retary with such information that reasonably
should be available to the trust for purposes of
applying sections 7602, 7603, and 7604 with
respect to any request by the Secretary to ex-
amine trust records or produce testimony relat-
ed to any transaction by the trust or with re-
spect to any summons by the Secretary for such
records or testimony, and
‘‘(B) contains an agreement to comply with
the requirements of subsection (d).
‘‘(2) SPECIAL RULE.—A foreign trust which ap-
points an agent described in paragraph (1)(A) shall
not be considered to have an office or a permanent
establishment in the United States solely because of
the activities of such agent pursuant to this section.
For purposes of this section, the appearance of per-
sons or production of records by reason of the cre-
ation of the agency shall not subject such persons or
records to legal process for any purpose other than
determining the correct treatment under this title of
the activities and operations of the trust.
‘‘(d) ANNUAL RETURNS AND STATEMENTS.—The re-
quirements of this subsection are met if—
‘‘(1) the trust makes a return for the taxable
year which sets forth a full and complete accounting
of all trust activities and operations for the taxable
year, and contains such other information as the
Secretary may prescribe; and
‘‘(2) the trust furnishes such information as the
Secretary may prescribe to each United States per-
son—
‘‘(A) who is treated as the owner of any
portion of such trust under the rules of subpart
E of part I of subchapter J of chapter 1,
‘‘(B) to whom any item with respect to the
taxable year is credited or allocated, or
‘‘(C) who receives a distribution from such
trust with respect to the taxable year.
‘‘(e) TIME
AND MANNER
OF FILING INFORMA-
TION.—Any notice, statement, or return required under
this section shall be made at such time and in such man-
ner as the Secretary shall prescribe.
‘‘(f) MODIFICATION OF RETURN REQUIREMENTS.—
The Secretary is authorized to suspend or modify any re-
quirement of this section if the Secretary determines that
the United States has no significant tax interest in obtain-
ing the required information.’’
(b) PENALTIES.—Section 6677 (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) FAILURE TO REPORT CERTAIN EVENTS.—
‘‘(1) IN GENERAL.—In the case of a reportable
event described in any subparagraph of section
6048(a)(3) for which a responsible party does not
file a written notice meeting the requirements of sec-
tion 6048(a)(2) within the time specified in section
6048(a)(1), the responsible party shall pay a penalty
of $10,000. 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 fail-
ure to the responsible party, such party shall pay a
penalty (in addition to the $10,000 amount) of
$10,000 for each 30-day period (or fraction thereof)
during which such failure continues after the expira-
tion of such 90-day period.
‘‘(2) 35-PERCENT PENALTY.—In the case of a
reportable event described in subparagraph (A), (B),
or (C) of section 6048(a)(3) (other than a transfer
by reason of death), the aggregate amount of the
penalties under paragraph (1) shall not be less than
an amount equal to 35 percent of the gross value of
the property involved in such event (determined as
of the date of the event).
‘‘(3) RESPONSIBLE
PARTY.—For purposes of
this subsection, the term ‘responsible party’ has the
meaning given to such term by section 6048(a)(4).
‘‘(b) FAILURE TO MAKE CERTAIN STATEMENTS AND
RETURNS.—
‘‘(1) IN GENERAL.—In the case of any failure
to meet the requirements of section 6048(b), the ap-
propriate tax treatment of any trust transactions or
operations shall be determined by the Secretary in
the Secretary’s sole discretion from the Secretary’s
own knowledge or from such information as the Sec-
retary may obtain through testimony or otherwise.
‘‘(2) MONETARY PENALTY.—In the case of any
failure to meet the requirements of section 6048(b)
with respect to a trust described in such section by
reason of paragraph (1) thereof, the grantor de-
scribed in such paragraph (1) shall pay a penalty of
$10,000 for each taxable year with respect to which
the foreign trust fails to meet such requirements. If
any failure described in the preceding sentence con-
tinues for more than 90 days after the day on which
the Secretary mails notice of such failure to such
grantor, such grantor shall pay a penalty (in addi-
tion to any other penalty) of $10,000 for each 30-
day period (or fraction thereof) during which such
failure continues after the expiration of such 90-day
period.
‘‘(c) 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 requested documentation is not
reasonable cause.
‘‘(d) 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 this section.’’
(c) CLERICAL AMENDMENTS.—
(1) 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.’’
(2) 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 for-
eign trusts.’’
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply—
(A) to reportable events occurring on or
after February 6, 1995, and
(B) to the extent such amendments require
reporting for any taxable year under section
6048(b) of the Internal Revenue Code of 1986
(as added by this section), to taxable years be-
ginning after the date of the enactment of this
Act.
(2) NOTICES.—For purposes of section 6048(a)
of such Code, the 90th day referred to therein shall
in no event be treated as being earlier than the 90th
day after the date of the enactment of this Act.
SEC. 203. MODIFICATION OF RULES RELATING TO FOREIGN
TRUSTS HAVING ONE OR MORE UNITED
STATES BENEFICIARIES.
(a) IN GENERAL.—Section 679 (relating to foreign
trusts having one or more United States beneficiaries) is
amended to read as follows:
‘‘SEC. 679. FOREIGN TRUSTS HAVING ONE OR MORE
UNITED STATES BENEFICIARIES.
‘‘(a) TRANSFEROR TREATED AS OWNER.—
‘‘(1) IN
GENERAL.—A United States person
who directly or indirectly transfers property to a for-
eign trust (other than a trust described in section
404(a)(4) or section 404A) shall be treated as the
owner for his taxable year of the portion of such
trust attributable to such property if for such year
there is a United States beneficiary of such trust.
‘‘(2) EXCEPTION.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any sale or exchange of property
to a trust if—
‘‘(i) the trust pays fair market value
for such property, and
‘‘(ii) all of the gain to the transferor
is recognized at the time of transfer.
‘‘(B) CERTAIN OBLIGATIONS NOT TAKEN
INTO ACCOUNT.—For purposes of subparagraph
(A), in determining whether the transferor re-
ceived fair market value, there shall not be
taken into account—
‘‘(i) any obligation of—
‘‘(I) the trust,
‘‘(II) any grantor or beneficiary
of the trust, or
‘‘(III) any person who is related
(within 
the 
meaning 
of 
section
643(i)(3)) to any grantor or bene-
ficiary of the trust, and
‘‘(ii) except as provided in regulations,
any obligation which is guaranteed by a
person described in clause (i).
‘‘(C) TREATMENT OF DEEMED SALE ELEC-
TION UNDER SECTION 1057.—For purposes of
subparagraph (A), a transfer with respect to
which an election under section 1057 is made
shall not be treated as a sale or exchange.
‘‘(3) SPECIAL RULES APPLICABLE TO FOREIGN
GRANTOR WHO LATER BECOMES A UNITED STATES
PERSON.—A nonresident alien individual who be-
comes a United States resident within 5 years after
directly or indirectly transferring property to a for-
eign trust shall be treated for purposes of this sec-
tion and section 6048 as having transferred such
property, and any undistributed income (including
all realized and unrealized gains) attributable there-
to, to the foreign trust immediately after becoming
a United States resident. For this purpose, a non-
resident alien shall be treated as becoming a resi-
dent of the United States on the residency starting
date (within the meaning of section 7701(b)(2)(A)).
‘‘(b) BENEFICIARIES TREATED AS TRANSFERORS IN
CERTAIN CASES.—For purposes of this section and sec-
tion 6048, if—
‘‘(1) a citizen or resident of the United States
who is treated as the owner of any portion of a trust
under subsection (a) dies,
‘‘(2) property is transferred to a foreign trust
by reason of the death of a citizen or resident of the
United States, or
‘‘(3) a domestic trust to which any United
States person made a transfer becomes a foreign
trust,
then, except as otherwise provided in regulations, the trust
beneficiaries shall be treated as having transferred to such
trust (as of the date of the applicable event under para-
graph (1), (2), or (3)) their respective interests (as deter-
mined under subsection (e)) in the property involved.
‘‘(c) TRUSTS ACQUIRING UNITED STATES BENE-
FICIARIES.—If—
‘‘(1) subsection (a) applies to a trust for the
transferor’s taxable year, and
‘‘(2) subsection (a) would have applied to the
trust for the transferor’s immediately preceding tax-
able year but for the fact that for such preceding
taxable year there was no United States beneficiary
for any portion of the trust,
then, for purposes of this subtitle, the transferor shall be
treated as having received as an accumulation distribution
taxable under subpart D an amount equal to the undis-
tributed net income (as determined under section 665(a)
as of the close of such immediately preceding taxable year)
attributable to the portion of the trust referred to in sub-
section (a).
‘‘(d) TRUSTS
TREATED
AS
HAVING
A
UNITED
STATES BENEFICIARY.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a trust shall be treated as having a United
States beneficiary for the taxable year unless—
‘‘(A) under the terms of the trust, no part
of the income or corpus of the trust may be
paid or accumulated during the taxable year to
or for the benefit of a United States person,
and
‘‘(B) if the trust were terminated at any
time during the taxable year, no part of the in-
come or corpus of such trust could be paid to
or for the benefit of a United States person.
To the extent provided by the Secretary, for pur-
poses of this subsection, the term ‘United States
person’ includes any person who was a United
States person at any time during the existence of
the trust.
‘‘(2) ATTRIBUTION OF OWNERSHIP.—For pur-
poses of paragraph (1), an amount shall be treated
as paid or accumulated to or for the benefit of a
United States person if such amount is paid to or
accumulated for a foreign corporation, foreign part-
nership, or foreign trust or estate, and—
‘‘(A) in the case of a foreign corporation,
more than 50 percent of the total combined vot-
ing power of all classes of stock of such cor-
poration entitled to vote is owned (within the
meaning of section 958(a)) or is considered to
be owned (within the meaning of section
958(b)) by United States shareholders (as de-
fined in section 951(b)),
‘‘(B) in the case of a foreign partnership,
a United States person is a partner of such
partnership, or
‘‘(C) in the case of a foreign trust or es-
tate, such trust or estate has a United States
beneficiary (within the meaning of paragraph
(1)).
‘‘(e) DETERMINATION
OF BENEFICIARIES’ INTER-
ESTS IN TRUST.—
‘‘(1) GENERAL
RULE.—For purposes of this
section, a beneficiary’s interest in a foreign trust
shall be based upon all relevant facts and cir-
cumstances, including the terms of the trust instru-
ment and any letter of wishes or similar document,
historical patterns of trust distributions, and the ex-
istence of and functions performed by a trust protec-
tor or any similar advisor.
‘‘(2) SPECIAL
RULE.—In the case of bene-
ficiaries whose interests in a trust cannot be deter-
mined under paragraph (1)—
‘‘(A) the beneficiary having the closest de-
gree of kinship to the grantor shall be treated
as holding the remaining interests in the trust
not determined under paragraph (1) to be held
by any other beneficiary, and
‘‘(B) if 2 or more beneficiaries have the
same degree of kinship to the grantor, such re-
maining interests shall be treated as held equal-
ly by such beneficiaries.
‘‘(3) CONSTRUCTIVE OWNERSHIP.—If a bene-
ficiary of a foreign trust is a corporation, partner-
ship, trust, or estate, the shareholders, partners, or
beneficiaries shall be deemed to be the trust bene-
ficiaries for purposes of this section.
‘‘(4) TAXPAYER
RETURN
POSITION.—A tax-
payer shall clearly indicate on its income tax re-
turn—
‘‘(A) the methodology used to determine
that taxpayer’s trust interest under this section,
and
‘‘(B) if the taxpayer knows (or has reason
to know) that any other beneficiary of such
trust is using a different methodology to deter-
mine such beneficiary’s trust interest under this
section.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years ending on
or after February 6, 1995.
(2) SECTION 679(a).—Paragraphs (2) and (3)
of section 679(a) of the Internal Revenue Code of
1986 (as added by this section) shall apply to—
(A) any trust created on or after February
6, 1995, and
(B) the portion of any trust created before
such date which is attributable to actual trans-
fers of property to the trust on or after such
date.
(3) SECTION 679(b).—
(A) IN GENERAL.—Paragraphs (1) and (2)
of section 679(b) of such Code (as so added)
shall apply to—
(i) any trust created on or after the
date of the enactment of this Act, and
(ii) the portion of any trust created
before such date which is attributable to
actual transfers of property to the trust on
or after such date.
(B) SECTION 679(b)(3).—Section 679(b)(3)
of such Code (as so added) shall take effect on
February 6, 1995, without regard to when the
property was transferred to the trust.
SEC. 204. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) IN GENERAL.—So much of section 672(f) (relat-
ing to special rule where grantor is foreign person) as pre-
cedes paragraph (2) 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
only to the extent such application results in an
amount being included (directly or through 1 or
more entities) in the gross income of a citizen or
resident of the United States or a domestic corpora-
tion. The preceding sentence shall not apply to any
portion of an investment trust if such trust is treat-
ed as a trust for purposes of this title and the grant-
or of such portion is the sole beneficiary of such por-
tion.’’
(b) CREDIT FOR CERTAIN TAXES.—Paragraph (2) of
section 665(d) is amended by adding at the end the follow-
ing new sentence: ‘‘Under rules or regulations prescribed
by the Secretary, 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 term ‘taxes imposed on the trust’ includes 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
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.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
(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, 1996, 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. 205. GRATUITOUS TRANSFERS BY PARTNERSHIPS AND
FOREIGN CORPORATIONS.
(a) IN GENERAL.—Subchapter C of chapter 80 (re-
lating to provisions affecting more than one subtitle) is
amended by adding at the end the following new section:
‘‘SEC. 7874. PURPORTED GIFTS BY PARTNERSHIPS AND
FOREIGN CORPORATIONS.
‘‘(a) IN GENERAL.—Any property (including money)
that is purportedly a direct or indirect gift by a partner-
ship or a foreign corporation to a person who is not a
partner of the partnership or a shareholder of the corpora-
tion, respectively, may be recharacterized by the Secretary
to prevent the avoidance of tax. The Secretary may not
recharacterize gifts made for bona fide business or chari-
table purposes.
‘‘(b) STATEMENTS
ON RECIPIENT’S RETURN.—A
taxpayer who receives a purported gift subject to sub-
section (a) shall attach a statement to his income tax re-
turn for the year of receipt that identifies the property
received and describes fully the circumstances surrounding
the purported gift.
‘‘(c) EXEMPTION.—Subsection (a) shall not apply to
purported gifts received by any person during any taxable
year if the amount thereof is less than $2,500.
‘‘(d) REGULATIONS.—The Secretary may prescribe
such rules as may be necessary or appropriate to carry
out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for such subchapter C is amended by adding at the end
the following new item:
‘‘Sec. 7874. Purported gifts by partnerships and foreign corpora-
tions.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received after the date
of the enactment of this Act.
SEC. 206. INFORMATION REPORTING REGARDING LARGE
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 $100,000, 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 to carry out the pur-
poses 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. 207. 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) SUM OF INTEREST CHARGES FOR EACH
THROWBACK
YEAR.—The interest charge (deter-
mined under paragraph (2)) with respect to any dis-
tribution is the sum of the interest charges for each
of the throwback years to which such distribution is
allocated under section 666(a).
‘‘(2) INTEREST CHARGE FOR YEAR.—Except as
provided in paragraph (6), the interest charge for
any throwback year on such year’s allocable share of
the partial tax computed under section 667(b) with
respect to any distribution shall be determined for
the period—
‘‘(A) beginning on the due date for the
throwback year, and
‘‘(B) ending on the due date for the tax-
able year of the distribution,
by using the rates and method applicable under sec-
tion 6621 for underpayments of tax for such period.
For purposes of the preceding sentence, the term
‘due date’ means the date prescribed by law (deter-
mined without regard to extensions) for filing the re-
turn of the tax imposed by this chapter for the tax-
able year.
‘‘(3) ALLOCABLE PARTIAL TAX.—For purposes
of paragraph (2), a throwback year’s allocable share
of the partial tax is an amount equal to such partial
tax multiplied by the fraction—
‘‘(A) the numerator of which is the amount
deemed by section 666(a) to be distributed on
the last day of such throwback year, and
‘‘(B) the denominator of which is the accu-
mulation distribution taken into account under
section 666(a).
‘‘(4) THROWBACK YEAR.—For purposes of this
subsection, the term ‘throwback year’ means any
taxable year to which a distribution is allocated
under section 666(a).
‘‘(5) PERIODS OF NONRESIDENCE.—The period
under paragraph (2) shall not include any portion
thereof during which the beneficiary was not a citi-
zen or resident of the United States.
‘‘(6) THROWBACK YEARS BEFORE 1996.—In the
case of any throwback year beginning before 1996—
‘‘(A) interest for the portion of the period
described in paragraph (2) which occurs before
the first taxable year beginning after 1995 shall
be determined by using an interest rate of 6
percent and no compounding, and
‘‘(B) interest for the remaining portion of
such period shall be determined as if the partial
tax computed under section 667(b) for the
throwback year were increased (as of the begin-
ning of such first taxable year) by the amount
of the interest determined under subparagraph
(A).’’
(b) RULE WHEN INFORMATION NOT AVAILABLE.—
Subsection (d) of section 666 is amended by adding at
the end the following: ‘‘In the case of a distribution from
a foreign trust to which section 6048(b) applies, adequate
records shall not be considered to be available for purposes
of the preceding sentence unless such trust meets the re-
quirements referred to in such section. If a taxpayer is
not able to demonstrate when a trust was created, the Sec-
retary may use any reasonable approximation based on
available evidence.’’
(c) 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.’’
(d) TREATMENT OF USE OF TRUST PROPERTY.—
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) USE OF FOREIGN TRUST PROPERTY.—
‘‘(1) GENERAL
RULE.—For purposes of sub-
parts B, C, and D, if, during a taxable year of a for-
eign trust a trust participant of such trust directly
or indirectly uses any of the trust’s property, the use
value for such taxable year shall be treated as an
amount paid to such participant (other than from
income for the taxable year) within the meaning of
sections 661(a)(2) and section 662(a)(2).
‘‘(2) EXEMPTION.—Paragraph (1) shall not
apply to any trust participant as to whom the aggre-
gate use value during the taxable year does not ex-
ceed $2,500.
‘‘(3) DEFINITIONS AND SPECIAL RULES.—For
purposes of this subsection—
‘‘(A) USE VALUE.—Except as provided in
subparagraph (B), the term ‘use value’ means
the fair market value of the use of property re-
duced by any amount paid for such use by the
trust participant or by any person who is
related to such participant.
‘‘(B) SPECIAL RULE FOR CASH AND CASH
EQUIVALENT.—A direct or indirect loan of
cash, or cash equivalent, by a foreign trust shall
be treated as a use of trust property by the bor-
rower and the full amount of the loan principal
shall be the use value.
‘‘(C) USE BY RELATED PARTY.—
‘‘(i) Use by a person who is related to
a trust participant shall be treated as use
by the participant.
‘‘(ii) If property is used by any person
who is a related person with respect to
more than one trust participant, then the
property shall be treated as used by the
trust participant most closely related, by
blood or otherwise, to such person.
‘‘(D) PROPERTY
INCLUDES
CASH
AND
CASH EQUIVALENTS.—The term ‘property’ in-
cludes cash and cash equivalents.
‘‘(E) TRUST
PARTICIPANT.—The term
‘trust participant’ means each grantor and ben-
eficiary of the trust.
‘‘(F) RELATED PERSON.—A person is re-
lated to a trust participant if the relationship
between such persons would result in a dis-
allowance of losses under section 267(b) or
707(b). In applying section 267 for purposes of
the preceding sentence—
‘‘(i) section 267(e) shall be applied as
if such person or the trust participant were
a pass-thru entity,
‘‘(ii) section 267(b) shall be applied
by substituting ‘at least 10 percent’ for
‘more than 50 percent’ each place it ap-
pears, and
‘‘(iii) in determining the family of an
individual under section 267(c)(4), such
section shall be treated as including the
spouse (and former spouse) of such indi-
vidual and of each other person who is
treated under such section as being a
member of the family of such individual or
spouse.
‘‘(G) SUBSEQUENT
TRANSACTIONS
RE-
GARDING
LOAN
PRINCIPAL.—If any loan de-
scribed in subparagraph (B) is taken into ac-
count under paragraph (1), any subsequent
transaction between the trust and the original
borrower regarding the principal of the loan (by
way of complete or partial repayment, satisfac-
tion, cancellation, discharge, or otherwise) shall
be disregarded for purposes of this title.’’
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after the date
of the enactment of this Act.
(2) INTEREST CHARGE.—The amendment made
by subsection (a) shall apply to interest for throw-
back years beginning before, on, or after the date of
the enactment of this Act.
SEC. 208. RESIDENCE OF ESTATES AND TRUSTS.
(a) TREATMENT
AS UNITED STATES PERSON.—
Paragraph (30) of section 7701(a) is amended by striking
subparagraph (D) and by inserting 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.’’
(b) CONFORMING AMENDMENT.—Paragraph (31) of
section 7701(a) 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).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply—
(1) to taxable years beginning after December
31, 1996, and
(2) at the election of the trustee of a trust, to
taxable years beginning after the date of the enact-
ment of this Act and on or before December 31,
1996.
Such an election, once made, shall be irrevocable.
TITLE III—ADDITIONAL
EMPOWERMENT ZONES
SEC. 301. ADDITIONAL EMPOWERMENT ZONES.
(a) IN GENERAL.—Paragraph (2) of section 1391(b)
(relating to designations of empowerment zones and enter-
prise communities) is amended—
(1) by striking ‘‘9’’ and inserting ‘‘11’’,
(2) by striking ‘‘6’’ and inserting ‘‘8’’, and
(3) by striking ‘‘750,000’’ and inserting
‘‘1,000,000’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect on the date of the enactment
of this Act.
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