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‘‘(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 ‘‘section
6048(a)(3)(B)(ii)’’.
(c) OTHER MODIFICATIONS.—Subsection (a) of section
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-
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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 other-
wise 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
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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 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 adding
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 February
6, 1995.
SEC. 603. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) GENERAL RULE.—
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(1) Subsection (f) of section 672 (relating to spe-
cial 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
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
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not
apply to any trust if—
‘‘(i) the power to revest absolutely in
the grantor title to the trust property is ex-
ercisable solely by the grantor without the
approval or consent of any other person or
with the consent of a related or subordinate
party who is subservient to the grantor, or
‘‘(ii) the only amounts distributable
from such trust (whether income or corpus)
during the lifetime of the grantor are
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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
from which are taxable as compensation for serv-
ices rendered.
‘‘(3) SPECIAL RULES.—Except as otherwise pro-
vided in regulations prescribed by the Secretary—
‘‘(A) a controlled foreign corporation (as de-
fined in section 957) shall be treated as a domes-
tic corporation for purposes of paragraph (1),
and
‘‘(B) paragraph (1) shall not apply for pur-
poses 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—
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‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any portion
of a trust, and
‘‘(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 has made
transfers of property by gift (directly or indirectly) 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 appro-
priate to carry out the purposes of this subsection, in-
cluding regulations providing that paragraph (1)
shall not apply in appropriate cases.’’.
(2) The last sentence of subsection (c) of section
672 of such Code is amended by inserting ‘‘subsection
(f) and’’ before ‘‘sections 674’’.
(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
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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 gross 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 pay-
ment 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.
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(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 grant-
or or another person under section 676 or 677
(other than subsection (a)(3) thereof) of the In-
ternal Revenue Code of 1986, and
(B) which is in existence on September 19,
1995.
The preceding sentence shall not apply to the portion
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 person
ceases to be treated as the owner of a portion of a do-
mestic 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 Rev-
enue Code of 1986 by reason of such trust becoming a for-
eign trust or the assets of such trust being transferred to
a foreign trust.
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SEC. 604. INFORMATION REPORTING REGARDING FOREIGN
GIFTS.
(a) IN GENERAL.—Subpart A of part III of subchapter
A of chapter 61 is amended by inserting after section 6039E
the following 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 ex-
ceeds $10,000, such United States person shall furnish (at
such time and in such manner as the Secretary shall pre-
scribe) such information as the Secretary may prescribe re-
garding 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 per-
son other than a United States person which the recipient
treats as a gift or bequest. Such term shall not include any
qualified 
transfer 
(within 
the 
meaning 
of 
section
2503(e)(2)).
‘‘(c) PENALTY FOR FAILURE TO FILE INFORMATION.—
‘‘(1) IN GENERAL.—If a United States person
fails to furnish the information required by subsection
(a) with respect to any foreign gift within the time
prescribed therefor (including extensions)—
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‘‘(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 information
as the Secretary may obtain through testimony
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 aggre-
gate).
‘‘(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 will-
ful 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 ap-
plied by substituting ‘1995’ for ‘1992’.
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‘‘(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.
SEC. 605. MODIFICATION OF RULES RELATING TO FOREIGN
TRUSTS WHICH ARE NOT GRANTOR TRUSTS.
(a) MODIFICATION OF INTEREST CHARGE ON ACCUMU-
LATION DISTRIBUTIONS.—Subsection (a) of section 668 (re-
lating to interest charge on accumulation distributions from
foreign trusts) is amended to read as follows:
‘‘(a) GENERAL RULE.—For purposes of the tax deter-
mined under section 667(a)—
‘‘(1) INTEREST DETERMINED USING UNDERPAY-
MENT 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 pe-
riod described in paragraph (2) using the rates and