the failure is due to reasonable cause and not due
to willful neglect.
‘‘(d) COST-OF-LIVING ADJUSTMENT.—In the case of
any taxable year beginning after December 31, 1996, the
$10,000 amount under subsection (a) shall be increased
by an amount equal to the product of such amount and
the cost-of-living adjustment for such taxable year under
section 1(f)(3), except that subparagraph (B) thereof shall
be applied by substituting ‘1995’ for ‘1992’.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for such subpart is amended by inserting after the item
relating to section 6039E the following new item:
‘‘Sec. 6039F. Notice of large gifts received from foreign per-
sons.’’.
(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. 415. MODIFICATION OF RULES RELATING TO FOREIGN
TRUSTS WHICH ARE NOT GRANTOR TRUSTS.
(a) MODIFICATION OF INTEREST CHARGE ON ACCU-
MULATION DISTRIBUTIONS.—Subsection (a) of section
668 (relating to interest charge on accumulation distribu-
tions from foreign trusts) is amended to read as follows:
‘‘(a) GENERAL RULE.—For purposes of the tax de-
termined under section 667(a)—
‘‘(1) INTEREST
DETERMINED
USING
UNDER-
PAYMENT RATES.—The interest charge determined
under this section with respect to any distribution is
the amount of interest which would be determined
on the partial tax computed under section 667(b) for
the period described in paragraph (2) using the
rates and the method under section 6621 applicable
to underpayments of tax.
‘‘(2) PERIOD.—For purposes of paragraph (1),
the period described in this paragraph is the period
which begins on the date which is the applicable
number of years before the date of the distribution
and which ends on the date of the distribution.
‘‘(3) APPLICABLE
NUMBER
OF
YEARS.—For
purposes of paragraph (2)—
‘‘(A) IN GENERAL.—The applicable num-
ber of years with respect to a distribution is the
number determined by dividing—
‘‘(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 undis-
tributed income years.
‘‘(6) PERIODS BEFORE 1996.—Interest for the
portion of the period described in paragraph (2)
which occurs before January 1, 1996, shall be deter-
mined—
‘‘(A) by using an interest rate of 6 percent,
and
‘‘(B) without compounding until January
1, 1996.’’.
(b) ABUSIVE TRANSACTIONS.—Section 643(a) is
amended by inserting after paragraph (6) the following
new paragraph:
‘‘(7) ABUSIVE TRANSACTIONS.—The Secretary
shall prescribe such regulations as may be necessary
or appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such
purposes.’’.
(c) TREATMENT OF LOANS FROM TRUSTS.—
(1) IN
GENERAL.—Section 643 (relating to
definitions applicable to subparts A, B, C, and D)
is amended by adding at the end the following new
subsection:
‘‘(i) LOANS FROM FOREIGN TRUSTS.—For purposes
of subparts B, C, and D—
‘‘(1) GENERAL RULE.—Except as provided in
regulations, if a foreign trust makes a loan of cash
or marketable securities directly or indirectly to—
‘‘(A) any grantor or beneficiary of such
trust who is a United States person, or
‘‘(B) any United States person not de-
scribed in subparagraph (A) who is related to
such grantor or beneficiary,
the amount of such loan shall be treated as a dis-
tribution by such trust to such grantor or bene-
ficiary (as the case may be).
‘‘(2) DEFINITIONS AND SPECIAL RULES.—For
purposes of this subsection—
‘‘(A) CASH.—The term ‘cash’ includes for-
eign currencies and cash equivalents.
‘‘(B) RELATED PERSON.—
‘‘(i) IN GENERAL.—A person is relat-
ed to another person if the relationship be-
tween such persons would result in a dis-
allowance of losses under section 267 or
707(b). In applying section 267 for pur-
poses of the preceding sentence, section
267(c)(4) shall be applied as if the family
of an individual includes the spouses of the
members of the family.
‘‘(ii) ALLOCATION.—If any person de-
scribed in paragraph (1)(B) is related to
more than one person, the grantor or bene-
ficiary to whom the treatment under this
subsection applies shall be determined
under regulations prescribed by the Sec-
retary.
‘‘(C) EXCLUSION OF TAX-EXEMPTS.—The
term ‘United States person’ does not include
any entity exempt from tax under this chapter.
‘‘(D) TRUST
NOT
TREATED
AS
SIMPLE
TRUST.—Any trust which is treated under this
subsection as making a distribution shall be
treated as not described in section 651.
‘‘(3) SUBSEQUENT TRANSACTIONS REGARDING
LOAN PRINCIPAL.—If any loan is taken into account
under paragraph (1), any subsequent transaction be-
tween the trust and the original borrower regarding
the principal of the loan (by way of complete or par-
tial repayment, satisfaction, cancellation, discharge,
or otherwise) shall be disregarded for purposes of
this title.’’.
(2) TECHNICAL AMENDMENT.—Paragraph (8)
of section 7872(f) is amended by inserting ‘‘,
643(i),’’ before ‘‘or 1274’’ each place it appears.
(d) EFFECTIVE DATES.—
(1) INTEREST CHARGE.—The amendment made
by subsection (a) shall apply to distributions after
the date of the enactment of this Act.
(2) ABUSIVE TRANSACTIONS.—The amendment
made by subsection (b) shall take effect on the date
of the enactment of this Act.
(3) LOANS
FROM
TRUSTS.—The amendment
made by subsection (c) shall apply to loans of cash
or marketable securities after September 19, 1995.
SEC. 416. RESIDENCE OF ESTATES AND TRUSTS, ETC.
(a) TREATMENT AS UNITED STATES PERSON.—
(1) IN GENERAL.—Paragraph (30) of section
7701(a) is amended by striking subparagraph (D)
and by inserting after subparagraph (C) the follow-
ing:
‘‘(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) is amended to read as fol-
lows:
‘‘(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 (relating to
imposition of tax on transfers to avoid income tax)
is amended by adding at the end the following new
flush sentence:
‘‘If a trust which is not a foreign trust becomes a foreign
trust, such trust shall be treated for purposes of this sec-
tion as having transferred, immediately before becoming
a foreign trust, all of its assets to a foreign trust.’’.
(2) PENALTY.—Section 1494 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 with respect to a trust, 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.
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