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the method under section 6621 applicable to under-
payments 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 num-
ber of years before the date of the distribution and
which ends on the date of the distribution.
‘‘(3) APPLICABLE NUMBER OF YEARS.—For pur-
poses of paragraph (2)—
‘‘(A) IN GENERAL.—The applicable number
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 pre-
scribed by the Secretary.
‘‘(B) PRODUCT DESCRIBED.—For purposes
of subparagraph (A), the product described in
this subparagraph with respect to any undistrib-
uted income year is the product of—
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‘‘(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 purposes
of this subsection, an accumulation distribution from
the trust shall be treated as reducing proportionately
the undistributed net income for undistributed 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—
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‘‘(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 defi-
nitions applicable to subparts A, B, C, and D) is
amended by adding at the end the following new sub-
section:
‘‘(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
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‘‘(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 distribu-
tion by such trust to such grantor or beneficiary (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 related
to another person if the relationship between
such persons would result in a disallowance
of losses under section 267 or 707(b). In ap-
plying section 267 for purposes of the pre-
ceding 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
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subsection applies shall be determined 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.
‘‘(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),’’ be-
fore ‘‘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.