II
104TH CONGRESS
2D SESSION
H. R. 3286
IN THE SENATE OF THE UNITED STATES
MAY 13, 1996
Received; read twice and referred to the Committee on Finance
MAY 23, 1996
Ordered, if and when reported by the Committee on Finance the bill then be
referred to the Committee on Indian Affairs for the purpose of consider-
ing title 3, for a period of 10 days of session, to report or be discharged
AN ACT
To help families defray adoption costs, and to promote the
adoption of minority children.
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 ‘‘Adoption Promotion
and Stability Act of 1996’’.
SEC. 2. TABLE OF CONTENTS.
The table of contents of this Act is as follows:
Sec. 1. Short title.
Sec. 2. Table of contents.
TITLE I—CREDIT FOR ADOPTION EXPENSES
Sec. 101. Credit for adoption expenses.
TITLE II—INTERETHNIC ADOPTION
Sec. 201. Removal of barriers to interethnic adoption.
TITLE III—CHILD CUSTODY PROCEEDINGS AFFECTED BY THE
INDIAN CHILD WELFARE ACT OF 1978
Sec. 301. Inapplicability of the Indian Child Welfare Act of 1978 to child cus-
tody proceedings involving a child whose parents do not main-
tain affiliation with their Indian tribe.
Sec. 302. Membership and child custody proceedings.
Sec. 303. Effective date.
TITLE IV—REVENUE OFFSETS
Sec. 400. Amendment of 1986 Code.
Subtitle A—Exclusion for Energy Conservation Subsidies Limited to Subsidies
With Respect to Dwelling Units
Sec. 401. Exclusion for energy conservation subsidies limited to subsidies with
respect to dwelling units.
Subtitle B—Foreign Trust Tax Compliance
Sec. 411. Improved information reporting on foreign trusts.
Sec. 412. Comparable penalties for failure to file return relating to transfers to
foreign entities.
Sec. 413. Modifications of rules relating to foreign trusts having one or more
United States beneficiaries.
Sec. 414. Foreign persons not to be treated as owners under grantor trust
rules.
Sec. 415. Information reporting regarding foreign gifts.
Sec. 416. Modification of rules relating to foreign trusts which are not grantor
trusts.
Sec. 417. Residence of trusts, etc.
TITLE I—CREDIT FOR ADOPTION
EXPENSES
SEC. 101. CREDIT FOR ADOPTION EXPENSES.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code of
1986 (relating to nonrefundable personal credits) is
amended by inserting after section 22 the following new
section:
‘‘SEC. 23. ADOPTION EXPENSES.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year the amount
of the qualified adoption expenses paid or incurred by the
taxpayer during such taxable year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The aggregate
amount of qualified adoption expenses which may be
taken into account under subsection (a) for all tax-
able years with respect to the adoption of a child by
the taxpayer shall not exceed $5,000.
‘‘(2) INCOME LIMITATION.—The amount allow-
able as a credit under subsection (a) for any taxable
year shall be reduced (but not below zero) by an
amount which bears the same ratio to the amount
so allowable (determined without regard to this
paragraph but with regard to paragraph (1)) as—
‘‘(A) the amount (if any) by which the tax-
payer’s adjusted gross income (determined
without regard to sections 911, 931, and 933)
exceeds $75,000, bears to
‘‘(B) $40,000.
‘‘(3) DENIAL OF DOUBLE BENEFIT.—
‘‘(A) IN GENERAL.—No credit shall be al-
lowed under subsection (a) for any expense for
which a deduction or credit is allowable under
any other provision of this chapter.
‘‘(B) GRANTS.—No credit shall be allowed
under subsection (a) for any expense to the ex-
tent that funds for such expense are received
under any Federal, State, or local program.
The preceding sentence shall not apply to ex-
penses for the adoption of a child with special
needs.
‘‘(C) REIMBURSEMENT.—No credit shall
be allowed under subsection (a) for any expense
to the extent that such expense is reimbursed
and the reimbursement is excluded from gross
income under section 137.
‘‘(c) CARRYFORWARDS OF UNUSED CREDIT.—If the
credit allowable under subsection (a) for any taxable year
exceeds the limitation imposed by section 26(a) for such
taxable year reduced by the sum of the credits allowable
under this subpart (other than this section), such excess
shall be carried to the succeeding taxable year and added
to the credit allowable under subsection (a) for such tax-
able year. No credit may be carried forward under this
subsection to any taxable year following the fifth taxable
year after the taxable year in which the credit arose. For
purposes of the preceding sentence, credits shall be treated
as used on a first-in first-out basis.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
ADOPTION
EXPENSES.—The
term ‘qualified adoption expenses’ means reasonable
and necessary adoption fees, court costs, attorney
fees, and other expenses—
‘‘(A) which are directly related to, and the
principal purpose of which is for, the legal
adoption of an eligible child by the taxpayer,
and
‘‘(B) which are not incurred in violation of
State or Federal law or in carrying out any sur-
rogate parenting arrangement.
‘‘(2) EXPENSES FOR ADOPTION OF SPOUSE’S
CHILD NOT ELIGIBLE.—The term ‘qualified adoption
expenses’ shall not include any expenses in connec-
tion with the adoption by an individual of a child
who is the child of such individual’s spouse.
‘‘(3) ELIGIBLE
CHILD.—The term ‘eligible
child’ means any individual—
‘‘(A) who has not attained age 18 as of the
time of the adoption, or
‘‘(B) who is physically or mentally incapa-
ble of caring for himself.
‘‘(4) CHILD WITH SPECIAL NEEDS.—The term
‘child with special needs’ means any child if—
‘‘(A) a State has determined that the child
cannot or should not be returned to the home
of his parents, and
‘‘(B) such State has determined that there
exists with respect to the child a specific factor
or condition (such as his ethnic background,
age, or membership in a minority or sibling
group, or the presence of factors such as medi-
cal conditions or physical, mental, or emotional
handicaps) because of which it is reasonable to
conclude that such child cannot be placed with
adoptive parents without providing adoption as-
sistance.
‘‘(e) SPECIAL RULES FOR FOREIGN ADOPTIONS.—In
the case of a foreign adoption—
‘‘(1) subsection (a) shall not apply to any quali-
fied adoption expense with respect to such adoption
unless such adoption becomes final, and
‘‘(2) any such expense which is paid or incurred
before the taxable year in which such adoption be-
comes final shall be taken into account under this
section as if such expense were paid or incurred dur-
ing such year.
‘‘(f) MARRIED COUPLES MUST FILE JOINT RE-
TURNS.—Rules similar to the rules of paragraphs (2), (3),
and (4) of section 21(e) shall apply for purposes of this
section.
‘‘(g) BASIS ADJUSTMENTS.—For purposes of this
subtitle, if a credit is allowed under this section for any
expenditure with respect to any property, the increase in
the basis of such property which would (but for this sub-
section) result from such expenditure shall be reduced by
the amount of the credit so allowed.
‘‘(h) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out this
section and section 137, including regulations which treat
unmarried individuals who pay or incur qualified adoption
expenses with respect to the same child as 1 taxpayer for
purposes of applying the dollar limitation in subsection
(b)(1) of this section and in section 137(b)(1).’’.
(b) EXCLUSION OF AMOUNTS RECEIVED UNDER EM-
PLOYER’S ADOPTION ASSISTANCE PROGRAMS.—Part III
of subchapter B of chapter 1 of such Code (relating to
items specifically excluded from gross income) is amended
by redesignating section 137 as section 138 and by insert-
ing after section 136 the following new section:
‘‘SEC. 137. ADOPTION ASSISTANCE PROGRAMS.
‘‘(a) IN GENERAL.—Gross income of an employee
does not include amounts paid or expenses incurred by the
employer for qualified adoption expenses in connection
with the adoption of a child by an employee if such
amounts are furnished pursuant to an adoption assistance
program.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The aggregate
amount excludable from gross income under sub-
section (a) for all taxable years with respect to the
adoption of a child by the taxpayer shall not exceed
$5,000.
‘‘(2) INCOME
LIMITATION.—The amount ex-
cludable from gross income under subsection (a) for
any taxable year shall be reduced (but not below
zero) by an amount which bears the same ratio to
the amount so excludable (determined without re-
gard to this paragraph but with regard to paragraph
(1)) as—
‘‘(A) the amount (if any) by which the tax-
payer’s adjusted gross income exceeds $75,000,
bears to
‘‘(B) $40,000.
‘‘(3) DETERMINATION OF ADJUSTED GROSS IN-
COME.—For purposes of paragraph (2), adjusted
gross income shall be determined—
‘‘(A) without regard to this section and
sections 911, 931, and 933, and
‘‘(B) after the application of sections 86,
135, 219, and 469.
‘‘(c) ADOPTION ASSISTANCE PROGRAM.—For pur-
poses of this section, an adoption assistance program is
a plan of an employer—
‘‘(1) under which the employer provides employ-
ees with adoption assistance, and
‘‘(2) which meets requirements similar to the
requirements of paragraphs (2), (3), and (5) of sec-
tion 127(b).
An adoption reimbursement program operated under sec-
tion 1052 of title 10, United States Code (relating to
armed forces) or section 514 of title 14, United States
Code (relating to members of the Coast Guard) shall be
treated as an adoption assistance program for purposes
of this section.
‘‘(d) QUALIFIED ADOPTION EXPENSES.—For pur-
poses of this section, the term ‘qualified adoption ex-
penses’ has the meaning given such term by section 23(d).
‘‘(e) CERTAIN RULES TO APPLY.—Rules similar to
the rules of subsections (e) and (g) of section 23 shall
apply for purposes of this section.’’.
(c) CONFORMING AMENDMENTS.—
(1) Sections 86(b)(2)(A) and 135(c)(4)(A) of
such Code are each amended by inserting ‘‘137,’’ be-
fore ‘‘911’’.
(2) Clause (i) of section 219(g)(3)(A) of such
Code is amended by inserting ‘‘, 137,’’ before ‘‘and
911’’.
(3) Clause (ii) of section 469(i)(3)(E) of such
Code is amended to read as follows:
‘‘(ii) the amounts excludable from
gross income under sections 135 and
137,’’.
(4) Subsection (a) of section 1016 of such Code
is amended by striking ‘‘and’’ at the end of para-
graph (24), by striking the period at the end of
paragraph (25) and inserting ‘‘, and’’, and by add-
ing at the end the following new paragraph:
‘‘(26) to the extent provided in sections 23(g)
and 137(e).’’
(5) The table of sections for subpart A of part
IV of subchapter A of chapter 1 of such Code is
amended by inserting after the item relating to sec-
tion 22 the following new item:
‘‘Sec. 23. Adoption expenses.’’.
(6) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by
striking the item relating to section 137 and insert-
ing the following:
‘‘Sec. 137. Adoption assistance programs.
‘‘Sec. 138. Cross reference to other Acts.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
TITLE II—INTERETHNIC
ADOPTION
SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOP-
TION.
(a) STATE PLAN REQUIREMENTS.—Section 471(a)
of the Social Security Act (42 U.S.C 671(a)) is amend-
ed—
(1) by striking ‘‘and’’ at the end of paragraph
(16);
(2) by striking the period at the end of para-
graph (17) and inserting ‘‘; and’’; and
(3) by adding at the end the following:
‘‘(18) not later than January 1, 1997, provides
that neither the State nor any other entity in the
State that receives funds from the Federal Govern-
ment and is involved in adoption or foster care
placements may—
‘‘(A) deny to any person the opportunity to
become an adoptive or a foster parent, on the
basis of the race, color, or national origin of the
person, or of the child, involved; or
‘‘(B) delay or deny the placement of a
child for adoption or into foster care, on the
basis of the race, color, or national origin of the
adoptive or foster parent, or the child, in-
volved.’’.
(b) ENFORCEMENT.—Section 474 of such Act (42
U.S.C. 674) is amended by adding at the end the follow-
ing:
‘‘(d)(1) If a State’s program operated under this part
is found, as a result of a review conducted under section
1123, to have violated section 471(a)(18) during a quarter
with respect to any person, then, notwithstanding sub-
section (a) of this section and any regulations promulgated
under section 1123(b)(3), the Secretary shall reduce the
amount otherwise payable to the State under this part,
for the quarter and for each subsequent quarter before
the 1st quarter for which the State program is found, as
a result of such a review, not to have violated section
471(a)(18) with respect to any person, by—
‘‘(A) 2 percent of such otherwise payable
amount, in the case of the 1st such finding with re-
spect to the State;
‘‘(B) 5 percent of such otherwise payable
amount, in the case of the 2nd such finding with re-
spect to the State; or
‘‘(C) 10 percent of such otherwise payable
amount, in the case of the 3rd or subsequent such
finding with respect to the State.
‘‘(2) Any other entity which is in a State that receives
funds under this part and which violates section
471(a)(18) during a quarter with respect to any person
shall remit to the Secretary all funds that were paid by
the State to the entity during the quarter from such funds.
‘‘(3)(A) Any individual who is aggrieved by a viola-
tion of section 471(a)(18) by a State or other entity may
bring an action seeking relief from the State or other en-
tity in any United States district court.
‘‘(B) An action under this paragraph may not be
brought more than 2 years after the date the alleged viola-
tion occurred.
‘‘(4) This subsection shall not be construed to affect
the application of the Indian Child Welfare Act of 1978.’’.
(c) CIVIL RIGHTS.—
(1) PROHIBITED CONDUCT.—A person or gov-
ernment that is involved in adoption or foster care
placements may not—
(A) deny to any individual the opportunity
to become an adoptive or a foster parent, on the
basis of the race, color, or national origin of the
individual, or of the child, involved; or
(B) delay or deny the placement of a child
for adoption or into foster care, on the basis of
the race, color, or national origin of the adop-
tive or foster parent, or the child, involved.
(2) ENFORCEMENT.—Noncompliance with para-
graph (1) is deemed a violation of title VI of the
Civil Rights Act of 1964.
(3) NO EFFECT ON THE INDIAN CHILD WEL-
FARE ACT OF 1978.—This subsection shall not be
construed to affect the application of the Indian
Child Welfare Act of 1978.
(d) CONFORMING REPEAL.—Section 553 of the How-
ard M. Metzenbaum Multiethnic Placement Act of 1994
(42 U.S.C. 5115a) is repealed.
TITLE III—CHILD CUSTODY PRO-
CEEDINGS AFFECTED BY THE
INDIAN CHILD WELFARE ACT
OF 1978
SEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WEL-
FARE ACT OF 1978 TO CHILD CUSTODY PRO-
CEEDINGS INVOLVING A CHILD WHOSE PAR-
ENTS DO NOT MAINTAIN AFFILIATION WITH
THEIR INDIAN TRIBE.
Title I of the Indian Child Welfare Act of 1978 (25
U.S.C. 1911 et seq.) is amended by adding at the end
the following:
‘‘SEC. 114. (a) This title does not apply to any child
custody proceeding involving a child who does not reside
or is not domiciled within a reservation unless—
‘‘(1) at least one of the child’s biological par-
ents is of Indian descent; and
‘‘(2) at least one of the child’s biological par-
ents maintains significant social, cultural, or politi-
cal affiliation with the Indian tribe of which either
parent is a member.
‘‘(b) The factual determination as to whether a bio-
logical parent maintains significant social, cultural, or po-
litical affiliation with the Indian tribe of which either par-
ent is a member shall be based on such affiliation as of
the time of the child custody proceeding.
‘‘(c) The determination that this title does not apply
pursuant to subsection (a) is final, and, thereafter, this
title shall not be the basis for determining jurisdiction over
any child custody proceeding involving the child.’’.
SEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEED-
INGS.
Title I of the Indian Child Welfare Act of 1978 (25
U.S.C. 1911 et seq.), as amended by section 301 of this
title, is further amended by adding at the end the follow-
ing:
‘‘SEC. 115. (a) A person who attains the age of 18
years before becoming a member of an Indian tribe may
become a member of an Indian tribe only upon the per-
son’s written consent.
‘‘(b) For the purposes of any child custody proceeding
involving an Indian child, membership in an Indian tribe
shall be effective from the actual date of admission to
membership in the Indian tribe and shall not be given ret-
roactive effect.’’.
SEC. 303. EFFECTIVE DATE.
The amendments made by this title shall take effect
on the date of the enactment of this Act and shall apply
with respect to any child custody proceeding in which a
final decree has not been entered as of such date.
TITLE IV—REVENUE OFFSETS
SEC. 400. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in
this title an amendment or repeal is expressed in terms
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code
of 1986.
Subtitle A—Exclusion for Energy
Conservation Subsidies Limited
to Subsidies With Respect to
Dwelling Units
SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUB-
SIDIES LIMITED TO SUBSIDIES WITH RE-
SPECT TO DWELLING UNITS.
(a) IN GENERAL.—Paragraph (1) of section 136(c)
(defining energy conservation measure) is amended by
striking ‘‘energy demand—’’ and all that follows and in-
serting ‘‘energy demand with respect to a dwelling unit.’’
(b) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 136 is amended to
read as follows:
‘‘(a) EXCLUSION.—Gross income shall not include
the value of any subsidy provided (directly or indirectly)
by a public utility to a customer for the purchase or instal-
lation of any energy conservation measure.’’
(2) Paragraph (2) of section 136(c) is amend-
ed—
(A) by striking subparagraph (A) and by
redesignating subparagraphs (B) and (C) as
subparagraphs (A) and (B), respectively, and
(B) by striking ‘‘AND SPECIAL RULES’’ in
the paragraph heading.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts received after Decem-
ber 31, 1996, unless received pursuant to a written bind-
ing contract in effect on September 13, 1995, and at all
times thereafter.
Subtitle B—Foreign Trust Tax
Compliance
SEC. 411. 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.—
‘‘(I) described in section 402(b),
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
trust under the rules of subpart E of part I of sub-
chapter J of chapter 1, such person shall be respon-
sible to ensure that—
‘‘(A) such trust makes a return for such
year which sets forth a full and complete ac-
counting of all trust activities and operations
for the year, the name of the United States
agent for such trust, and such other informa-
tion as the Secretary may prescribe, and
‘‘(B) such trust furnishes such information
as the Secretary may prescribe to each United
States person (i) who is treated as the owner of
any portion of such trust or (ii) who receives
(directly or indirectly) any distribution from the
trust.
‘‘(2) TRUSTS
NOT
HAVING
UNITED
STATES
AGENT.—
‘‘(A) IN
GENERAL.—If the rules of this
paragraph apply to any foreign trust, the deter-
mination of amounts required to be taken into
account with respect to such trust by a United
States person under the rules of subpart E of
part I of subchapter J of chapter 1 shall be de-
termined by the Secretary.
‘‘(B) UNITED STATES AGENT REQUIRED.—
The rules of this paragraph 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.—
‘‘(A) IN
GENERAL.—If adequate records
are not provided to the Secretary to determine
the proper treatment of any distribution from a
foreign trust, such distribution shall be treated
as an accumulation distribution includible in
the gross income of the distributee under chap-
ter 1. To the extent provided in regulations, 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).
‘‘(B) APPLICATION
OF
ACCUMULATION
DISTRIBUTION RULES.—For purposes of apply-
ing section 668 in a case to which subpara-
graph (A) applies, the applicable number of
years for purposes of section 668(a) shall be 1⁄2
of the number of years the trust has been in ex-
istence.
‘‘(d) SPECIAL RULES.—
‘‘(1) DETERMINATION
OF
WHETHER
UNITED
STATES
PERSON
MAKES
TRANSFER
OR
RECEIVES
DISTRIBUTION.—For purposes of this section, in de-
termining whether a United States person makes a
transfer to, or 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 sub-
part E of part I of subchapter J of chapter 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 (relating
to failure to file information returns with respect to cer-
tain 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. In no event shall the
penalty under this subsection with respect to any failure
exceed the gross reportable amount.
‘‘(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) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (S),
by striking the period at the end of subparagraph
(T) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (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 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.’’.
(3) 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 foreign 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 December 31, 1995.
(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. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE
RETURN RELATING TO TRANSFERS TO FOR-
EIGN ENTITIES.
(a) IN GENERAL.—Section 1494 is amended by add-
ing 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 notice under section 6048(a).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after the date of
the enactment of this Act.
SEC. 413. MODIFICATIONS OF RULES RELATING TO FOR-
EIGN TRUSTS HAVING ONE OR MORE UNITED
STATES BENEFICIARIES.
(a) TREATMENT OF TRUST OBLIGATIONS, ETC.—
(1) Paragraph (2) of section 679(a) is amended
by striking subparagraph (B) and inserting the fol-
lowing:
‘‘(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 (relating to
foreign trusts having one or more United 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) except as provided in regulations,
any obligation of a person described 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)(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 ‘‘sec-
tion 6048(a)(3)(B)(ii)’’.
(c) OTHER MODIFICATIONS.—Subsection (a) of sec-
tion 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-
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 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 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. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWN-
ERS UNDER GRANTOR TRUST RULES.
(a) GENERAL RULE.—
(1) Subsection (f) of section 672 (relating to
special 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 (if any) being currently taken into account
(directly or through 1 or more entities) under this
chapter in computing the income of a citizen or resi-
dent of the United States or a domestic corporation.
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN
REVOCABLE
AND
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not
apply to any portion of a trust if—
‘‘(i) the power to revest absolutely in
the grantor title to the trust property to
which such portion is attributable is exer-
cisable solely by the grantor without the
approval or consent of any other person or
with the consent of a related or subordi-
nate party who is subservient to the grant-
or, or
‘‘(ii) the only amounts distributable
from such portion (whether income or cor-
pus) during the lifetime of the grantor are
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
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 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—
‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any por-
tion 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 or any
member of such beneficiary’s family (within the
meaning of section 267(c)(4)) has made (directly or
indirectly) transfers of property (other than in a sale
for full and adequate consideration) 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 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.—
(1) Paragraph (2) of section 665(d) is amended
by adding at the end the following new sentence:
‘‘Under rules or regulations prescribed by the Sec-
retary, 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 for-
eign country or possession of the United States on
the settlor or such other person in respect of trust
income.’’.
(2) Paragraph (5) of section 901(b) is amended
by adding at the end the following new sentence:
‘‘Under rules or regulations prescribed by the Sec-
retary, 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 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.—
(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 under section 676 or 677 (other than
subsection (a)(3) thereof) of the Internal Reve-
nue 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. 415. INFORMATION REPORTING REGARDING 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 $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)) or any distribution properly disclosed in
a return under section 6048(c).
‘‘(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,
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) 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 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. 416. 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 made after September 19,
1995.
SEC. 417. RESIDENCE OF TRUSTS, ETC.
(a) TREATMENT AS UNITED STATES PERSON.—
(1) IN GENERAL.—Paragraph (30) of section
7701(a) is amended by striking ‘‘and’’ at the end of
subparagraph (C) and by striking subparagraph (D)
and by inserting the following new subparagraphs:
‘‘(D) any estate (other than a foreign es-
tate, within the meaning of paragraph (31)),
and
‘‘(E) any trust if—
‘‘(i) a court within the United States
is able to exercise primary supervision over
the administration of the trust, and
‘‘(ii) one or more United States fidu-
ciaries have the authority to control all
substantial decisions of the trust.’’.
(2) 
CONFORMING
AMENDMENT.—Paragraph
(31) of section 7701(a) is amended to read as fol-
lows:
‘‘(31) FOREIGN ESTATE OR TRUST.—
‘‘(A) FOREIGN
ESTATE.—The term ‘for-
eign estate’ means an estate the income of
which, from sources without the United States
which is not effectively connected with the con-
duct of a trade or business within the United
States, is not includible in gross income under
subtitle A.
‘‘(B) FOREIGN TRUST.—The term ‘foreign
trust’ means any trust other than a trust de-
scribed in subparagraph (E) of paragraph
(30).’’.
(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) EFFECTIVE DATE.—The amendment made
by this subsection shall take effect on the date of the
enactment of this Act.
Æ