Transactions With Foreign Trusts and Information Reporting on Transactions With Foreign Trusts and Large Foreign Gifts, 39440-39485 [2024-09434]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 90 (Wednesday, May 8, 2024)]
[Proposed Rules]
[Pages 39440-39485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09434]



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Vol. 89

Wednesday,

No. 90

May 8, 2024

Part VIII





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Transactions With Foreign Trusts and Information Reporting on 
Transactions With Foreign Trusts and Large Foreign Gifts; Proposed Rule

Federal Register / Vol. 89 , No. 90 / Wednesday, May 8, 2024 / 
Proposed Rules

[[Page 39440]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124850-08]
RIN 1545-BI04


Transactions With Foreign Trusts and Information Reporting on 
Transactions With Foreign Trusts and Large Foreign Gifts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding information reporting of transactions with foreign 
trusts and receipt of large foreign gifts and regarding loans from, and 
uses of property of, foreign trusts. This document also contains 
proposed amendments to the regulations relating to foreign trusts 
having one or more United States beneficiaries. The proposed 
regulations affect United States persons who engage in transactions 
with, or are treated as the owners of, foreign trusts, and United 
States persons who receive large gifts or bequests from foreign 
persons. This document also provides notice of a public hearing on the 
proposed regulations.

DATES: 
    Comments: Electronic or written public comments must be received by 
July 8, 2024.
    Public Hearing: A public hearing on these proposed regulations has 
been scheduled for August 21, 2024, at 10 a.m. ET. Requests to speak 
and outlines of topics to be discussed at the public hearing must be 
received by July 8, 2024. If no outlines are received by July 8, 2024, 
the public hearing will be cancelled. Requests to attend the public 
hearing must be received by 5:00 p.m. ET on August 19, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124850-
08) by following the online instructions for submitting comments. 
Requests for a public hearing must be submitted as prescribed in the 
``Comments and Requests for a Public Hearing'' section. Once submitted 
to the Federal eRulemaking Portal, comments cannot be edited or 
withdrawn. The Department of the Treasury (Treasury Department) and the 
IRS will publish for public availability any comments submitted to the 
IRS's public docket.
    Send paper submissions to: CC:PA:01:PR (REG-124850-08), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Lara A. Banjanin at (202) 317-6933 or S. Eva Wolf at (202) 317-3893 
(not toll-free numbers); concerning submissions of comments, the 
hearing, or to be placed on the building access list to attend the 
hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by 
email at [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

I. In General

    This document contains proposed amendments to 26 CFR part 1 under 
sections 643(i), 679, 6039F, 6048, and 6677 of the Internal Revenue 
Code (Code) (the proposed regulations). Section 6048, as significantly 
modified by the Small Business Job Protection Act of 1996 (1996 Act), 
Public Law 104-188 (110 Stat. 1755), and further amended by the 
Taxpayer Relief Act of 1997 (1997 Act), Public Law 105-34 (111 Stat. 
788), and the Hiring Incentives to Restore Employment Act (HIRE Act), 
Public Law 111-147 (124 Stat. 71), generally requires U.S. persons to 
report transactions that involve foreign trusts. Section 6677, as 
significantly modified by the 1996 Act and further amended by the HIRE 
Act, imposes penalties on U.S. persons for failing to comply with 
section 6048. Section 6039F, which was added to the Code by the 1996 
Act, and modified by the Tax Cuts and Jobs Act, Public Law 115-97 (131 
Stat. 2054), requires U.S. persons to report the receipt of large gifts 
or bequests from foreign persons, and in the event of a failure to 
provide this information, section 6039F(c) imposes penalties and allows 
the IRS to recharacterize the purported gift or bequest as income. 
Section 643(i), which was added to the Code by the 1996 Act and amended 
by the HIRE Act, and section 679, as amended by the 1996 Act and the 
HIRE Act, provide additional rules intended to prevent taxpayers from 
avoiding U.S. income tax consequences through the use of foreign 
trusts.
    On June 2, 1997, the Treasury Department and the IRS issued Notice 
97-34, 1997-1 CB 422, which provides guidance on sections 643(i), 679, 
6039F, 6048 and 6677 (the foreign trust and gift provisions) as enacted 
or modified by the 1996 Act. On August 7, 2000, the Treasury Department 
and the IRS published a notice of proposed rulemaking and a notice of 
public hearing (REG-209038-89) under section 679 in the Federal 
Register (65 FR 48185). On July 20, 2001, the Treasury Department and 
the IRS published final regulations under section 679. TD 8955 (66 FR 
37866).
    U.S. persons currently provide information required by the foreign 
trust and gift provisions on Form 3520, Annual Return to Report 
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, 
and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. 
Owner (Under section 6048(b)). In 2015, section 2006(b)(9) and (10) of 
the Surface Transportation and Veterans Health Care Choice Improvement 
Act of 2015 (Surface Transportation Act), Public Law 114-41 (129 Stat. 
443), modified the due dates for Forms 3520 and 3520-A for taxable 
years beginning after December 31, 2015. On March 16, 2020, the 
Treasury Department and the IRS issued Revenue Procedure 2020-17, 2020-
12 IRB 539, which exempts from section 6048 information reporting 
requirements certain U.S. individuals' transactions with, and ownership 
of, certain tax-favored foreign trusts that are established and 
operated exclusively or almost exclusively to provide pension or 
retirement benefits, or to provide medical, disability, or educational 
benefits.

II. Purpose of Foreign Trust and Gift Provisions

    During the mid- to late-1990s, abusive tax schemes, including 
offshore schemes involving foreign trusts, reemerged in the United 
States after last peaking in the 1980s. GAO, Efforts to Identify and 
Combat Abusive Tax Schemes Have Increased, But Challenges Remain, GAO-
02-733 (Washington, DC: May 22, 2002). In these schemes, foreign trusts 
were used to transfer large amounts of assets offshore, where it was 
much more difficult for the IRS to identify whether U.S. persons owned 
an interest in such trusts, and whether such persons were reporting and 
paying the required taxes on their income from such trusts. Many of the 
foreign trusts were established in tax haven jurisdictions with bank 
secrecy laws. Before the 1996 Act amended sections 6048 and 6677, there 
was no requirement for U.S. persons to report distributions from 
foreign trusts, and the penalty for failing to report transfers to a 
foreign trust, or an annual foreign trust information return (on

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Form 3520-A), was limited to five percent of the transfer or trust 
corpus, as applicable, not to exceed $1,000. Given that, it was 
difficult for the IRS to obtain information about income earned by 
U.S.-owned foreign trusts and distributions to U.S. beneficiaries of 
foreign trusts, and sections 6048 and 6677 were generally ineffective 
at ensuring that U.S. persons provided this information. The result was 
``rampant tax avoidance.'' 141 Cong. Rec. S13859 (daily ed. Sept. 19, 
1995) (remarks of Senator Moynihan).
    The foreign trust and gift provisions in the 1996 Act were designed 
to accommodate changes in the use of foreign trusts and to limit 
avoidance and evasion of U.S. tax. The most significant changes were 
made to sections 6048 and 6677 to enhance the IRS's ability to obtain 
the information necessary to enforce the tax laws that apply to U.S. 
persons' transactions with, and ownership of, foreign trusts. Other 
changes included enactment of new section 643(i) and amendments to 
section 679, each of which is designed to prevent tax avoidance through 
the use of foreign trusts. In addition, the legislation included new 
section 6039F, which enables the IRS to obtain information about large 
foreign gifts or bequests received by U.S. persons.

III. Overview

A. Section 643(i)
    Section 643(i), as originally enacted in 1996, generally provides 
that, if a foreign trust makes a loan of cash or marketable securities 
directly or indirectly to any grantor or beneficiary of the foreign 
trust who is a U.S. person (other than an entity that is exempt from 
tax under Chapter 1 of the Code), or to a U.S. person related (under 
sections 267 and 707(b)) to such a grantor or beneficiary, the amount 
of the loan is treated as a distribution by the trust to the grantor or 
beneficiary. Section 643(i) also authorizes the Secretary to issue 
regulations providing exceptions, under which a loan by a foreign trust 
would not be treated as a distribution to the grantor or beneficiary of 
the trust. The 1996 Act's legislative history explains that these 
regulations are expected to provide an exception under section 643(i) 
for loans with arm's-length terms, and in applying this exception, the 
regulations should consider whether there is a reasonable expectation 
that the grantor, beneficiary, or related person would repay the loan. 
H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess., at 334 (1996).
    Section V.A of Notice 97-34 provides that a loan of cash or 
marketable securities by a foreign trust to a U.S. grantor or U.S. 
beneficiary of the trust, or to a U.S. person who is related to a U.S. 
grantor or U.S. beneficiary of the trust, is treated as a distribution 
under section 643(i) unless the loan is made in consideration for a 
``qualified obligation'' that satisfies certain specified requirements. 
Notice 97-34 states that what constitutes a qualified obligation will 
be provided in regulations. (Section III.C of Notice 97-34 provides 
similar qualified obligation rules for transfers to foreign trusts. See 
section III.B of this Background.)
    In 2010, Congress expanded the scope of section 643(i) in response 
to concerns that U.S. persons were avoiding the application of section 
643(i) by using trust property other than cash or marketable securities 
without compensating the foreign trust for the use of the property. 
Section 533 of the HIRE Act amended section 643(i) to provide that any 
uncompensated use of trust property by a U.S. grantor or U.S. 
beneficiary of the foreign trust, or any U.S. person related to such 
U.S. grantor or U.S. beneficiary, generally is treated as a 
distribution of the fair market value of the use of such property to 
the U.S. grantor or U.S. beneficiary. This rule does not apply if the 
foreign trust is paid fair market value for the use of the trust 
property within a reasonable timeframe.
    Loans and use of trust property are reported on Part III of Form 
3520. Taxpayers provide this information based on guidance in section 
V.A of Notice 97-34, as well as the instructions for Form 3520. This 
information allows the IRS to determine whether the loan or use of 
trust property should be treated as a distribution pursuant to section 
643(i).
B. Section 679
1. 1976 Act
    Section 679 was enacted by the Tax Reform Act of 1976 (1976 Act), 
Public Law 94-455 (90 Stat. 1520). Section 679 treats a U.S. person who 
directly or indirectly transfers property to a foreign trust as the 
owner of the portion of the foreign trust attributable to the 
transferred property to the extent that, under the terms of the trust, 
the income or corpus of the trust may be paid to or accumulated for the 
benefit of a U.S. person during the taxable year, including if the 
trust were to be terminated during the taxable year.
2. 1996 Act Amendments
    Section 1903 of the 1996 Act made several important changes to 
section 679. For example, Congress was concerned that taxpayers were 
attempting to avoid the application of section 679(a)(1) by 
transferring property to a foreign trust in exchange for obligations 
from the foreign trust that might not be repaid and arguing that such 
obligations satisfied the fair market value exception in section 
679(a)(2). H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess., at 334-35 
(1996). The fair market value exception provides that section 679(a)(1) 
does not apply to any transfer of property to a foreign trust in 
exchange for consideration of at least the fair market value of the 
transferred property. Accordingly, Congress added new section 
679(a)(3), which generally provides that obligations issued by the 
foreign trust, by any grantor or beneficiary of the trust, or by any 
person related to any grantor or beneficiary, are not taken into 
account in applying the fair market value exception except as provided 
in regulations.
    Section III.C of Notice 97-34 implemented the fair market value 
exception of section 679(a)(2)(B) and (a)(3) by providing that, if a 
U.S. person transfers money or other property to a related foreign 
trust in exchange for an obligation issued by the trust or by a person 
related to the trust, the obligation is taken into account for purposes 
of determining whether the U.S. person received fair market value from 
the foreign trust only if the obligation is a qualified obligation that 
satisfies certain specified requirements. (Section V.A of Notice 97-34 
provides similar qualified obligation rules that apply with respect to 
loans from foreign trusts under section 643(i). See section III.A of 
this Background.) In 2001, the Treasury Department and the IRS issued 
final regulations under section 679 in TD 8955 (66 FR 37886) that 
included the section 679 qualified obligation rules described in Notice 
97-34. See Sec.  1.679-4(d).
    A U.S. person's transfers to a foreign trust are reported on Part I 
of Form 3520, together with information about any qualified obligations 
received from the trust. Taxpayers provide this information based on 
the final regulations under section 679, as well as the instructions 
for Form 3520. This information allows the IRS to determine whether the 
U.S. person should be treated as an owner of the foreign trust under 
section 679.
3. HIRE Act Amendments
    In 2010, the HIRE Act made five amendments to section 679, three of 
which are consistent with the final regulations under section 679, and 
two of which set forth new rules not reflected in the final 
regulations.

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    First, section 531(a) of the HIRE Act added new language to section 
679(c)(1) to clarify that an amount is treated as accumulated for the 
benefit of a U.S. person even if the U.S. person's interest in the 
foreign trust is contingent on a future event. This statutory amendment 
is consistent with Sec.  1.679-2(a)(2)(i), which states that the 
determination as to whether income or corpus may be paid to or 
accumulated for the benefit of a U.S. person is made without regard to 
whether the income or corpus actually is distributed to the U.S. person 
during the year, or whether the U.S. person's interest in the income or 
corpus of the trust is contingent on a future event.
    Second, section 531(b) of the HIRE Act added a new paragraph (4) to 
section 679(c) to clarify that, if any person has the discretion to 
make a distribution from the foreign trust to or for the benefit of any 
person, the trust shall be treated as having a U.S. beneficiary unless 
the terms of the trust specifically identify the class of persons to 
whom such distributions may be made, and none of those persons are U.S. 
persons during the taxable year. This statutory amendment is consistent 
with Sec.  1.679-2(a)(1), which provides that a foreign trust is 
treated as having a U.S. beneficiary unless no part of the trust's 
income or corpus may be paid or accumulated to or for the benefit of a 
U.S. person, and if the trust is terminated at any time during the 
taxable year, no part of the trust's income or corpus could be paid to 
or for the benefit of a U.S. person.
    Third, section 531(c) of the HIRE Act added a new paragraph (5) to 
section 679(c) to clarify that, if any U.S. person who directly or 
indirectly transfers property to a foreign trust is directly or 
indirectly involved in any agreement or understanding that may result 
in the income or corpus of the trust being paid to or accumulated for 
the benefit of a U.S. person, then such an agreement or understanding 
shall be treated as constituting a term of the trust. This statutory 
amendment is consistent with Sec.  1.679-2(a)(4)(i), which, assuming 
that a transferor of property to a trust is generally directly or 
indirectly involved with any agreements regarding the accumulation or 
disposition of the income and corpus of the trust, allows the IRS to 
treat a foreign trust as having a U.S. beneficiary by looking beyond 
the language of the trust instrument to all written and oral agreements 
and understandings related to the trust, memoranda or letters of 
wishes, all records that relate to the actual distribution of income 
and corpus, and all other documents relating to the trust, whether or 
not of any purported legal effect.
    Fourth, section 532 of the HIRE Act added a new paragraph (d) to 
section 679, which provides a presumption that a foreign trust has a 
U.S. beneficiary in certain circumstances. If a U.S. person directly or 
indirectly transfers property to a foreign trust (other than certain 
compensatory and charitable trusts), the IRS may treat the trust as 
having a U.S. beneficiary for purposes of applying section 679 to the 
transfer unless the U.S. person submits such information to the IRS as 
the IRS may require and demonstrates to the satisfaction of the IRS 
that the trust satisfies the requirements of section 679(c)(1).
    Finally, section 533(c) of the HIRE Act added a new paragraph (6) 
to section 679(c), which generally treats a loan of cash or marketable 
securities to, or the use of any other trust property by, any U.S. 
person, whether or not a beneficiary under the terms of the trust, as 
paid to or accumulated for the benefit of a U.S. person. Section 
679(c)(6) does not apply to the extent that the U.S. person repays the 
loan at a market rate of interest or pays the fair market value of the 
use of the property within a reasonable period of time. The effect of 
section 679(c)(6) is that, if a foreign trust is not already treated as 
having a U.S. beneficiary, a loan by the trust of cash or marketable 
securities to a U.S. person or the uncompensated use of trust property 
by a U.S. person may cause the foreign trust to be treated as having a 
U.S. beneficiary, with the result that a U.S. person who transferred 
property to the trust may be treated as the owner of the trust under 
section 679(a).
    Final regulations were issued under section 679 in 2001, and 
although instructions for Form 3520 and Form 3520-A have been updated 
to take into account the HIRE Act amendments to section 679, 
regulations implementing these amendments have not been issued.
C. Section 6039F
    Section 1905 of the 1996 Act created new reporting requirements 
under section 6039F for U.S. persons (other than certain exempt 
organizations) that receive large gifts (including bequests) from 
foreign persons. The new information reporting provisions require U.S. 
persons to provide information concerning the receipt of large amounts 
that they treat as foreign gifts or bequests, giving the IRS an 
opportunity to review the characterization of these payments and 
determine whether they are properly treated as gifts.
    Section 6039F(b) generally defines the term foreign gift as any 
amount received from a person other than a U.S. person that the 
recipient treats as a gift or bequest. However, a foreign gift does not 
include a qualified transfer (within the meaning of section 2503(e)(2)) 
or a distribution from a foreign trust. A distribution from a foreign 
trust must be reported as a distribution under section 6048(c) 
(discussed in section III.E of this Background) rather than as a gift 
under section 6039F.
    Section 6039F(c) provides that, if a U.S. person fails, without 
reasonable cause, to report a foreign gift as required by section 
6039F, then (i) the tax consequences of the receipt of the gift will be 
determined by the Secretary and (ii) the U.S. person will be subject to 
a penalty equal to 5 percent of the amount of the gift for each month 
the failure to report the foreign gift continues, with the total 
penalty not to exceed 25 percent of the value of the gift. Under 
sections 6039F(a) and (d), reporting is required if the value of the 
aggregate foreign gifts received by a U.S. person during any taxable 
year exceeds $10,000, as modified by cost-of-living adjustments. Under 
section VI.B.1 of Notice 97-34, however, a U.S. person is required to 
report gifts from a foreign individual or foreign estate only if the 
aggregate amount of gifts from that foreign individual or foreign 
estate exceeds $100,000 during the U.S. person's taxable year. Section 
VI.B.3 of Notice 97-34 provides guidance on when a U.S. person must 
aggregate foreign gifts received from foreign persons that the U.S. 
person knows or has reason to know are related to each other. Once the 
$100,000 threshold has been met, the U.S. person must identify each 
foreign gift in excess of $5,000 but is not required to identify the 
transferor.
    A U.S. person who receives foreign gifts that exceed the threshold 
amounts must report the foreign gifts on Part IV of Form 3520. 
Taxpayers provide this information based on guidance in section VI of 
Notice 97-34, as well as the instructions for Form 3520.
D. Section 6048
    Section 6048(a) through (c) contains three distinct reporting 
obligations with respect to a U.S. person's transactions with, and 
ownership of, foreign trusts.
1. Section 6048(a)
    Section 6048(a) generally requires a responsible party to file 
information returns upon the occurrence of certain reportable events. A 
responsible party is the U.S. grantor of an inter vivos foreign trust, 
the U.S. transferor, or the executor of a U.S. decedent's estate. A 
reportable event is (a) the creation of any foreign trust by a U.S. 
person; (b) the direct or

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indirect transfer of any money or property to a foreign trust by a U.S. 
person, including a transfer by reason of death; or (c) the death of a 
U.S. citizen or resident if the decedent was treated as the owner of 
any portion of a foreign trust or if any portion of a foreign trust was 
included in the gross estate of the decedent. Section 6048(a)(3)(B)(i) 
provides an exception for transfers for fair market value (the fair 
market value exception), and section 6048(a)(3)(B)(ii) provides an 
exception for transfers to certain deferred compensation and charitable 
trusts. (These exceptions correspond to the current substantive 
exemptions to the scope of section 679. See section 679(a)(1) and 
(2)(B).)
    A reportable event is reported on Part I of Form 3520. Section III 
of Notice 97-34 and the instructions for Form 3520 provide information 
to taxpayers regarding this reporting. Section 6048(a) enables the IRS 
to obtain the information necessary to enforce sections 679 (discussed 
in section III.B of this Background) and 684 (added by section 1131(b) 
of the 1997 Act to provide for recognition of gain on certain transfers 
to foreign trusts).
2. Section 6048(b)
    Section 6048(b)(1) generally requires a U.S. person who is treated 
as the owner of any portion of a foreign trust under the grantor trust 
rules (U.S. owner) to ensure that the trust (i) files an annual 
information return to provide a full accounting of all the trust 
activities for the trust's taxable year and (ii) furnishes an annual 
information statement to each U.S. owner and to any other U.S. person 
who receives (directly or indirectly) any distribution from the trust 
during the year (U.S. beneficiary). In addition, the U.S. owner must 
submit such information as the IRS may prescribe with respect to the 
foreign trust.
    Section 6048(b)(2) provides that, unless a foreign trust with a 
U.S. owner appoints a U.S. agent, the Secretary may determine the 
amounts required to be taken into account with respect to such trust by 
the U.S. owner under the grantor trust rules. The U.S. agent will be 
required to act as the foreign trust's limited agent solely for 
purposes of applying sections 7602, 7603, and 7604 with respect to any 
request or summons by the Secretary in connection with the tax 
treatment of any items related to the trust. Certain rules (similar to 
the rules of section 6038A(e)(2) and (4)) relating to the enforcement 
of requests for certain records with respect to foreign-owned 
corporations will apply. Information about the U.S. agent must be 
reported on both the U.S. owner's Form 3520 and the foreign trust's 
Form 3520-A.
    The foreign trust's annual information return is Form 3520-A, and 
any additional information required to be submitted by the U.S. owner 
is provided on Part II of Form 3520. The information statements that 
the foreign trust must furnish to each U.S. owner and to each U.S. 
beneficiary who receives a distribution are the Foreign Grantor Trust 
Owner Statement and the Foreign Grantor Trust Beneficiary Statement, as 
applicable. Taxpayers provide this information based on guidance in 
section IV of Notice 97-34, as well as the instructions for Form 3520 
and Form 3520-A. If the foreign trust fails to file Form 3520-A, 
section 6677 imposes a penalty on the U.S. owner. In order to avoid 
penalties under section 6677, the U.S. owner must complete a substitute 
Form 3520-A for the foreign trust and attach it to the U.S. owner's 
Form 3520. See instructions for Part II of Form 3520.
3. Section 6048(c)
    Section 6048(c)(1) provides that any U.S. person who directly or 
indirectly receives any distribution from a foreign trust is required 
to file an information return to report the name of the trust, the 
aggregate amount of the distributions received, and any other 
information that the Secretary may prescribe. Section 6048(c)(2) 
generally provides that, if adequate records are not provided to the 
Secretary to determine the proper treatment of a distribution from a 
foreign trust, the distribution is treated as an accumulation 
distribution. However, to the extent provided in regulations, this rule 
does not apply if the foreign trust authorizes a U.S. person to act as 
its limited agent under rules similar to the rules of section 
6048(b)(2)(B) (discussed in section III.D.2 of this Background). 
Section 6048(d)(5) (discussed in section III.D.4 of this Background) 
provides that a U.S. person's treatment of a distribution from a 
foreign trust must be consistent with the trust's treatment of such 
item or the Secretary must be notified of the inconsistency.
    Distributions from a foreign trust are reported on Part III of Form 
3520. Taxpayers provide this information based on guidance in section V 
of Notice 97-34, as well as the instructions for Form 3520. Section 
6048(c) enables the IRS to obtain the information it needs to enforce 
the rules relating to the taxation of accumulation distributions 
(sections 665 through 669), as well as sections 672(f), 643(h), and 
643(i). Section 6048(c) requires any U.S. person, including a U.S. 
owner and U.S. beneficiary of a foreign trust, who receives a 
distribution from a foreign trust to report information about the 
distribution. See Wilson v. United States, 6 F.4th 432 (2d Cir. 2021), 
rev'g, No. 19-CV-5037 (BMC), 2019 WL 6118013 (E.D.N.Y. Nov. 18, 2019) 
(holding that when an individual is both the sole owner and beneficiary 
of a foreign trust and fails to timely report distributions received 
from the trust, the IRS may impose a penalty under section 6677 equal 
to 35 percent of the gross reportable amount).
4. Section 6048(d)
    Section 6048(d)(1) provides that, for purposes of section 6048, in 
determining whether a U.S. person makes a transfer to, or receives a 
distribution from, a foreign trust, the fact that a portion of the 
trust is treated as owned by another person under the grantor trust 
rules is disregarded.
    Section 6048(d)(2) provides that, to the extent provided in 
regulations, a domestic trust will be treated as a foreign trust for 
purposes of sections 6048 and 6677 if the trust has substantial 
activities, or holds substantial property, outside the United States. 
The legislative history includes the statement ``that in exercising its 
regulatory authority to treat a U.S. trust as a foreign trust for 
purposes of information reporting purposes, the Secretary of the 
Treasury will take into account the information that such a trust 
reported under the domestic trust reporting rules.'' H.R. Conf. Rep. 
737, 104th Cong., 2d Sess. at 338 (1996). Section VIII.C of Notice 97-
34 states that the Treasury Department and the IRS are studying the 
appropriate scope of section 6048(d)(2) and that, until further 
guidance is issued, a domestic trust is not treated as a foreign trust 
pursuant to section 6048(d)(2).
    Section 6048(d)(3) provides that any notice or return required 
under section 6048 is to be made at such time and in such manner as the 
Secretary prescribes.
    Section 6048(d)(4) authorizes the IRS to suspend or modify any 
requirement of section 6048 if the IRS determines that the United 
States has no significant tax interest in obtaining the required 
information. The Treasury Department and the IRS previously have issued 
guidance providing that information reporting under section 6048(c) is 
not required with respect to distributions from certain foreign 
compensatory trusts, provided that the U.S. person who receives the 
distribution reports the distribution as compensation income on an 
applicable Federal income tax return, and that information reporting 
under section 6048(a) through (c) is not required with respect to 
certain

[[Page 39444]]

Canadian retirement plans. See Section V of Notice 97-34; Rev. Proc. 
2014-55, 2014-44 I.R.B. 753. In addition, on March 16, 2020, the 
Treasury Department and the IRS issued Revenue Procedure 2020-17, which 
exempts from section 6048 information reporting requirements certain 
U.S. individuals' transactions with, and ownership of, certain tax-
favored foreign trusts that are established and operated exclusively or 
almost exclusively to provide pension or retirement benefits or to 
provide medical, disability, or educational benefits.
    Section 6048(d)(5) (added by section 1027(b) of the 1997 Act) 
provides that a U.S. person who either is treated as an owner of any 
portion of a foreign trust or receives (directly or indirectly) any 
distribution from a foreign trust must treat any portion owned or any 
item distributed in a manner that is consistent with the trust's 
treatment of such ownership or item; otherwise, the U.S. person must 
notify the Secretary of the inconsistency. A similar rule in section 
6034A(c) (added by section 1027(a) of the 1997 Act) generally provides 
that a beneficiary of an estate or trust is required to file a return 
in a manner that is consistent with the information received from the 
estate or trust, unless the beneficiary files with the return a 
notification of inconsistent treatment identifying the inconsistency. 
The Treasury Department and the IRS are of the view that the rules in 
sections 6034A(c) and 6048(d)(5) are to be interpreted as comparable to 
the consistency rules that already apply to S corporation shareholders 
and partners in partnerships. H.R. Conf. Rep. 220, 105th Cong., 1st 
Sess. at 551 (1997). Taxpayers may use Form 8082, Notice of 
Inconsistent Treatment or Administrative Adjustment Request (AAR), to 
report an inconsistency.
    Although regulations were issued under section 6048, these 
regulations now are obsolete because they were issued under an earlier 
version of section 6048. These regulations were removed as a result of 
regulations issued pursuant to Executive Order 13789. See TD 9849 (84 
FR 9231).
E. Section 6677
    Under section 6677, as amended by section 1901(b) of the 1996 Act, 
a U.S. person who fails to file a required information return under 
section 6048(a) or (c) is subject to an initial penalty of 35 percent 
of the gross reportable amount (generally, the value of the property 
transferred or received). If an information return required under 
section 6048(b) is not filed, the U.S. person who is treated as the 
owner of the foreign trust is subject to an initial penalty of five 
percent of the gross reportable amount (the trust corpus at the end of 
the year). See also Wilson v. United States, 6 F.4th 432 (2d Cir. 2021) 
(holding that gross reportable amount has multiple meanings under 
section 6677(c) that differ depending on the part of section 6048 that 
is violated), rev'g, No. 19-CV-5037 (BMC), 2019 WL 6118013 (E.D.N.Y. 
2019). In all cases, if the failure to file an information return 
continues for more than 90 days after the day on which the IRS mails 
notification of the failure, an additional $10,000 penalty is imposed 
for each 30-day period (or fraction thereof) during which the failure 
continues. The total amount of the penalties with respect to any 
failure cannot exceed the gross reportable amount with respect to that 
failure. If the gross reportable amount is partially reported, then the 
penalties are applied based on the amount that is unreported. Section 
VII of Notice 97-34.
    Section 535 of the HIRE Act strengthened the penalty structure by 
further amending section 6677 to allow the IRS to impose penalties when 
it does not have enough information to determine the gross reportable 
amount. Section 6677, as amended, provides that the initial penalty is 
the greater of $10,000 or 35 percent (five percent in the case of a 
failure to comply with section 6048(b)) of the gross reportable amount. 
Thus, the IRS may impose an initial penalty of $10,000 on a U.S. person 
who fails to report information without having any information about 
the foreign trust's gross reportable amount. The amendment did not 
change the rules for the additional penalties of $10,000 for each 30-
day period (or fraction thereof) during which the failure to report 
continues.
    Section 6677, as amended, also provides that, if the IRS, after 
having assessed penalties, obtains sufficient information to determine 
the gross reportable amount, any subsequent penalty imposed will be 
reduced as necessary to ensure that the aggregate amount of the 
penalties does not exceed the gross reportable amount. To the extent 
that the amount already paid exceeds the gross reportable amount, the 
IRS will refund the excess to the U.S. person pursuant to section 6402.
    Section 6677(d) provides that no penalty will be imposed on any 
failure that is shown to be due to reasonable cause and not due to 
willful neglect. It further provides that the fact that a foreign 
jurisdiction would impose a civil or criminal penalty on the U.S. 
person (or any other person) for disclosing the required information is 
not reasonable cause.
    Section 6677(e) provides that subchapter B of chapter 63 (relating 
to deficiency procedures for income, estate, gift, and certain excise 
taxes) does not apply in respect of the assessment or collection of any 
penalty imposed under section 6677.
F. Section 643(a)(7)
    Section 643(a)(7), which was added to the Code by section 1906(b) 
of the 1996 Act, provides that the Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of part I of subchapter J of chapter 1 of the Code (sections 
641 through 685), including regulations to prevent avoidance of such 
purposes.
G. Information Return Due Dates
    Section 2006(b) of the Surface Transportation Act provides that, in 
the case of returns for taxable years beginning after December 31, 
2015, the Secretary, or the Secretary's designee, shall modify the 
appropriate regulations addressing certain due dates. Section 
2006(b)(9) provides that the due date of Form 3520-A shall be the 15th 
day of the third month after the close of the trust's taxable year, and 
the maximum extension shall be a 6-month period beginning on such day. 
Section 2006(b)(10) states that the due date of Form 3520 for calendar 
year filers shall be April 15 with a maximum extension for a 6-month 
period ending on October 15.

Explanation of Provisions

I. Section 643(i)--Loans to and Uses of Foreign Trust Property by U.S. 
Persons

    These proposed regulations provide rules relating to loans from 
foreign trusts to U.S. persons and uses of foreign trust property by 
U.S. persons. They generally incorporate the section 643(i) guidance 
that was provided in Notice 97-34 (discussed in section III.A of the 
Background), with certain modifications to provide procedural rules, 
such as how to determine a loan's yield to maturity and how to extend 
the period of assessment for any income tax associated with the loan, 
and anti-abuse rules, such as requiring payments and information 
reporting to be timely. In addition, the proposed regulations provide 
guidance implementing the HIRE Act amendments to section 643(i).
A. Application of Section 643(i) to Loans by or Uses of Property of a 
Foreign Trust
    Proposed Sec.  1.643(i)-1 provides rules for determining when a 
loan of cash or marketable securities from a foreign nongrantor trust, 
made to a U.S. person who is either a grantor or beneficiary of

[[Page 39445]]

the foreign trust or is related to a U.S. person who is a grantor or 
beneficiary of the foreign trust, will be treated as a distribution 
under subchapter J of chapter 1 of the Code (a section 643(i) 
distribution) to the U.S. grantor or beneficiary of the foreign trust. 
These rules also apply to determine whether a distribution is made when 
any such U.S. persons use the property of the foreign trust.
    These rules apply solely for purposes of subparts B, C, and D 
(sections 651-652, 661-664, and 665-668) of part I of subchapter J of 
chapter 1 of the Code, and thus section 643(i) does not apply to a 
foreign trust to the extent that it is a grantor trust described in 
subpart E (sections 671 through 679) of part I of subchapter J. 
Although section 643(i) applies to loans of cash or marketable 
securities from a foreign trust to a U.S. grantor or a U.S. person 
related to a U.S. grantor, these provisions of section 643(i) predate 
the HIRE Act, which enacted section 679(c)(6). Under section 679, a 
U.S. person who transfers property to a foreign trust is treated as the 
owner of the portion of the trust attributable to the property 
transferred to the trust if there is a U.S. beneficiary of any portion 
of the trust, unless an exception applies. Section 679(c)(6) provides 
that any direct or indirect loan of cash or marketable securities to a 
U.S. person, or direct or indirect use of any other trust property by a 
U.S. person, whether or not the U.S. person is a beneficiary under the 
terms of the trust, will be treated as paid to or accumulated for the 
benefit of a U.S. person, unless an exception applies (see proposed 
Sec.  1.679-2(a)(5)(iii)). That is, the U.S. person will be treated as 
a beneficiary of the foreign trust for purposes of section 679. In most 
circumstances, this causes the foreign trust to be a grantor trust 
under section 679, removing it from the purview of section 643(i). 
Section 643(i), therefore, will rarely apply to a U.S. grantor or a 
U.S. person related to a U.S. grantor. It might apply, however, if the 
U.S. grantor created but did not make a transfer to the foreign trust.
    Proposed Sec.  1.643(i)-1(b)(1) provides that, unless an exception 
applies, any loan of cash or marketable securities made from a foreign 
trust (whether from trust corpus or income) directly or indirectly to a 
U.S. grantor or beneficiary of the trust or to any U.S. person related 
to a U.S. grantor or beneficiary of the trust is treated as a section 
643(i) distribution to such U.S. grantor or beneficiary as of the date 
on which the loan is made. For these purposes, a loan to a grantor 
trust or to a disregarded entity is treated as a loan to the owner of 
the grantor trust or of the disregarded entity. For example, a loan to 
a single member LLC treated as a disregarded entity is treated as a 
loan to the owner of the LLC.
    Proposed Sec.  1.643(i)-1(b)(2)(i) describes indirect loans for 
purposes of section 643(i) to include loans made through an 
intermediary, agent, or nominee. Proposed Sec.  1.643(i)-1(b)(2)(i) 
also provides three examples of indirect loans: (1) a loan made by any 
person to a U.S. grantor or beneficiary of a foreign trust or any U.S. 
person related to a U.S. grantor or beneficiary if the foreign trust 
guarantees (within the meaning of Sec.  1.679-3(e)(4)) the loan; (2) a 
loan made by any person related (within the meaning of proposed Sec.  
1.643(i)-1(d)(9)) to the foreign trust to a U.S. grantor or beneficiary 
of the foreign trust or to a U.S. person related to a U.S. grantor or 
beneficiary; and (3) a loan made by a foreign trust to a foreign 
person, other than to a nonresident alien individual who is a grantor 
or beneficiary of the trust, if the foreign person is related (within 
the meaning of proposed Sec.  1.643(i)-1(d)(9)) to a U.S. grantor or 
beneficiary of the trust. See proposed Sec.  1.643(i)-1(b)(2)(i)(A) 
through (C). However, the loans described in examples (2) and (3) above 
are excepted from section 643(i) treatment if the U.S. grantor or 
beneficiary of the foreign trust satisfies the information reporting 
requirements of proposed Sec.  1.6048-4 with respect to the loan and 
attaches to a Federal income tax return an explanatory statement that 
demonstrates to the satisfaction of the IRS that the loan would have 
been made without regard to the U.S. grantor's or beneficiary's 
relationship to the foreign trust. See proposed Sec.  1.643(i)-
1(b)(2)(ii). There is no such exception for a loan made by any person 
that is guaranteed (within the meaning of Sec.  1.679-3(e)(4)) by a 
foreign trust because a foreign trust is unlikely to guarantee such a 
loan absent its relationship with the U.S. grantor or beneficiary.
    Proposed Sec.  1.643(i)-1(b)(2)(iii) provides that loans from a 
foreign trust to a U.S. grantor or beneficiary or U.S. person related 
to a U.S. grantor or beneficiary through an intermediary are treated as 
made directly from the foreign trust to the U.S. grantor or beneficiary 
or U.S. person related to a U.S. grantor or beneficiary.
    In order to discourage grantors and beneficiaries of a foreign 
trust from changing their U.S. residence in a particular year to avoid 
the application of section 643(i), proposed Sec.  1.643(i)-1(b)(3) 
provides an anti-abuse rule. If a nonresident alien who is a grantor or 
beneficiary of a foreign trust receives a loan from the foreign trust 
and becomes a U.S. person within two years, that grantor or beneficiary 
will be subject to section 643(i) with respect to the outstanding 
amount of the loan as of the date the grantor or beneficiary acquires 
U.S. residence or citizenship if the loan was not a qualified 
obligation as of the date that it was made.
    Proposed Sec.  1.643(i)-1(c) provides that any direct or indirect 
use of other property of a foreign trust by a U.S. grantor or 
beneficiary or any U.S. person related to a U.S. grantor or beneficiary 
is treated as a section 643(i) distribution to the U.S. grantor or 
beneficiary in the taxable year in which the use occurs. Use of 
property of a foreign trust by a grantor trust or a disregarded entity 
is treated as use by the owner of the grantor trust or of the 
disregarded entity. For example, use of trust property by a single 
member LLC treated as a disregarded entity would be treated as use by 
the owner of the LLC.
    Proposed Sec.  1.643(i)-1(c)(2)(i) describes indirect use of trust 
property to include use by an agent or nominee. Indirect use of trust 
property also includes use by a foreign person, other than a 
nonresident alien individual who is a beneficiary of the foreign trust, 
if the foreign person is related to a U.S. grantor or beneficiary of 
the trust, unless the U.S. grantor or beneficiary reports the use of 
trust property on Part III of Form 3520, as required by proposed Sec.  
1.6048-4, and attaches to the U.S. grantor's or beneficiary's Federal 
income tax return an explanatory statement that demonstrates to the 
satisfaction of the IRS that the use of trust property would have been 
made without regard to the U.S. grantor's or beneficiary's relationship 
to the foreign trust. See proposed Sec.  1.643(i)-1(c)(2).
B. Exceptions
    Proposed Sec.  1.643(i)-2(a) provides four exceptions to the 
general rule of proposed Sec.  1.643(i)-1(b)(1):
    First, the general rule will not apply to any loan of cash in 
exchange for a qualified obligation within the meaning of proposed 
Sec.  1.643(i)-2(b)(2)(iii). The proposed regulations do not provide an 
exception from the general rule for loans of marketable securities as 
such a rule would be more difficult to apply, and it is less likely 
that a foreign trust would make a loan of marketable securities. The 
Treasury Department and the IRS request comments on whether qualified 
obligation rules are needed for loans of marketable securities.
    Second, in the case of a use of trust property other than a loan of 
cash or marketable securities, the general rule will not apply to the 
extent that the

[[Page 39446]]

foreign trust receives the fair market value of such use within a 
reasonable period (described in proposed Sec.  1.643(i)-2(a)(2)(ii) as 
60 days or less) from the start of the use of the trust property. The 
fair market value of the use will be based on all the facts and 
circumstances, including the type of property used and the period of 
use.
    Third, the general rule will not apply to any de minimis use of 
trust property (described in proposed Sec.  1.643(i)-2(a)(3) as 
aggregate use by members of a group consisting of the U.S. grantors and 
beneficiaries and the U.S. persons related to them for a total of 14 
days or less during the taxable year), other than a loan of cash or 
marketable securities, by a U.S. grantor or beneficiary or a U.S. 
person related to a U.S. grantor or beneficiary.
    Fourth, the general rule will not apply to a loan of cash that is 
made by a foreign corporation to a U.S. beneficiary of the foreign 
trust to the extent the aggregate amount of all such loans to the 
beneficiary does not exceed undistributed earnings and profits of the 
foreign corporation attributable to amounts that are, or have been, 
included in the beneficiary's gross income under section 951, 951A, or 
1293. This exception is intended to prevent double taxation that could 
result by reason of the application of section 643(i) to an amount that 
has already been included in the U.S. beneficiary's gross income as a 
subpart F income inclusion, a global intangible low-taxed income 
inclusion, an inclusion by reason of a controlled foreign corporation's 
investment of earnings in United States property, or a qualified 
electing fund inclusion. The Treasury Department and the IRS request 
comments on whether the scope of the exception is appropriate, and 
whether ordering rules to determine the sourcing of loan amounts, for 
example, rules based on the principles of section 959 or similar to the 
provisions of Sec.  1.672(f)-4(c)(3), or other clarifications on the 
exception's application, are necessary.
C. Qualified Obligations
    Proposed Sec.  1.643(i)-2(b) provides rules for determining whether 
a loan of cash is made in exchange for a qualified obligation. Proposed 
Sec.  1.643(i)-2(b)(2) defines the terms obligor, obligation, and 
qualified obligation. The definitions of obligation and qualified 
obligation are consistent with the amended definitions of obligation 
and qualified obligation in proposed Sec.  1.679-1(c)(6) and Sec.  
1.679-4(d), respectively. The term obligor means a person who issues an 
obligation (within the meaning of proposed Sec.  1.643(i)-2(b)(2)(i)) 
to a foreign trust in exchange for a loan of cash. The term obligation 
means any instrument or contractual arrangement that constitutes 
indebtedness under general principles of Federal income tax law (for 
example, a bond, note, debenture, certificate, bill receivable, account 
receivable, note receivable, open account, or other evidence of 
indebtedness), and an annuity contract that would not otherwise be 
classified as indebtedness under general principles of Federal income 
tax law. Under proposed Sec.  1.643(i)-2(b)(2)(iii)(A), the term 
qualified obligation means an obligation that satisfies all of the 
following requirements:
    First, the obligation must be in writing.
    Second, the term of the obligation must not exceed five years.
    Third, all payments on the obligation must be made in cash in U.S. 
dollars. The Treasury Department and the IRS stress this requirement to 
make all payments in cash in U.S. dollars, in light of abusive 
transactions in which taxpayers have used an inflated valuation of in-
kind property to purportedly repay an obligation.
    Fourth, the obligation must be issued at par and must provide for 
stated interest at a fixed rate or a qualified floating rate within the 
meaning of Sec.  1.1275-5(b).
    Fifth, the yield to maturity must be not less than 100 percent and 
not greater than 130 percent of the applicable Federal rate in effect 
under section 1274(d) on the day on which the obligation is issued. The 
yield to maturity and the applicable Federal rate must be based on the 
same compounding period. If an obligation is a variable rate debt 
instrument that provides for stated interest at a qualified floating 
rate, the rules in Sec. Sec.  1.1274-2(f)(1) and 1.1275-5(e) apply to 
determine the obligation's yield to maturity.
    Sixth, all stated interest on the obligation must be qualified 
stated interest within the meaning of Sec.  1.1273-1(c).
    In addition to these six initial requirements, for both the first 
year and each succeeding year in which the obligation remains 
outstanding, the three requirements of proposed Sec.  1.643(i)-
2(b)(2)(iii)(B) must be satisfied in order for the obligation to remain 
a qualified obligation. First, the U.S. grantor or beneficiary (as the 
person who would be subject to income tax if an obligation either is 
not a qualified obligation or ceases to be a qualified obligation) must 
extend the period for assessment on Part III of Form 3520 (under rules 
described in proposed Sec.  1.643(i)-2(b)(2)(iii)(B)(1)) of any income 
tax attributable to the loan and any consequent income tax changes for 
each year that the obligation is outstanding to a date not earlier than 
three years after the maturity date of the obligation issued in 
consideration for the loan. Second, the U.S. grantor or beneficiary 
must report the status of the obligation, including any payments made, 
on Part III of Form 3520. Third, the obligor must make all payments of 
principal and interest on the obligation according to the terms of the 
obligation.
    Proposed Sec.  1.643(i)-2(b)(3) provides that, if the terms of the 
obligation are modified and the modification is treated as an exchange 
under Sec.  1.1001-3, the new obligation that is deemed issued in the 
exchange under Sec.  1.1001-3 must satisfy the requirements in proposed 
Sec.  1.643(i)-2(b)(2)(iii) to be a qualified obligation using the 
original obligation's issue date. If the modification is not treated as 
an exchange under Sec.  1.1001-3, then the obligation is retested as of 
the date of the modification to determine whether the obligation, as 
modified, continues to satisfy the requirements to be a qualified 
obligation.
    Proposed Sec.  1.643(i)-2(b)(4) provides that if, while the 
obligation is outstanding, the U.S. obligor directly or indirectly 
issues another obligation to the foreign trust in exchange for cash, 
the outstanding obligation is deemed to have the maturity date of the 
new obligation for purposes of determining whether the term of the 
outstanding obligation exceeds five years. The outstanding obligation 
must be retested as of the issue date of the new obligation to 
determine whether the outstanding obligation continues to be a 
qualified obligation. The new obligation also must be separately tested 
to see if it satisfies the requirements to be a qualified obligation.
    Proposed Sec.  1.643(i)-2(b)(5) provides that the IRS may treat two 
or more obligations issued by a U.S. obligor as a single obligation 
that is not a qualified obligation if they are structured with a 
principal purpose to avoid the application of section 643(i).
    Proposed Sec.  1.643(i)-2(b)(6) provides that, if a qualified 
obligation ceases to be a qualified obligation (for example, because a 
modification causes the term of the obligation to exceed five years), 
the U.S. grantor or beneficiary is treated as receiving a section 
643(i) distribution from the foreign trust. In general, the amount of 
the section 643(i) distribution is the obligation's outstanding stated 
principal amount plus any accrued but

[[Page 39447]]

unpaid qualified stated interest (within the meaning of Sec.  1.1273-
1(c)) as of the date of the event that causes the obligation to no 
longer be a qualified obligation. If the IRS treats two or more 
obligations as a single obligation that is not a qualified obligation 
under proposed Sec.  1.643(i)-2(b)(5), then the amount of the section 
643(i) distribution will not exceed the sum of the outstanding stated 
principal amounts of the obligations plus any accrued but unpaid 
qualified stated interest as of the date determined by the IRS.
D. Trust Property Attributable to Nongrantor Trust Portion
    Proposed Sec.  1.643(i)-2(c) provides rules for determining the 
extent to which a loan or use of trust property from a partial 
nongrantor trust will be attributable to the nongrantor trust portion. 
Generally, a loan or use of trust property from a partial nongrantor 
trust must be apportioned in a manner that is reasonable based on all 
the facts and circumstances, including the terms of the governing 
instrument, local law, and the practice of the trustee, if it is 
reasonable and consistent. However, if a loan or use of trust property 
can be made from only one portion of the foreign trust because the type 
of property loaned or used is held only by that portion, then the loan 
or use of property is attributable to that portion.
E. Reporting
    The Treasury Department and the IRS are of the view that it is 
appropriate to require reporting, pursuant to the authority granted to 
the Treasury Department and the IRS by section 643(a)(7), of all loans 
and uses of trust property that are potentially subject to section 
643(i), in order to ensure that the IRS has the information necessary 
to enforce taxpayer compliance with these rules. Thus, proposed Sec.  
1.643(i)-2(d) provides that any loan of cash or marketable securities 
by a foreign trust to a U.S. person and any use by a U.S. person of 
property belonging to a foreign trust, without regard to whether such 
loan or use of property is treated as a section 643(i) distribution, 
also is a distribution within the meaning of proposed Sec.  1.6048-4(b) 
and subject to the information reporting described under proposed Sec.  
1.6048-4(a). See proposed Sec.  1.6048-4(b)(3)(ii) and (iii) and 
(b)(4)(ii) and (iii).
F. Amount Treated as Section 643(i) Distribution
    Proposed Sec.  1.643(i)-3(a) provides rules for determining the 
amount that is treated as a section 643(i) distribution if an exception 
does not apply. In the case of a loan of cash, the amount of the 
section 643(i) distribution is the issue price of the loan as of the 
date the loan is treated as a distribution from the foreign trust. In 
the case of a loan of marketable securities, the amount of the section 
643(i) distribution is the fair market value of the securities as of 
the date the loan is treated as a distribution from the foreign trust. 
In the case of the use of trust property without fair market value 
compensation, the amount of the section 643(i) distribution is the fair 
market value of the use of the property less any payments made for the 
use of the property within a reasonable period of time.
G. Allocation of Section 643(i) Distribution Among Multiple U.S. 
Grantors and Beneficiaries
    Proposed Sec.  1.643(i)-3(b) provides a rule for allocating a 
section 643(i) distribution among multiple U.S. grantors and 
beneficiaries. If a U.S. person who is not a U.S. grantor or 
beneficiary of a foreign trust but who is related to more than one U.S. 
grantor or beneficiary of the foreign trust receives a loan of cash or 
marketable securities from the trust, or uses trust property, and the 
loan or use is treated as a section 643(i) distribution, then each U.S. 
grantor or beneficiary who is related to the U.S. person receiving the 
loan or using trust property is treated as receiving an equal share of 
the section 643(i) distribution.
H. Tax Consequences of a Section 643(i) Distribution
    Proposed Sec.  1.643(i)-3(c) provides rules to determine the tax 
consequences of a section 643(i) distribution to a foreign trust 
treated as making a section 643(i) distribution and to a U.S. grantor 
or beneficiary treated as receiving the distribution. Proposed Sec.  
1.643(i)-3(c)(2) provides that a foreign trust generally must treat the 
section 643(i) distribution as an amount properly paid, credited, or 
required to be distributed by the trust as described in section 
661(a)(2) for which the trust may be allowed a distribution deduction 
in computing its taxable income. In addition, a section 643(i) 
distribution of marketable securities would cause a foreign trust to be 
deemed to have elected to have section 643(e)(3) apply to such 
distribution, which would cause the trust to recognize gain or loss as 
if the marketable securities had been sold at fair market value. Any 
capital gain recognized by the foreign trust would be included in the 
trust's distributable net income (DNI) pursuant to section 
643(a)(6)(C). As a result of the deemed election, a U.S. grantor or 
beneficiary would be treated as including in gross income under section 
662(a)(2) the fair market value of the marketable securities, and in 
computing its taxable income, the foreign trust would be allowed to 
deduct the fair market value of the marketable securities to the extent 
allowed under section 661(a)(2).
    Proposed 1.643(i)-3(c)(2)(iii) provides that the foreign trust may 
issue a Foreign Nongrantor Trust Beneficiary Statement (described in 
proposed Sec.  1.6048-4(c)(2)) to each U.S. grantor or beneficiary who 
receives any loan of cash or marketable securities or uses other trust 
property during the taxable year of the trust or is related to a U.S. 
person who receives any loan of cash or marketable securities or uses 
other trust property during the taxable year of the trust, whether or 
not such U.S. grantor or beneficiary would be required to take the 
amount into account as a section 643(i) distribution. A U.S. grantor or 
beneficiary who does not receive a Foreign Nongrantor Trust Beneficiary 
Statement with respect to a section 643(i) distribution is required to 
determine the tax consequences of the distribution under the default 
calculation method in proposed Sec.  1.643(i)-3(c)(3)(ii).
    Proposed Sec.  1.643(i)-3(c)(3) provides that a U.S. grantor or 
beneficiary who is treated as receiving a section 643(i) distribution 
must determine the tax consequences of the distribution using either 
the actual calculation method or the default calculation method. Under 
the actual calculation method, set out under proposed Sec.  1.643(i)-
3(c)(3)(i), a U.S. grantor or beneficiary must treat a section 643(i) 
distribution as an amount properly paid, credited, or required to be 
distributed by the foreign trust as described in section 662(a)(2) 
(relating to inclusions in gross income by beneficiaries of trusts 
accumulating income or distributing corpus). The tax consequences of 
the section 643(i) distribution to a U.S. grantor or beneficiary are 
determined by using information provided in the Foreign Nongrantor 
Trust Beneficiary Statement and applying the rules of subparts C and D 
of part I of subchapter J of chapter 1 of the Code.
    Under the default calculation method, as provided in proposed Sec.  
1.643(i)-3(c)(3)(ii), a U.S. grantor or beneficiary must determine the 
tax consequences of the section 643(i) distribution under the rules 
provided in proposed Sec.  1.6048-4(d)(3). For an explanation of the 
default calculation method, see section IV.C of this Explanation of 
Provisions.
    A U.S. grantor or beneficiary may not use the actual calculation 
method unless the U.S. grantor or beneficiary

[[Page 39448]]

has received a Foreign Nongrantor Trust Beneficiary Statement 
(described in proposed Sec.  1.6048-4(c)(2)) from the foreign trust. A 
U.S. grantor or beneficiary who previously has used the default 
calculation method must consistently use the default calculation method 
to determine the tax consequences of all subsequent distributions from 
the same foreign trust (including distributions other than section 
643(i) distributions), except in the year in which the foreign trust 
terminates. See proposed Sec.  1.6048-4(b) for the definition of the 
term distribution, and see proposed Sec.  1.6048-4(d)(3)(iii) for rules 
relating to the tax consequences to a U.S. grantor or beneficiary in 
the year in which a foreign trust terminates.

I. Subsequent Transactions

    Proposed Sec.  1.643(i)-3(d)(1) provides rules regarding the 
treatment of any subsequent transaction between a foreign trust and an 
obligor regarding the principal of any loan of cash or marketable 
securities (or use of trust property) that is treated as a section 
643(i) distribution, including complete or partial repayment, 
satisfaction, cancellation, discharge, return of trust property, or 
otherwise, but not including payments of interest. Proposed Sec.  
1.643(i)-3(d)(2) provides that any subsequent transaction with respect 
to the principal of any loan of cash or marketable securities or return 
of trust property treated as a section 643(i) distribution has no tax 
consequences to a foreign trust. However, payment to a foreign trust 
other than the repayment of principal of any loan treated as a section 
643(i) distribution, such as the payment of interest, is treated as 
income to the trust.
    Proposed Sec.  1.643(i)-3(d)(3) provides the consequences to an 
obligor of subsequent transactions between a foreign trust and the 
obligor related to a section 643(i) distribution. Generally, any 
subsequent transaction regarding the principal of any loan of cash or 
marketable securities or return of trust property treated as a section 
643(i) distribution is treated as a transfer that is not a gratuitous 
transfer by a U.S. person for purposes of Sec.  1.671-2(e)(2)(i) and 
chapter 1 of the Code. Thus, the repayment of principal would not cause 
an obligor to be treated as the owner of the foreign trust. However, if 
an obligor satisfies the principal of any loan of cash or marketable 
securities treated as a section 643(i) distribution through a transfer 
of property to the foreign trust, the obligor will recognize as gain or 
loss the difference between the fair market value of the property 
transferred and its adjusted basis in the hands of the obligor under 
the rules of section 1001 and the regulations issued under section 
1001.

II. Section 679--Foreign Trusts Treated as Having a U.S. Beneficiary

    The proposed regulations amend the definition of U.S. person in 
Sec.  1.679-1(c)(2), the definition of obligation in Sec.  1.679-
1(c)(6), and the definition of qualified obligation in Sec.  1.679-
4(d). The amended definitions generally are consistent with the 
definitions of the same terms in proposed Sec. Sec.  1.643(i)-1(d)(12) 
and 1.643(i)-2(b)(2), except that the definition of a U.S. person in 
proposed Sec.  1.679-1(c)(2) does not exclude tax-exempt entities.
    The proposed regulations also make two additions to Sec.  1.679-2 
that provide guidance on two statutory provisions added to section 679 
by the HIRE Act. First, proposed Sec.  1.679-2(a)(5) and proposed Sec.  
1.679-2(b)(3) provide guidance to determine when a loan from a foreign 
trust to a U.S. person or the use of foreign trust property by a U.S. 
person causes the foreign trust to be treated as having a U.S. 
beneficiary. Second, proposed Sec.  1.679-2(d) implements section 
679(d), which generally provides that, if a U.S. person directly or 
indirectly transfers property to a foreign trust, the trust is presumed 
to have a U.S. beneficiary in certain circumstances.
A. Definition of U.S. Person
    Proposed Sec.  1.679-1(c)(2) amends the current definition of U.S. 
person for purposes of Sec. Sec.  1.679-1 through 1.679-6 to remove the 
explicit statement that a nonresident alien individual who elects under 
section 6013(g) to be treated as a resident of the United States is a 
U.S. person for purposes of section 679 without intending a substantive 
change from the existing regulation regarding the treatment of persons 
who make an election under section 6013(g). Additionally, a U.S. person 
for purposes of section 679 will include a nonresident alien individual 
who elects under section 6013(h) to be treated as a resident of the 
United States. An election under either section 6013(g) or (h) is 
effective for all purposes of chapter 1 of the Code, including section 
679, and thus, no specific reference to either rule should be required.
    Under the definition of U.S. person in the proposed regulations, 
however, a dual resident taxpayer (within the meaning of Sec.  
301.7701(b)-7(a)(1)) is not treated as a U.S. person with respect to 
any taxable year (or portion of a taxable year) for which such person 
computes U.S. tax liability as a nonresident alien pursuant to Sec.  
301.7701(b)-7. The Treasury Department and the IRS are of the view that 
it is not necessary to treat a dual resident taxpayer who has elected 
to compute such person's income tax liability as a nonresident alien as 
a U.S. person for purposes of Sec. Sec.  1.679-1 through 1.679-6 in 
order to carry out the purposes of section 679. However, see Sec.  
1.679-5 for rules that may apply if a dual resident taxpayer who has 
been computing U.S. tax liability as a nonresident alien begins to 
compute tax liability as a U.S. resident.
B. Definition of Obligation
    Proposed Sec.  1.679-1(c)(6) amends the current definition of 
obligation for purposes of Sec. Sec.  1.679-1 through 1.679-6 to 
conform to the definition of obligation in proposed Sec.  1.643(i)-
2(b)(2)(i).
C. Loans From Foreign Trusts and Uses of Trust Property
    Proposed Sec.  1.679-2(a)(5)(i) provides guidance under section 
679(c)(6), which was added to the Code by the HIRE Act. As a general 
rule, any direct or indirect loan of cash or marketable securities 
(whether from trust income or corpus) by a foreign trust to, or the 
direct or indirect use of any other property of a foreign trust by, any 
U.S. person (whether or not a beneficiary under the terms of the trust) 
will be treated as causing trust income or corpus to be paid to or 
accumulated for the benefit of a U.S. person for purposes of Sec.  
1.679-2(a)(1). For these purposes, a loan to, or use of any other 
property of a foreign trust by, a grantor trust or a disregarded entity 
is treated as a loan to, or use of trust property by, the owner of the 
grantor trust or of the disregarded entity. (For example, a loan to a 
single member LLC treated as a disregarded entity would be treated as a 
loan to the owner of the LLC.) Consequently, a foreign trust that is 
not already treated as having a U.S. beneficiary under Sec.  1.679-2 is 
treated as having a U.S. beneficiary for purposes of Sec.  1.679-1, 
with the result that a U.S. grantor who has made a transfer to the 
foreign trust is treated as the owner of the trust (or a portion of the 
trust). See proposed Sec.  1.6048-4 for rules relating to information 
reporting with respect to loans from foreign trusts and the use of 
property of a foreign trust.
    Proposed Sec.  1.679-2(a)(5)(ii) provides that an indirect loan 
from a foreign trust to a U.S. person includes a loan made by any 
person, whether U.S. or foreign, if the foreign trust provides a 
guarantee (within the meaning of Sec.  1.679-3(e)(4)) for the loan. An 
indirect loan from a foreign trust to a U.S. person also

[[Page 39449]]

includes a loan made through an intermediary, such as an agent or 
nominee of the foreign trust or of the U.S. beneficiary, and a loan 
from a person related (within the meaning of proposed Sec.  1.643(i)-
1(d)(9)) to the foreign trust.
    Proposed Sec.  1.679-2(a)(5)(iii) provides three exceptions to the 
general rule of proposed Sec.  1.679-2(a)(5)(i).
    First, the general rule does not apply if the U.S. person who 
receives the loan of cash or marketable securities, or who uses trust 
property, is described in section 501(c)(3).
    Second, the general rule does not apply to any loan of cash 
received by a U.S. person in exchange for a qualified obligation within 
the meaning of proposed Sec.  1.643(i)-2(b)(2)(iii)(A), provided the 
obligor timely makes all payments within the meaning of proposed Sec.  
1.643(i)-2(b)(2)(iii)(B)(3).
    Third, the general rule does not apply if the U.S. person who uses 
trust property (other than a loan of cash or marketable securities) 
pays the foreign trust the fair market value of the use of such 
property within a reasonable period from the date of the start of the 
use of the property. The fair market value is based on all the facts 
and circumstances, including the type of property used and the period 
of use. Proposed Sec.  1.679-2(a)(5)(iv) provides two safe harbors in 
which this fair market value exception applies.
    Proposed Sec.  1.679-2(a)(5)(v) addresses the interaction of 
proposed Sec.  1.679-2(a)(5) with section 643(i) and confirms that 
section 643(i) does not apply to the extent a foreign trust is treated 
as having acquired a U.S. beneficiary and is treated as owned by a U.S. 
person under section 679 (discussed in section I.A of this Explanation 
of Provisions).
    Proposed Sec.  1.679-2(b)(3) provides that a loan of cash or 
marketable securities or the use of trust property that does not 
qualify for the exceptions described in proposed Sec.  1.679-
2(a)(5)(iii) is treated as paid to or accumulated for the benefit of a 
U.S. person if the loan is made to, or the property is used by, a 
foreign entity described in Sec.  1.679-2(b)(1), or if the loan is made 
through, or the property is used by, an intermediary or is made by any 
other means where a U.S. person may obtain an actual or constructive 
benefit, as described in Sec.  1.679-2(b)(2).
D. Presumption That Foreign Trust Has U.S. Beneficiary
    Proposed Sec.  1.679-2(d)(1) provides guidance under section 679(d) 
regarding whether a foreign trust is deemed to have a U.S. beneficiary. 
As a general rule, if a U.S. person directly or indirectly transfers 
property to a foreign trust (other than a compensatory or charitable 
trust described in Sec.  1.679-4(a)(2) or (3)), the IRS may treat the 
trust as having a U.S. beneficiary for purposes of applying Sec.  
1.679-1 unless the U.S. person, for the tax year in which the transfer 
is made, (i) satisfies the information reporting requirements of 
proposed Sec.  1.6048-2 with respect to the transfer, and (ii) attaches 
an explanatory statement to the U.S. person's Federal income tax return 
demonstrating to the satisfaction of the IRS that the trust satisfies 
the requirements of Sec.  1.679-2(a)(1) immediately after the transfer. 
Section 1.679-2(a)(1) provides that a foreign trust is treated as 
having a U.S. beneficiary unless, during the taxable year in which the 
U.S. person made the transfer, (i) no part of the income or corpus of 
the foreign trust may be paid to or accumulated for the benefit of, 
directly or indirectly, a U.S. person, and (ii) if the foreign trust is 
terminated at any time during the taxable year, no part of the income 
or corpus of the trust could be paid to or for the benefit of, directly 
or indirectly, a U.S. person.
    Proposed Sec.  1.679-2(d)(2) provides that the IRS may request 
additional information related to the foreign trust and its potential 
beneficiaries to determine whether the trust satisfies the requirements 
of Sec.  1.679-2(a)(1). Unless the U.S. person provides such additional 
information within 60 days (90 days if the U.S. person is outside the 
United States) after the IRS's written notice and request, the trust 
will be presumed to have a U.S. beneficiary.
E. Definition of Qualified Obligation
    Proposed Sec.  1.679-4(d) amends the current definition of 
qualified obligation for purposes of Sec.  1.679-4 to conform to the 
definition of qualified obligation in proposed Sec.  1.643(i)-
2(b)(2)(iii) and the additional rules in proposed Sec. Sec.  1.643(i)-
2(b)(3) through (6) (discussed in section I.C of this Explanation of 
Provisions).

III. Section 6039F--Information Reporting Rules for U.S. Recipients of 
Foreign Gifts

    The proposed regulations provide information reporting rules for 
U.S. recipients of foreign gifts by generally incorporating the section 
6039F guidance that was provided in Notice 97-34 (discussed in section 
III.C of the Background). They also provide additional guidance that is 
needed to implement all of section 6039F and to address certain abuses 
of which the IRS has become aware and relevant statutory developments 
since 1997, including the enactment of section 2801 dealing with gifts 
and bequests from certain expatriates.
A. In General
    Proposed Sec.  1.6039F-1(a)(1) provides that any U.S. person who 
treats an amount received from a foreign person as a foreign gift 
during a taxable year must report that amount on Part IV of Form 3520 
by the fifteenth day of the fourth month after the close of the U.S. 
person's taxable year. Proposed Sec.  1.6039F-1(a)(2) provides that, if 
the U.S. person qualifies for an automatic extension of time to file an 
income tax return under section 6081 and Sec.  1.6081-5(a)(5) because 
the U.S. person resides outside of the United States and Puerto Rico, 
and the U.S. person's main place of business or post of duty is outside 
of the United States or Puerto Rico, Form 3520 must be filed by the 
fifteenth day of the sixth month after the close of the U.S. person's 
taxable year. In either case, if the U.S. person has been granted an 
extension of time to file an income tax return pursuant to section 
6081, an extension of time for filing Form 3520 is automatically 
granted to the fifteenth day of the tenth month following the close of 
the U.S. person's taxable year. See proposed Sec.  1.6039F-1(a)(1) and 
(2). Proposed Sec.  1.6039F-1(a)(3) provides that, if the U.S. person 
dies, the executor of the U.S. person's estate must report the foreign 
gift on Part IV of Form 3520 by the fifteenth day of the fourth month 
following the close of the 12-month period which began with the first 
day of the U.S. person's final taxable year or, if the executor has 
been granted an extension of time to file the U.S. person's final 
income tax return pursuant to section 6081, by the fifteenth day of the 
tenth month following the close of the 12-month period which began with 
the first day of the U.S. person's final taxable year. No additional 
extension of time to file Form 3520 is allowed.
    For purposes of proposed Sec.  1.6039F-1, the term U.S. person 
means a United States person as defined under section 7701(a)(30). 
However, under proposed Sec.  1.6039F-1(f), consistent with the 
approach in proposed Sec. Sec.  1.643(i)-1(d)(12)(ii) and 1.679-
1(c)(2)(ii), neither a dual resident taxpayer nor a dual status 
taxpayer is treated as a U.S. person for purposes of proposed Sec.  
1.6039F-1 for a taxable year or any portion of a taxable year that the 
taxpayer is treated as a nonresident alien for purposes of computing 
U.S. tax liability. See section III.F of this Explanation of 
Provisions.

[[Page 39450]]

B. Definition of ``Foreign Gift'' and Coordination With Section 6048(c)
    For purposes of proposed Sec.  1.6039F-1, the term foreign gift is 
defined to include any amount received from a person other than a U.S. 
person that the recipient treats as a gift, bequest, devise, or 
inheritance for Federal income tax purposes. The term, however, does 
not include any qualified transfer within the meaning of section 
2503(e)(2) (relating to certain transfers for educational or medical 
expenses) or any transfer from a foreign trust that is treated as a 
distribution (within the meaning of proposed Sec.  1.6048-4(b)) and 
reported on a return under proposed Sec.  1.6048-4. Proposed Sec.  
1.6039F-1(b)(1) also provides that a U.S. person who receives a 
transfer from a foreign trust must treat the transfer as a distribution 
from the trust that is reportable under proposed Sec.  1.6048-4, rather 
than reportable as a foreign gift under proposed Sec.  1.6039F-1(a), 
even if the U.S. person treats the transfer as a gift for another 
purpose, such as computing the U.S. person's Federal income tax 
liability.
    Proposed Sec.  1.6039F-1(b)(2) includes an anti-avoidance rule that 
provides that the term foreign gift includes transfers from a person 
other than a U.S. person that the recipient does not treat as a gift, 
bequest, devise, or inheritance for Federal income tax purposes, such 
as a purported loan, if based on all the facts and circumstances the 
IRS determines that the transfer is in substance a gift. The IRS has 
become aware of U.S. persons who are seeking to circumvent the section 
6039F information reporting rules by claiming that the amounts they 
receive from foreign persons are not foreign gifts because they do not 
treat them as gifts but that they are otherwise not taxable (claiming 
instead that the transfers are loans). These amounts, however, 
objectively have all the indicia of being a gift. Under the existing 
principles of Federal tax law, the IRS therefore will recharacterize 
these amounts as foreign gifts that should have been reported under 
section 6039F.
C. Exceptions
    Proposed Sec.  1.6039F-1(c) provides a number of exceptions to the 
general rule in proposed Sec.  1.6039F-1(a). Proposed Sec.  1.6039F-
1(c)(1) provides that the general rule does not apply if the recipient 
of the foreign gift is described in section 501(c) and is exempt from 
tax under section 501(a). Proposed Sec.  1.6039F-1(c)(2)(i) through 
(iii) provides exceptions from information reporting under proposed 
Sec.  1.6039F-1(a) for amounts below the reporting thresholds.
    Under proposed Sec.  1.6039F-1(c)(2)(i)(A), a U.S. person is not 
required to report foreign gifts from foreign individuals or foreign 
estates if, during the U.S. person's taxable year, the aggregate amount 
of foreign gifts received, directly or indirectly, from any one 
individual or estate (the transferor) does not exceed $100,000, as 
modified by cost of living adjustments under proposed Sec.  1.6039F-
1(c)(2)(v). For purposes of determining whether the $100,000 reporting 
threshold is met, all foreign gifts (including covered gifts and 
bequests) from the transferor and from any foreign persons related to 
the transferor are aggregated. See proposed Sec.  1.6039F-
1(c)(2)(i)(B).
    If the aggregate amount of foreign gifts from a transferor exceeds 
the $100,000 reporting threshold, the proposed regulations require the 
U.S. person to separately identify each foreign gift in excess of 
$5,000 received from the transferor and from each foreign person 
related to the transferor, and to provide identifying information about 
the transferor and related foreign persons, including foreign 
individuals or foreign estates (for example, name and address). 
Specific identifying information about the transferor is not currently 
required to be provided on Form 3520. The Treasury Department and the 
IRS are of the view that the additional identifying information would 
assist the IRS in its determination of whether these amounts are 
properly treated as foreign gifts, and the burden imposed on the U.S. 
person should be minimal because the U.S. person would need to know the 
transferor's identity in order to know whether the transferor is 
foreign and in order to apply the aggregation rule.
    Under proposed Sec.  1.6039F-1(c)(2)(ii), notwithstanding the 
reporting threshold described above, beginning on the date on which 
final regulations under section 2801 (tax on gifts and bequests from 
expatriates) apply, a U.S. person who receives foreign gifts that are 
covered gifts or bequests will be required to report the covered gifts 
or bequests under proposed Sec.  1.6039F-1(a) if the aggregate amount 
of all covered gifts and bequests received by the U.S. person during 
the calendar year exceeds the exclusion amount under section 2801(c). 
See proposed Sec.  1.6039F-1(h)(2). This exclusion amount is the dollar 
amount of the per-donee gift tax exclusion in effect under section 
2503(b) for the calendar year ($18,000 for 2024).
    Under proposed Sec.  1.6039F-1(c)(2)(iii), a U.S. person is not 
required to report foreign gifts from a foreign corporation or 
partnership if, during the U.S. person's taxable year, the aggregate 
amount of transfers received from any particular corporation or 
partnership does not exceed $10,000, as modified by cost-of-living 
adjustments under proposed Sec.  1.6039F-1(c)(2)(v). The proposed 
regulations provide rules for aggregating and reporting foreign gifts 
from persons related to the transferor.
    Proposed Sec.  1.6039F-1(c)(2)(iv) provides that, with respect to 
spouses who file joint income tax returns under section 6013, the 
reporting threshold amounts apply separately to each spouse.
D. Valuation Principles
    Proposed Sec.  1.6039F-1(d) provides that the amount of a foreign 
gift is the value of the property at the time of the transfer. The 
value of the property is the price at which the property would change 
hands between a willing buyer and a willing seller, neither being under 
any compulsion to buy or sell, and both having reasonable knowledge of 
relevant facts. The value is to be determined in accordance with the 
Federal gift tax valuation principles of section 2512 and sections 2701 
through 2704 (chapter 14 of the Code) and the related regulations.
E. Penalty for Failure To File Information
    Proposed Sec.  1.6039F-1(e)(1) describes penalties for failure to 
furnish the information required by proposed Sec.  1.6039F-1(a) by the 
due date (including extensions) of Form 3520. The tax consequences of 
the receipt of the foreign gift will be determined by the IRS based on 
all the facts and circumstances. A U.S. person who fails to furnish the 
required information is subject to a penalty equal to five percent of 
the amount of the foreign gift for each month (or portion thereof) for 
which the failure continues, but not to exceed 25 percent of the amount 
of the foreign gift.
    For purposes of determining the tax consequences of the receipt of 
the foreign gift, the IRS may take into account the purported gift 
rules in Sec.  1.672(f)-4 (which address the treatment of a purported 
gift, as defined in Sec.  1.672(f)-4(d), from a partnership or foreign 
corporation). Unless an exception described in Sec.  1.672(f)-4(b), (e) 
or (f) applies, Sec.  1.672(f)-4 generally requires a U.S. person who 
receives a purported gift or bequest, directly or indirectly, from a 
partnership or foreign corporation to include the purported gift or 
bequest in gross income as ordinary income.
    Proposed Sec.  1.6039F-1(e)(2)(i) explains that no penalty is 
imposed if the U.S.

[[Page 39451]]

person shows that the failure to comply is due to reasonable cause and 
not due to willful neglect. The determination of whether a failure is 
due to reasonable cause and not due to willful neglect will be made 
under the principles set out in Sec.  1.6664-4 and Sec.  301.6651-1(c) 
and will be made on a case-by-case basis, taking into account all 
pertinent facts and circumstances.
F. Special Rules for Dual Resident and Dual Status Taxpayers
    Proposed Sec.  1.6039F-1(f)(1) provides a special rule for dual 
resident taxpayers (within the meaning of Sec.  301.7701(b)-7(a)(1)). A 
dual resident taxpayer who, pursuant to a provision of an income tax 
treaty that provides for resolution of conflicting claims of residence 
by the United States and the treaty partner, claims to be treated as a 
resident of the treaty partner as provided in Sec.  301.7701(b)-7 is 
taxed as a nonresident for U.S. tax purposes for the portion of the 
taxable year that the individual is treated as a nonresident. The 
Treasury Department and the IRS are of the view that, because the dual 
resident taxpayer's filing of relevant forms pursuant to Sec.  
301.7701(b)-7 provides adequate information for the IRS to identify 
residents in this category in order to ensure their tax compliance, 
reporting on Form 3520 by such a taxpayer is not essential to effective 
IRS tax enforcement efforts relating to this category of residents.
    Similarly, proposed Sec.  1.6039F-1(f)(2) provides a special rule 
for dual status taxpayers. As provided in Sec.  1.6012-1(b)(2)(ii), a 
dual status taxpayer who, during the taxable year, abandons U.S. 
citizenship or U.S. residence or acquires U.S. citizenship or U.S. 
residence is not treated as a U.S. person for the part of the year that 
the taxpayer is treated as a nonresident alien for purposes of 
computing the taxpayer's income tax liability as reflected on the Form 
1040NR or other similar schedule attached to such Form 1040NR.
    These rules are relevant both for purposes of determining whether a 
dual resident taxpayer or dual status taxpayer who receives a foreign 
gift is a U.S. person required to report the foreign gift on Form 3520 
and for purposes of determining whether a gift or bequest from a dual 
resident taxpayer or dual status taxpayer is a gift from a foreign 
person.

IV. Section 6048--Information With Respect to Certain Foreign Trusts

    The proposed regulations provide information reporting rules with 
respect to a U.S. person's transfers to, creation of, ownership of, and 
receipt of distributions from foreign trusts. These proposed 
regulations generally implement the rules set forth in Notice 97-34, 
Revenue Procedure 2014-55, and Revenue Procedure 2020-17 (discussed in 
section III.D of the Background) but also provide additional exceptions 
to section 6048 reporting and include certain other modifications.
A. Section 6048(a)--Notice of Certain Events
    The proposed regulations under section 6048(a) require a 
responsible party to provide notice of reportable events that occur 
during the taxable year on Part I of Form 3520. See proposed Sec.  
1.6048-2(a)(1).
    Proposed Sec.  1.6048-2(c) defines responsible party as the grantor 
in the case of the creation of an inter vivos foreign trust, the 
transferor in the case of a transfer of property to a foreign trust by 
a U.S. person other than a transfer by reason of death, or the executor 
of the estate of a deceased grantor or transferor in any other case, 
even if the executor is not a U.S. person.
    Proposed Sec.  1.6048-2(b) defines a reportable event as: (i) the 
creation of a foreign trust by a U.S. person, (ii) any direct, 
indirect, or constructive transfer, within the meaning of Sec.  1.679-3 
or Sec.  1.684-2, of property (including cash) to a foreign trust by a 
U.S. person, including a transfer by reason of death, and (iii) the 
death of a citizen or resident of the United States if the decedent was 
treated as the owner of any portion of a foreign trust under the 
grantor trust rules or if any portion of a foreign trust was included 
in the gross estate of the decedent. A reportable event also includes a 
U.S. person's transfer of property to a domestic trust that becomes a 
foreign trust, as described in Sec.  1.684-4 (outbound migrations of 
domestic trusts), and a U.S. person's transfer of property in exchange 
for any obligation of the foreign trust or of a related person, as 
described in Sec.  1.679-4, without regard to whether the obligation is 
a qualified obligation. A reportable event does not include transfers 
to certain foreign charitable trusts, foreign compensatory trusts, and 
tax-favored foreign retirement and non-retirement savings trusts, as 
discussed in section IV.D.2.i of this Explanation of Provisions. See 
proposed Sec.  1.6048-5.
    Form 3520 generally must be filed by the fifteenth day of the 
fourth month after the close of the responsible party's taxable year, 
but no later than the fifteenth day of the tenth month if the 
responsible party receives an extension of time to file the responsible 
party's income tax return under section 6081. See proposed Sec.  
1.6048-2(a)(2)(i). However, if the responsible party who is a grantor 
or transferor qualifies for an automatic extension of time to file an 
income tax return under section 6081 and Sec.  1.6081-5(a)(5) because 
the responsible party resides outside of the United States and Puerto 
Rico, and the responsible party's main place of business or post of 
duty is outside of the United States or Puerto Rico, Form 3520 must be 
filed by the fifteenth day of the sixth month after the close of the 
responsible party's taxable year. See proposed Sec.  1.6048-
2(a)(2)(ii). If the responsible party who is a grantor or transferor 
dies, the executor of the responsible party's estate must file Form 
3520 by the fifteenth day of the fourth month after the close of the 
12-month period which began on the first day of the responsible party's 
final taxable year. See proposed Sec.  1.6048-2(a)(2)(iii).
B. Section 6048(b)--U.S. Owners of Foreign Trusts
    The proposed regulations under section 6048(b) generally require 
any U.S. person who is treated as the owner (U.S. owner) of any portion 
of a foreign trust under the grantor trust rules to ensure that the 
foreign trust: (i) files Form 3520-A with the IRS by the fifteenth day 
of the third month after the end of the trust's taxable year (March 15 
if the trust's taxable year is a calendar year) with a maximum 
extension of a 6-month period beginning on such day, (ii) furnishes a 
Foreign Grantor Trust Owner Statement (described in proposed Sec.  
1.6048-4(c)(1)(i)) to each U.S. owner of the foreign trust, and (iii) 
furnishes a Foreign Grantor Trust Beneficiary Statement (described in 
proposed Sec.  1.6048-4(c)(1)(ii)) to each U.S. person to whom the 
trust made distributions during the trust's taxable year. The foreign 
trust must attach copies of each Foreign Grantor Trust Owner Statement 
and each Foreign Grantor Trust Beneficiary Statement to the Form 3520-
A. See proposed Sec.  1.6048-3(a)(1). If the foreign trust does not 
comply with all these requirements, the U.S. owner is required to: (i) 
complete and file Part II of Form 3520 by the U.S. owner's Form 3520 
due date, and (ii) complete the foreign trust's Form 3520-A and related 
statements and file them with Part II of the U.S. owner's Form 3520. 
Further, the U.S. owner must furnish the Foreign Grantor Trust 
Beneficiary Statement to each U.S. beneficiary by the due date of the 
U.S. owner's Form 3520. See proposed Sec.  1.6048-3(a)(2). If neither 
the foreign trust nor the U.S. owner complies with these requirements, 
the penalty for failure to comply is imposed on the U.S.

[[Page 39452]]

owner. See proposed Sec.  1.6677-1(b). As discussed in section IV.D.2.i 
of this Explanation of Provisions, the proposed regulations under 
section 6048(b) do not apply to tax-favored foreign retirement and non-
retirement savings trusts. See proposed Sec.  1.6048-5.
    The proposed regulations require a U.S. person who receives a 
Foreign Grantor Trust Owner Statement or Foreign Grantor Trust 
Beneficiary Statement from a foreign trust to treat any item reported 
by the trust consistently with the trust's treatment of such item 
unless the U.S. person notifies the IRS about any inconsistency on Form 
8082. See proposed Sec.  1.6048-3(b). If the U.S. person fails to 
notify the IRS about the inconsistency, or if the U.S. person receives 
information believed to be incorrect from the foreign trust, then, 
similar to the rules of section 6034A(c) (addressing reporting in 
respect of income tax returns), any adjustment relating to an 
unreported item is treated as a mathematical or clerical error under 
section 6213(b), with the result that the adjustment would not be 
subject to the usual restrictions on assessment and the U.S. grantor or 
U.S. beneficiary would have no right to file a Tax Court petition based 
on the adjustment.
    Proposed Sec.  1.6048-3(c) provides that, unless a foreign trust 
with a U.S. owner appoints a limited U.S. agent, the determination of 
amounts required to be taken into account with respect to the trust by 
the U.S. owner under the grantor trust rules will be determined by the 
IRS based on all the facts and circumstances. Proposed Sec.  1.6048-
3(d) provides rules relating to the appointment and duties of the 
limited U.S. agent. Proposed Sec.  1.6048-3(d) also provides rules 
concerning the issuance of a summons to a U.S. person (either directly 
or as the limited agent of the foreign trust) or to the foreign trust 
to produce records or testimony to determine the amounts required to be 
taken into account under the grantor trust rules.
C. Section 6048(c)--Reporting by U.S. Persons Receiving Distributions 
From Foreign Trusts
1. In General
    Unless an exception described in proposed Sec.  1.6048-5 applies, 
proposed regulations under section 6048(c) generally require a U.S. 
person to complete and file Part III of Form 3520 for each taxable year 
in which the U.S. person receives (directly or indirectly) any 
distribution from a foreign trust (including a foreign trust that the 
U.S. person is treated as owning under the grantor trust rules). Part 
III of Form 3520 must be filed by the due date of the U.S. person's 
Form 3520 for that taxable year. See proposed Sec.  1.6048-4(a). The 
Treasury Department and the IRS interpret section 6048(c) as requiring 
any U.S. person, including a U.S. owner, to report the receipt of 
foreign trust distributions. This interpretation is consistent with 
both the plain language of section 6048(c) and its purpose--to address 
Congress's concerns that U.S. taxpayers were avoiding their U.S. tax 
obligations through the use of foreign trusts that are less visible to 
the IRS--and empowers the IRS to obtain information that would allow it 
to enforce U.S. tax laws.
2. Distributions
    Proposed Sec.  1.6048-4(b)(1) provides that, as a general rule, the 
term distribution for purposes of proposed Sec.  1.6048-4 means any 
transfer of property from a foreign trust received directly or 
indirectly by a U.S. person to the extent such property exceeds the 
fair market value of any property or services received by the foreign 
trust in exchange, without regard to whether any portion of the trust 
is treated as owned by the grantor or another person under the grantor 
trust rules, whether the recipient is designated as a beneficiary under 
the terms of the trust, or whether the distribution has any income tax 
consequences. A distribution includes any amount actually or 
constructively received and includes the receipt of a gift or bequest 
described in section 663(a). For purposes of proposed Sec.  1.6048-
4(b)(1), a transfer of property from a foreign trust to a grantor trust 
or to a disregarded entity is treated as a transfer to the U.S. owner 
of the grantor trust or of the disregarded entity.
    Proposed Sec.  1.6048-4(b)(2)(i) provides that the term 
distribution also includes any transfer of property from a foreign 
trust received by a U.S. person through an intermediary, nominee, or 
agent. In such a case, the intermediary, nominee, or agent generally is 
treated as an agent of the foreign trust, and the property is treated 
as distributed to the U.S. person in the year the property is 
transferred or made available to the U.S. person. However, proposed 
Sec.  1.6048-4(b)(2)(ii) provides that, if the IRS determines that the 
intermediary, nominee, or agent is an agent of the U.S. person, then 
the property is treated as being transferred from the foreign trust to 
the U.S. person on the date of the transfer from the foreign trust to 
the intermediary, nominee, or agent. Regardless of the income tax 
consequences of such a transfer, pursuant to proposed Sec.  1.6048-
4(b)(2)(iii), the U.S. person receiving an indirect transfer of 
property from a foreign trust must report it on Part III of Form 3520.
    Proposed Sec.  1.6048-4(b)(3) provides that a distribution includes 
any transfer of property from an entity owned by a foreign trust to a 
U.S. person who is related (within the meaning of Sec.  1.679-1(c)(5)) 
to the foreign trust. It also explains that the transfer is treated as 
a distribution from the entity to the foreign trust followed by a 
distribution from the foreign trust to the U.S. person, unless the U.S. 
person demonstrates to the satisfaction of the IRS that the 
distribution from the entity is attributable to the U.S. person's 
ownership interest in the entity. This rule is the converse of the rule 
of Sec.  1.679-3(f)(1), which provides that a transfer by a U.S. person 
to an entity owned by a foreign trust is treated as a transfer to the 
foreign trust followed by a transfer from the foreign trust to the 
entity, unless the U.S. person demonstrates to the satisfaction of the 
IRS that the transfer to the entity is attributable to the U.S. 
person's ownership interest in the entity.
    Proposed Sec.  1.6048-4(b)(4) provides that a distribution includes 
the migration of a foreign trust to a domestic trust. In such a case, 
the income and corpus of the foreign trust is treated as distributed to 
the domestic trust on the date the foreign trust becomes a domestic 
trust. See Sec.  301.7701-7 for the rules that apply to determine 
whether a trust is a foreign trust or domestic trust.
    Proposed Sec.  1.6048-4(b)(5)(i) provides that a distribution 
includes any loan of cash or marketable securities made from a foreign 
trust (whether from corpus or income) directly or indirectly to a U.S. 
person. It also clarifies that a loan to a grantor trust or to an 
entity disregarded as an entity separate from its owner will be treated 
as a loan to the owner of the grantor trust or of the disregarded 
entity. Loans from a foreign trust also include a loan made by any 
foreign or U.S. person if the foreign trust guarantees the loan, as 
well as a loan made to a U.S. person through any intermediary, nominee 
or agent.
    Proposed Sec.  1.6048-4(b)(5)(ii) further provides that a 
distribution includes any loan of cash or marketable securities made 
directly or indirectly to a U.S. grantor or beneficiary (as defined in 
proposed Sec.  1.643(i)-1(d)(1)) of a foreign nongrantor trust or to a 
U.S. person related (as defined in proposed Sec.  1.643(i)-1(d)(9)) to 
a U.S. grantor or beneficiary of such foreign nongrantor trust without 
regard to whether the foreign trust receives an obligation (within the 
meaning of proposed

[[Page 39453]]

Sec.  1.643(i)-2(b)(2)(i)) in exchange for the loan.
    Proposed Sec.  1.6048-4(b)(5)(iii) provides that a loan of cash or 
marketable securities from a foreign trust must be reported by the U.S. 
person who receives the loan without regard to whether the loan would 
have any U.S. income tax consequences to a U.S. grantor or beneficiary 
of the foreign trust. If the U.S. person who receives the loan is 
related to a U.S. grantor or beneficiary of a foreign nongrantor trust, 
then the U.S. grantor or beneficiary also must report the distribution.
    Proposed Sec.  1.6048-4(b)(6)(i) provides that a distribution 
includes the fair market value of the direct or indirect use of trust 
property by a U.S. person without regard to whether the use of trust 
property would be treated as having any U.S. income tax consequences to 
a U.S. grantor or beneficiary of the foreign trust. For these purposes, 
the use of trust property by a grantor trust or a disregarded entity is 
treated as used by the owner of the grantor trust or of the disregarded 
entity, respectively. Proposed Sec.  1.6048-4(b)(6)(ii) further 
provides that a distribution includes the fair market value of the 
direct or indirect use of trust property by a U.S. grantor or 
beneficiary of a foreign nongrantor trust or by a U.S. person related 
to such U.S. grantor or beneficiary whether or not the foreign trust is 
paid the fair market value for such use. Proposed Sec.  1.6048-
4(b)(6)(iii) provides that the use of trust property must be reported 
on Part III of Form 3520 by the U.S. person that uses the trust 
property without regard to whether the use of trust property would have 
any U.S. income tax consequences to a U.S. grantor or beneficiary of 
the foreign trust. If the U.S. person who uses the trust property is 
related to a U.S. grantor or beneficiary of a foreign nongrantor trust, 
then the U.S. grantor or beneficiary also must report the distribution.
    The Treasury Department and the IRS are of the view that because, 
under section 643(i), a distribution to a U.S. person related to a U.S. 
grantor or beneficiary affects the U.S. grantor's or beneficiary's 
income tax liability, it is appropriate to require reporting by both 
the U.S. person receiving a distribution from a foreign trust and the 
U.S. grantor or beneficiary of the foreign trust who is related to that 
U.S. person. Requiring both parties to report the distribution ensures 
that the IRS has the information it needs for tax compliance efforts.
    Proposed Sec.  1.6048-4(b)(7) confirms that the term distribution 
also includes any covered gift or bequest (within the meaning of 
section 2801(e)) that is received from a foreign trust.
3. Information Statements
    Proposed Sec.  1.6048-4(c) lists four types of information 
statements that may be provided by a foreign trust if a U.S. person 
receives a distribution (including a loan of cash or marketable 
securities or the use of other trust property) from the foreign trust--
Foreign Grantor Trust Owner Statement, Foreign Grantor Trust 
Beneficiary Statement, Foreign Nongrantor Trust Beneficiary Statement, 
and Foreign-Owned Grantor Trust Beneficiary Statement. The instructions 
for Form 3520 will be modified after these regulations are finalized to 
include a list of items that must be included on a Foreign-Owned 
Grantor Trust Beneficiary Statement. The list will be similar to the 
lists of items that must be included on the Foreign Grantor Trust 
Beneficiary Statement and the Foreign Nongrantor Trust Beneficiary 
Statement. A U.S. person who receives one of these statements may use 
the statement to determine the tax consequences of the distribution.
4. Tax Consequences of Distributions
    Proposed Sec.  1.6048-4(d) describes the rules that a U.S. person 
(other than a U.S. owner of the distributing trust) must use to 
determine the tax consequences of a distribution from a foreign trust 
other than a distribution that is a loan of cash or marketable 
securities or the use of other trust property that is not treated as a 
section 643(i) distribution under proposed Sec.  1.643(i)-1. Two 
methods to determine the tax consequences are provided: (i) the actual 
calculation method and (ii) the default calculation method. If the U.S. 
person who receives the distribution does not receive a copy of the 
relevant statement (see proposed Sec.  1.6048-4(c)), the U.S. person 
must determine the tax consequences of the distribution under the 
default calculation method. A U.S. person who receives the relevant 
statement generally may compute the tax consequences of the 
distribution under either the actual calculation method or the default 
calculation method. However, a U.S. person may not use the actual 
calculation method if the U.S. person knows or has reason to know that 
the information in the relevant statement is incorrect. Additionally, 
if the U.S. person has previously used the default calculation method 
with respect to distributions from the foreign trust, the U.S. person 
must consistently use the default calculation method to determine the 
tax consequences of any subsequent distributions from the trust for all 
future years, except for the year in which the trust terminates.
    Under the actual calculation method provided in proposed Sec.  
1.6048-4(d)(2), a U.S. person who receives a Foreign Grantor Trust 
Beneficiary Statement or a Foreign-Owned Grantor Trust Beneficiary 
Statement from the foreign trust determines the income tax consequences 
of the distribution as a distribution being made from a grantor trust. 
Thus, if the distribution is a gift under section 102, the U.S. person 
does not include the distribution in gross income, but the distribution 
remains subject to the proposed Sec.  1.6048-4 reporting requirements. 
A U.S. person who receives a Foreign Nongrantor Trust Beneficiary 
Statement determines the tax consequences of the distribution by 
applying the rules of subparts C and D of Part 1 of subchapter J of 
chapter 1 of the Code.
    Under the default calculation method provided in proposed Sec.  
1.6048-4(d)(3)(i)(A), the U.S. person treats a portion of the 
distribution as a distribution of current income based on the average 
amount of the distributions that the U.S. person received from the 
foreign trust during the prior three taxable years, with only the 
excess amount of the distribution (that is, the amount that exceeds 125 
percent of that average) treated as an accumulation distribution within 
the meaning of section 665(b) consisting of undistributed net income 
(UNI) of the foreign trust. In applying the default calculation method, 
in the absence of actual information provided on a statement described 
in proposed Sec.  1.6048-4(c), the U.S. person must presume that the 
applicable number of years the foreign trust has been in existence is 
ten years and that no taxes described in section 665(d) have been 
imposed on the trust in any applicable previous year (even if a 
distribution has been made and tax under section 665(d) has previously 
been imposed). These rules are consistent with the default calculation 
method that is currently prescribed in the instructions for Part III of 
Form 3520. The U.S. person's use of the default calculation method does 
not affect any calculations made by the foreign trust for purposes of 
trust accounting. See proposed Sec.  1.6048-4(d)(3)(ii).
5. Accumulation Distributions and U.S. Agents
    Proposed Sec.  1.6048-4(e) provides that, if a U.S. person fails to 
provide adequate records to the IRS for purposes of determining the 
income tax consequences of a distribution from a foreign trust (within 
the meaning of

[[Page 39454]]

proposed Sec.  1.6048-4(b)) other than a loan or use of trust property 
that is not treated as a section 643(i) distribution under proposed 
Sec.  1.643(i)-1, then the entire distribution is treated as an 
accumulation distribution includible in the U.S. person's income. 
However, if the trustee of the foreign trust authorizes a U.S. person 
to act as the trust's limited agent under the rules prescribed in 
proposed Sec.  1.6048-3(e), then the IRS can summons and examine trust 
records through the U.S. agent and thus may determine the tax 
consequences of the distribution under the general rules provided in 
proposed Sec.  1.6048-4(d)(1) rather than treating the entire 
distribution as an accumulation distribution.
6. Coordination With the Rule for Reporting Large Foreign Gifts
    Proposed Sec.  1.6048-4(f) addresses the interaction of proposed 
Sec.  1.6048-4 and proposed Sec.  1.6039F-1. If a U.S. person receives 
a distribution from a foreign trust, the U.S. person must report the 
distribution under proposed Sec.  1.6048-4(a) and not under proposed 
Sec.  1.6039F-1, regardless of whether the distribution is taxable to 
the U.S. person.
D. Exceptions
1. Exceptions To Reporting Transfers of Property to Foreign Trusts
    Proposed Sec.  1.6048-5(a) provides an exception from section 
6048(a) reporting based on section 6048(a)(3)(B). The proposed 
regulations provide that, for purposes of proposed Sec.  1.6048-2, a 
reportable event does not include any of the following: (1) a transfer 
of property to a foreign trust that is a transfer for fair market value 
within the meaning of Sec.  1.679-4(b) (other than a transfer described 
in the following sentence); (2) any transfer of property to certain 
compensatory foreign trusts, as described in section 402(b), 404(a)(4), 
or 404A; and (3) any transfer of property to a foreign trust provided 
that the trust has received a determination letter from the IRS that 
has not been revoked that recognizes the trust as an organization 
described in section 501(c)(3) that is exempt from Federal income tax 
under section 501(a). However, a reportable event does include a 
transfer for fair market value if the transfer is made by a U.S. 
transferor that is a related person (as defined in Sec.  1.679-1(c)(5)) 
with respect to the foreign trust in exchange for any obligation of the 
trust or of a related person, without regard to whether such obligation 
is a qualified obligation described in proposed Sec.  1.679-4(d).
2. Additional Exceptions To Reporting Transactions With Foreign Trusts
    Proposed Sec.  1.6048-5(b) through (e) provides additional 
exceptions from section 6048 reporting based on the authority granted 
to the IRS by section 6048(d)(4) to suspend or modify the requirements 
of section 6048.
i. Tax-Favored Foreign Retirement Trusts, Non-Retirement Savings 
Trusts, and de Minimis Savings Trusts
    Proposed Sec.  1.6048-5(b) provides an exception from section 
6048(a) through (c) and proposed Sec. Sec.  1.6048-2 through 1.6048-4 
for certain eligible U.S. individuals' transactions with, or ownership 
of, certain tax-favored foreign retirement trusts, non-retirement 
savings trusts, and de minimis savings trusts. These exceptions to 
section 6048 reporting generally follow the exceptions provided under 
Rev. Proc. 2020-17, but are modified to address comments received, 
including comments requesting that future guidance include an increase 
to the applicable contribution limitation thresholds, rules for tax-
favored foreign retirement trusts that may allow limited contributions 
of unearned income, and relief with respect to certain trusts that do 
not fall within the listed categories but that have values below a 
certain threshold.
    A tax-favored foreign retirement trust means a foreign trust that 
is established under the laws of a foreign jurisdiction to operate 
exclusively or almost exclusively to provide, or to earn income for the 
provision of, pension or retirement benefits and ancillary or 
incidental benefits, and that meets certain additional requirements, 
such as contribution limitations or value thresholds, conditions for 
withdrawal, and information reporting. See proposed Sec.  1.6048-
5(b)(2). A tax-favored foreign non-retirement savings trust means a 
foreign trust that is established under the laws of a foreign 
jurisdiction to operate exclusively or almost exclusively to provide, 
or to earn income for the provision of, medical, disability, or 
educational benefits, and that also meets certain additional 
requirements, such as contribution limitations, conditions for 
withdrawal, and information reporting. See proposed Sec.  1.6048-
5(b)(3). A tax-favored foreign de minimis savings trust means a foreign 
trust that is established under the laws of a foreign jurisdiction to 
operate as a savings vehicle, that is not treated as a tax-favored 
foreign retirement trust or a tax-favored foreign non-retirement 
savings trust, and that meets certain additional requirements, such as 
information reporting, and whose value is under a de minimis threshold. 
See proposed Sec.  1.6048-5(b)(4).
    The Treasury Department and the IRS are of the view that it would 
be appropriate to exempt U.S. individuals from the requirement to 
provide information about these foreign trusts for several reasons. 
First, these foreign trusts generally are subject to written 
restrictions, such as contribution limitations, conditions for 
withdrawal, and information reporting, under the laws of the country in 
which they are established that are broadly consistent with the 
eligibility requirements under the Code for U.S. trusts serving similar 
policy goals. Second, U.S. individuals with an interest in these trusts 
may be required under section 6038D to separately report information 
about their interests in accounts held by, or through, these trusts. 
Additionally, with respect to tax-favored foreign de minimis savings 
trusts and tax-favored foreign retirement trusts, the Treasury 
Department and the IRS are of the view that exempting U.S. individuals 
from the section 6048 requirements based on the value of the trust is 
appropriate and consistent with the reporting thresholds under section 
6038D.
ii. Distributions From Certain Foreign Compensatory Trusts
    The proposed regulations implement the exception from section 
6048(c) reporting provided in section V of Notice 97-34 for 
distributions from certain foreign compensatory trusts described in 
Sec.  1.672(f)-3(c)(1) (section 402(b) employee trusts and foreign 
rabbi trusts). Proposed Sec.  1.6048-5(c). The exception applies only 
if the U.S. individual who receives the distribution reports the 
distribution as compensation income on a Federal income tax return.
iii. Distributions Received by Certain Domestic Charitable 
Organizations
    Proposed Sec.  1.6048-5(d) implements the exception from section 
6048(c) reporting provided in section V of Notice 97-34 for 
distributions received by a domestic organization described in section 
501(c)(3). The exception applies only if the domestic organization has 
received a determination letter from the IRS that has not been revoked 
recognizing the domestic organization's exemption from Federal income 
tax under section 501(a) as an organization described in section 
501(c)(3).
iv. Certain Trusts Located in a Mirror Code Possession
    Proposed Sec.  1.6048-5(e) provides an exemption from sections 
6048(a)

[[Page 39455]]

through (c) for a trust located in a mirror code possession to the 
extent the responsible party (within the meaning of section 
6048(a)(4)), U.S. owner, or U.S. recipient is a bona fide resident 
(within the meaning of Sec.  1.937-1(b)) of the mirror code possession. 
For this purpose, a mirror code possession is a possession of the 
United States where, under the income tax system of the possession, the 
income tax liability of the residents of the possession is determined 
by reference to the income tax laws of the United States as if the 
possession were the United States, A trust is located in a mirror code 
possession if a court within such mirror code possession is able to 
exercise primary supervision over the administration of the trust and 
one or more bona fide residents of the mirror code possession have the 
authority to control all substantial decisions of the trust.
E. Special Rules
1. Dual Resident and Dual Status Taxpayers
    Proposed Sec.  1.6048-6(a)(1) provides that a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1)) who computes 
U.S. income tax liability as a nonresident alien and complies with the 
filing requirements of Sec.  301.7701(b)-7(b) and (c) is not treated as 
a U.S. person for purposes of the proposed regulations for the portion 
of the year that the dual resident taxpayer is treated as a nonresident 
alien. Similarly, under proposed Sec.  1.6048-6(a)(2), a dual status 
taxpayer who abandons U.S. citizenship or residence during the tax year 
or acquires U.S. citizenship or residence during the taxable year, as 
provided in Sec.  1.6012-1(b)(2)(ii), is not treated as a U.S. person 
for purposes of the proposed regulations for the portion of the year 
that the dual status taxpayer is treated as a nonresident alien. As a 
result, these taxpayers are not subject to section 6048 reporting for 
the portion of the year during which they are treated as nonresident 
aliens for purposes of computing their U.S. income tax liability.
2. Reporting by all U.S. Transferors and Recipients
    Section 6048(d)(1) provides that, ``For purposes of [section 6048], 
in determining 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 
subpart E of Part I of subchapter J of chapter 1 shall be 
disregarded.'' The Treasury Department and the IRS are of the view that 
it is necessary to receive information about transfers to, and 
distributions from, foreign grantor trusts with regard to all U.S. 
transferors and U.S. recipients, including the U.S. owner, in order to 
administer the foreign trust provisions and to determine a taxpayer's 
U.S. tax liability with respect to foreign trusts. For example, the IRS 
uses this information to determine whether the transferor should be 
treated as the owner of the foreign trust, the value of the foreign 
trust's corpus at the end of the year for purposes of assessing 
penalties under section 6677, and the tax consequences of distributions 
in later years, such as distributions of corpus or UNI, if the foreign 
trust becomes a nongrantor trust (because, for example, the grantor 
dies). Therefore, proposed Sec.  1.6048-6(b) clarifies that, pursuant 
to section 6048(d)(1), a transfer to, or a distribution from, a foreign 
trust is reportable under section 6048(a) and (c) and the proposed 
regulations without regard to whether the trust is a grantor trust or a 
nongrantor trust, and whether or not there are any U.S. income tax 
consequences associated with the transfer or distribution.
3. Domestic Trust With Substantial Foreign Activities or Assets
    Proposed Sec.  1.6048-6(c) is reserved for rules under section 
6048(d)(2). Section 6048(d)(2) provides that, to the extent provided in 
regulations, a domestic trust is treated as a foreign trust for 
purposes of sections 6048 and 6677 if the trust has substantial 
activities, or holds substantial property, outside the United States. 
See section III.D.4 of the Background.
4. Joint Filers
    Proposed Sec.  1.6048-6(d) provides that married U.S. persons, each 
of whom is subject to the information reporting requirements under 
proposed Sec.  1.6048-2(a) (as a grantor or transferor required to file 
Part I of Form 3520), proposed Sec.  1.6048-3(a)(2) (as a U.S. owner of 
a foreign trust required to file a substitute Form 3520-A), or proposed 
Sec.  1.6048-4(a) (as a U.S. recipient of a distribution from a foreign 
trust required to file Part III of Form 3520) for the same foreign 
trust, may file one Form 3520 for purposes of proposed Sec. Sec.  
1.6048-2 through 1.6048-4, but only if they file a joint income tax 
return under section 6013 for the tax year for which reporting is 
required.

V. Section 6677--Civil Penalties for Failure To File Information With 
Respect to Certain Foreign Trusts

    Proposed Sec.  1.6677-1 provides rules for civil penalties that may 
be assessed if any notice or return required to be filed under proposed 
Sec. Sec.  1.6048-2 through 1.6048-4 is not timely filed or contains 
incomplete or incorrect information. The proposed regulations provide 
for three separate civil penalties that correspond to each separate 
reporting requirement under proposed Sec.  1.6048-2, Sec.  1.6048-3, 
and Sec.  1.6048-4. The Treasury Department and the IRS interpret 
section 6677 as assessing a penalty based on a percentage of a gross 
reportable amount, a term that is defined separately under section 
6677(c) and in the proposed regulations with respect to each 
corresponding section 6048 reporting requirement. This interpretation 
is consistent with the plain text of sections 6048 and 6677 and the 
purpose of the 1996 Act's modifications to these sections, which is to 
discourage U.S. persons from using foreign trusts to avoid their U.S. 
tax obligations.
A. General Rules
    Proposed Sec.  1.6677-1(a)(1) provides that, as a general rule, a 
person who fails to timely file a required notice or return, or fails 
to provide complete and correct information, is subject to a penalty 
equal to the greater of $10,000 or 35 percent of the applicable gross 
reportable amount (defined in proposed Sec.  1.6677-1(c)) for each such 
failure (or for each year, in the case of a failure under proposed 
Sec.  1.6048-3 relating to information reporting about U.S. owners of 
foreign trusts). If a person reports an amount that is less than the 
gross reportable amount, the penalty is based on the amount that is 
unreported.
    Proposed Sec.  1.6677-1(a)(2) provides that, if the failure to 
comply with the applicable reporting requirement continues for more 
than 90 days after the day on which the IRS mails notice of the failure 
to the U.S. person required to pay the penalty, the person is required 
to pay an additional penalty of $10,000 for each 30-day period (or 
fraction thereof) during which the failure continues.
    Proposed Sec.  1.6677-1(a)(3)(i) addresses maximum penalties. 
Proposed Sec.  1.6677-1(a)(3)(i) provides that the aggregate amount of 
the penalties imposed by proposed Sec.  1.6677-1(a)(1) and (2) (as 
modified by proposed Sec.  1.6677-1(b), if applicable) with respect to 
any single failure may not exceed the gross reportable amount with 
respect to that failure (provided that the IRS receives

[[Page 39456]]

enough information to accurately determine the gross reportable 
amount). In some cases, the IRS can begin to assess penalties before it 
has received enough information to determine the gross reportable 
amount. If the aggregate amount of the penalty collected exceeds the 
applicable gross reportable amount (because the penalty was assessed 
and collected before the IRS was able to determine the gross reportable 
amount), the IRS will refund the excess amount pursuant to section 
6402.
    Proposed Sec.  1.6677-1(a)(3)(ii) provides that the limitations 
period for claims for refund under section 6511(a) and (b) applies to 
the refund of any excess amount.
B. Failures To Comply With Proposed Sec.  1.6048-3
    Proposed Sec.  1.6677-1(b) makes two modifications to the rules of 
proposed Sec.  1.6677-1(a) in the case of a notice or return required 
to be filed under proposed Sec.  1.6048-3 (relating to information 
reporting about U.S. owners of foreign trusts). First, in the case of a 
notice or return required to be filed by a foreign trust under proposed 
Sec.  1.6048-3(a), the U.S. owner, rather than the foreign trust, must 
pay the penalty. Second, the amount of any penalty that initially is 
imposed under proposed Sec.  1.6677-1(a)(1) is the greater of $10,000 
or five percent (rather than 35 percent) of the gross reportable 
amount.
C. Gross Reportable Amount
    Proposed Sec.  1.6677-1(c)(1) provides that the term gross 
reportable amount means (i) the gross value of the property involved in 
the reportable event (determined as of the date of the event) in the 
case of a failure relating to proposed Sec.  1.6048-2, (ii) the gross 
value of the portion of the foreign trust's assets (at the close of the 
trust's taxable year) treated as owned by the U.S. person in the case 
of a failure relating to proposed Sec.  1.6048-3, and (iii) the gross 
amount of the distribution or deemed distribution in the case of a 
failure relating to proposed Sec.  1.6048-4. Proposed Sec.  1.6677-
1(c)(2) provides guidance on how to determine the gross value or gross 
amount of property for purposes of proposed Sec.  1.6677-1(c)(1).
D. Reasonable Cause
    Proposed Sec.  1.6677-1(d) provides that the penalty does not apply 
if the person required to file the notice or return (including a U.S. 
person who is treated as an owner of a foreign trust that fails to 
comply with proposed Sec.  1.6048-3(b)) shows that the failure to file 
is due to reasonable cause and not due to willful neglect. The 
determination of whether a failure is due to reasonable cause and not 
due to willful neglect will be made under the principles set out in 
Sec.  1.6664-4 and Sec.  301.6651-1(c) and will be made on a case-by-
case basis, taking into account all pertinent facts and circumstances. 
The fact that a foreign jurisdiction would impose a civil or criminal 
penalty on any person for disclosing the required information will not 
satisfy the reasonable cause exception. In addition, refusal on the 
part of a foreign trustee to provide information for any reason, 
including difficulty in producing the required information or the 
existence of provisions in the trust instrument that prevent the 
disclosure of required information, does not constitute reasonable 
cause.
E. Inapplicability of Deficiency Procedures
    Proposed Sec.  1.6677-1(e) provides that deficiency procedures do 
not apply in the case of the assessment or collection of a penalty 
imposed under section 6677.
F. Joint Filers
    Proposed Sec.  1.6677-1(f)(1) provides that married U.S. persons 
who jointly file Form 3520 for purposes of proposed Sec. Sec.  1.6048-2 
through 1.6048-4 and jointly file an income tax return under section 
6013 (as described section IV.E of this Explanation of Provisions) are 
treated as a single U.S. person for purposes of assessing section 6677 
penalties.
    In addition, proposed Sec.  1.6677-1(f)(2) provides that the IRS 
may treat married U.S. persons who file a joint income tax return under 
section 6013, but who did not file an information return as required 
under Sec. Sec.  1.6048-2 through 1.6048-4, as a single U.S. person for 
purposes of assessing section 6677 penalties, unless the IRS determines 
that, based on all the facts and circumstances, only one of the spouses 
was subject to the information reporting requirement (for example, 
because only one spouse had an interest in the property constituting 
the transfer to, or receipt from, a foreign trust). In these cases, it 
can be difficult for the IRS to determine who, between spouses, should 
be treated as the transferor, grantor, or owner of, or the recipient of 
a distribution from, a foreign trust (because, for example, a transfer 
of property to, or the receipt of property from, a foreign trust was 
made from (or to) a joint bank account). By enabling the IRS to assess 
section 6677 penalties on a joint and several basis against married U.S 
persons who do not file information returns required under section 
6048, proposed Sec.  1.6677-1(f)(2) allows the IRS to properly enforce 
section 6048, while still allowing each spouse to demonstrate that they 
should not be jointly and severally liable for the section 6677 
penalties assessed (for example, because one spouse did not have an 
interest in the underlying property giving rise to a reporting 
requirement under proposed Sec. Sec.  1.6048-2 through 1.6048-4).
    The liability of married U.S. persons treated as a single person is 
joint and several pursuant to proposed Sec.  1.6677-1(f)(3).

VI. Proposed Applicability Dates

    These regulations are proposed to apply to transactions with 
foreign trusts and the receipt of foreign gifts in taxable years 
beginning after the date on which the final regulations are published 
in the Federal Register. However, a taxpayer may rely on these proposed 
regulations for any taxable year ending after May 8, 2024 and beginning 
on or before the date that final regulations are published in the 
Federal Register, provided that the taxpayer and all related persons 
(within the meaning of sections 267(b) and 707(b)(1)) apply the 
proposed regulations in their entirety and in a consistent manner for 
all taxable years beginning with the first taxable year of reliance 
until the applicability date of the final regulations.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit.
    The estimated number of taxpayers impacted by these proposed 
regulations is 58,000. This is the number of taxpayers who currently 
file Form 3520 and Form 3520-A to report information required by 
sections 643(i), 679, 6039F, and 6048 as reflected under OMB

[[Page 39457]]

control numbers 1545-0074 (for individual filers), 1545-0123 (for 
business filers), and 1545-0159 (for trust and estate filers). However, 
the Treasury Department and the IRS estimate that 58,000 is the upper 
bound because the proposed regulations exempt certain taxpayers from 
information reporting under sections 6039F and 6048. See, e.g., 
proposed Sec. Sec.  1.6039F-1(c) and 1.6048-5.
    The collections of information in the proposed regulations are in 
proposed Sec. Sec.  1.643(i)-1(b)(2)(ii), 1.643(i)-1(c)(2)(ii), 1.679-
2(d)(1), 1.679-4(d)(1)(ii), 1.6039F-1(a), 1.6039F-1(e), 1.6048-2(a), 
1.6048-3(a), 1.6048-4(c), and 1.6677-1(d). In general, the collections 
of information contained in these proposed regulations are currently 
reflected in the collection of information for Form 3520 and Form 3520-
A, which have been reviewed and approved by the OMB in accordance with 
the PRA under control numbers 1545-0074 (for individual filers), 1545-
0123 (for business filers), and 1545-0159 (for trust and estate 
filers). Thus, the burden estimates for OMB control numbers 1545-0074, 
1545-0123, and 1545-0159 will be updated to reflect the collections of 
information associated with the proposed regulations.
    An agency may not conduct or sponsor and a person is not required 
to respond to a collection of information unless it displays a valid 
OMB control number.

III. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency ``to 
prepare and make available for public comment an initial regulatory 
flexibility analysis'' that will ``describe the impact of the proposed 
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA 
provides an exception to this requirement if the agency certifies that 
the proposed rulemaking will not have a significant economic impact on 
a substantial number of small entities. A small entity is defined as a 
small business, small nonprofit organization, or small governmental 
jurisdiction. See 5 U.S.C. 601(3) through (6).
    The Treasury Department and the IRS do not expect the proposed 
regulations to have a significant economic impact on a substantial 
number of small entities within the meaning of sections 601(3) through 
601(6) of the RFA. The proposed regulations generally reflect the 
existing collection of information requirements for Form 3520 and Form 
3520-A. However, because the proposed regulations generally apply to 
any U.S. person, including small entities, that engage in certain 
transactions with foreign trusts or receive large foreign gifts, an 
initial regulatory flexibility analysis has been prepared for this 
notice of proposed rulemaking under 5 U.S.C. chapter 6 and is provided 
below. The Treasury Department and the IRS request comments on the 
number of small entities that may be impacted and whether that impact 
will be economically significant.
A. Statement of the Need for, and Objectives of, the Proposed 
Regulations
    As discussed in the Background and Explanation of Provisions, the 
proposed regulations implement sections 643(i), 679, 6039F, 6048 and 
6677 (the foreign trust and gift provisions), which were added to the 
Code or significantly modified to address the use of foreign trusts and 
similar offshore arrangements by United States persons to avoid U.S. 
tax. These provisions also enhance the IRS's ability to obtain 
information regarding these offshore arrangements, including the 
receipt of large foreign gifts by United States persons. The proposed 
regulations address potential uncertainty under current law, including 
the necessary requirements for complying with the foreign trust and 
gift provisions, and the relevant tax consequences and potential 
penalties for compliance failures.
B. Small Entities To Which the Proposed Regulations Will Apply
    The proposed regulations generally define a United States person 
using the definition in section 7701(a)(30), which includes domestic 
partnerships and domestic corporations, subject to exceptions for 
certain entities that are exempt from taxation under chapter 1 of the 
Code. See, e.g., proposed Sec. Sec.  1.643(i)-1(d)(12), 1.679-1(c)(2), 
1.6039F-1(a), and 1.6048-1(b)(7). Because the number of small 
businesses that file Form 3520 and Form 3520-A is reflected in the 
taxpayer compliance burden provided for U.S. business income tax 
returns under OMB 1545-0123, an estimate of the number of small 
businesses affected by the proposed regulations is not currently 
feasible, and, therefore, this initial regulatory flexibility analysis 
assumes that a substantial number of small businesses will be affected. 
The Treasury Department and the IRS do not expect that the proposed 
regulations will affect a substantial number of small nonprofit 
organizations or small governmental jurisdictions.
C. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    The proposed regulations generally do not impose additional 
reporting, recordkeeping, or other compliance obligations. The proposed 
regulations are substantially similar to the existing guidance in 
Notice 97-34, Revenue Procedure 2014-55, and Revenue Procedure 2020-17 
and the existing instructions to Form 3520 and Form 3520-A. The 
proposed regulations include certain limited clarifications to the 
existing guidance and also provide additional taxpayer relief, 
including with respect to small entities. Moreover, even without the 
proposed regulations, small entities would continue to be required to 
file Form 3520 or Form 3520-A to comply with the statutory 
requirements. Therefore, these regulations generally are not expected 
to impose new compliance burdens, other than the time necessary for 
small entities to read the proposed regulations.
D. Duplicate, Overlapping, or Relevant Federal Rules
    The Treasury Department and the IRS are not aware of any Federal 
rules that duplicate, overlap, or conflict with the proposed 
regulations.
E. Alternatives Considered
    The foreign trust and gift provisions apply to any United States 
person, and the statutes do not establish different rules for small 
entities. Because the foreign trust and gift provisions are intended to 
address the use of foreign trusts and similar arrangements to avoid 
U.S. tax, which can be structured using large and small business 
entities, the Treasury Department and the IRS are of the view that the 
proposed regulations should apply uniformly to all business entities. 
The Treasury Department and the IRS did not consider any significant 
alternatives. The proposed regulations address potential uncertainty 
under current law without imposing additional economic burdens on these 
entities. Therefore, the proposed regulations adopt the approach with 
the least economic impact.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs

[[Page 39458]]

and benefits and take certain other actions before issuing a final rule 
that includes any Federal mandate that may result in expenditures in 
any one year by a State, local, or Tribal government, in the aggregate, 
or by the private sector, of $100 million in 1995 dollars, updated 
annually for inflation. The proposed regulations do not include any 
Federal mandate that may result in expenditures by State, local, or 
Tribal governments, or by the private sector in excess of that 
threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled Federalism) prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. The proposed regulations do not have 
federalism implications, do not impose substantial direct compliance 
costs on State and local governments, and do not preempt State law 
within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any comments 
regarding the notice of proposed rulemaking that are submitted timely 
to the IRS, as prescribed in this preamble under the ``Addresses'' 
heading. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules. Comments are specifically requested in 
Section I.B. of the Explanation of Provisions, regarding whether 
qualified obligation rules are needed for loans of marketable 
securities and regarding the scope and application of the exception 
from section 643(i) distribution treatment for certain loans made by a 
foreign corporation. All comments will be made available at 
www.regulations.gov. Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn.
    A public hearing has been scheduled for August 21, 2024, at 10 a.m. 
ET, in the Auditorium at the Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. Participants may alternatively attend the public 
hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
July 8, 2024. Outlines must be submitted electronically via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124850-
08). A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing. If no 
outline of the topics to be discussed at the hearing is received by 
July 8, 2024, the public hearing will be cancelled. If the public 
hearing is cancelled, a notice of cancellation of the public hearing 
will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-124850-08 and the language TESTIFY in Person. 
For example, the subject line may say: Request to TESTIFY in Person at 
Hearing for REG-124850-08.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-124850-08 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-124850-08.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-124850-08 and the language 
ATTEND In Person. For example, the subject line may say: Request to 
ATTEND Hearing in Person for REG-124850-08. Requests to attend the 
public hearing must be received by 5:00 p.m. ET on August 19, 2024.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by at least August 16, 2024.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this document are published in the Internal Revenue Bulletin 
or Cumulative Bulletin and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these proposed regulations are Lara A. 
Banjanin, Tracy M. Villecco, and S. Eva Wolf of the Office of Associate 
Chief Counsel (International), and M. Grace Fleeman, formerly of the 
Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and IRS propose to amend 26 
CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1.The authority citation for part 1 is amended by adding 
entries in numerical order and revising entries for Sec. Sec.  1.679-1, 
1.679-2, and 1.679-4 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.643(i)-1 also issued under 26 U.S.C. 643.
    Sections 1.643(i)-2 through 1.643(i)-4 also issued under 26 
U.S.C. 643 and 6048.
    Section 1.643(i)-5 also issued under 26 U.S.C. 643.
* * * * *
    Section 1.679-1 also issued under 26 U.S.C. 643 and 679.
    Section 1.679-2 also issued under 26 U.S.C. 643 and 679.
    Section 1.679-4 also issued under 26 U.S.C. 643 and 679.
* * * * *
    Section 1.6039F-1 also issued under 26 U.S.C. 6039F.
* * * * *
    Sections 1.6048-1 through 1.6048-6 also issued under 26 U.S.C. 
643 and 6048.
* * * * *

[[Page 39459]]

    Section 1.6677-1 also issued under 26 U.S.C. 643 and 6048.
* * * * *

0
Par. 2. Sections 1.643(i)-1, 1.643(i)-2, 1.643(i)-3, 1.643(i)-4, and 
1.643(i)-5 are added to read as follows:


Sec.  1.643(i)-1  Loans from and use of trust property of foreign 
nongrantor trusts.

    (a) Loans and use of trust property--(1) In general. For purposes 
of subparts B, C, and D of part I of subchapter J of chapter 1 of the 
Internal Revenue Code, a loan or use of trust property described in 
paragraph (b) or (c) of this section is treated as a section 643(i) 
distribution from a foreign trust to a U.S. grantor or beneficiary of 
the foreign trust under subchapter J of chapter 1 of the Internal 
Revenue Code, as provided in such paragraphs. Paragraph (d) of this 
section provides definitions for this section and Sec. Sec.  1.643(i)-2 
through 1.643(i)-5. Section 1.643(i)-2 provides exceptions to the 
general rules of this section. Section 1.643(i)-3 provides rules 
relating to the determination of the amount treated as a section 643(i) 
distribution and the tax consequences of a section 643(i) distribution. 
Section 1.643(i)-4 provides examples, and Sec.  1.643(i)-5 provides the 
applicability date for the rules in this section and Sec. Sec.  
1.643(i)-2 through 1.643(i)-4.
    (2) Interaction with section 6048(c). For rules relating to 
information reporting of loans from foreign trusts and the use of 
property of a foreign trust, see Sec.  1.6048-4. That provision applies 
without regard to whether the loan or use of property is treated as a 
section 643(i) distribution or has any other tax consequences, and 
without regard to whether the foreign trust is a nongrantor or grantor 
trust.
    (b) Loan of cash or marketable securities from foreign nongrantor 
trust generally treated as a distribution--(1) In general. Except as 
provided in Sec.  1.643(i)-2, any direct or indirect loan of cash or 
marketable securities from a foreign nongrantor trust (whether from 
trust corpus or income) to any U.S. grantor or beneficiary of that 
trust or any U.S. person related to such a U.S. grantor or beneficiary 
is treated as a section 643(i) distribution to the U.S. grantor or 
beneficiary on the date such loan is made. For these purposes, a loan 
from a nongrantor trust to a grantor trust or to a disregarded entity 
is treated as a loan to the owner of the grantor trust or of the 
disregarded entity, respectively. For example, a loan to a single 
member LLC treated as a disregarded entity is treated as a loan to the 
owner of the LLC.
    (2) Indirect loans--(i) In general. Except as provided in paragraph 
(b)(2)(ii) of this section, an indirect loan of cash or marketable 
securities from a foreign nongrantor trust includes a loan of cash or 
marketable securities made by an intermediary, agent, or nominee of the 
trust, as well as a loan made to an intermediary, agent, or nominee of 
a U.S. grantor or beneficiary or of a U.S. person related to a U.S. 
grantor or beneficiary. For example, such indirect loans include:
    (A) Loans made by any person other than the trust to either a U.S. 
grantor or beneficiary of a foreign trust or any U.S. person related to 
a U.S. grantor or beneficiary if the foreign trust provides a guarantee 
(within the meaning of Sec.  1.679-3(e)(4)) for the loan;
    (B) Loans made by any person related to a foreign trust, to either 
a U.S. grantor or beneficiary of the trust, or a U.S. person related to 
a U.S. grantor or beneficiary; and
    (C) Loans made by a foreign trust to a foreign person, other than 
to a nonresident alien individual grantor or beneficiary of the trust, 
if the foreign person is related to a U.S. grantor or beneficiary of 
the trust.
    (ii) Limitation. The loans described in paragraphs (b)(2)(i)(B) and 
(b)(2)(i)(C) of this section will not be treated as a section 643(i) 
distribution if the U.S. grantor or beneficiary:
    (A) Satisfies the information reporting requirements of Sec.  
1.6048-4 with respect to the loan, and
    (B) Includes an explanatory statement attached to the U.S. grantor 
or beneficiary's Federal income tax return that demonstrates to the 
satisfaction of the Commissioner that the loan would have been made 
without regard to the fact that the U.S. grantor or beneficiary is a 
grantor or beneficiary of the foreign trust.
    (iii) Effect of indirect loans--(A) In general. In the case of a 
loan described in paragraph (b)(2)(i)(A) or (B) of this section, the 
person making the loan is treated as an agent of the foreign trust.
    (B) Loans to a foreign person related to a U.S. grantor or 
beneficiary. In the case of a loan described in paragraph (b)(2)(i)(C) 
of this section, the foreign person related to the U.S. grantor or 
beneficiary is treated as an agent of the U.S. grantor or beneficiary, 
and the date the loan is made to the foreign person is treated as the 
date the loan is made to the U.S. grantor or beneficiary.
    (3) Rule for nonresident alien individual grantors or beneficiaries 
of a foreign trust who become U.S. persons. If a nonresident alien 
individual who is a grantor or beneficiary of a foreign trust receives 
a loan from the trust and, while the loan is outstanding, becomes a 
U.S. resident (within the meaning of section 7701(b)) or a U.S. citizen 
within two years after the date the loan was made, the loan will be 
treated as a section 643(i) distribution with respect to the 
outstanding amount of the loan as of the date the individual acquires 
U.S. residence or citizenship unless an exception described in Sec.  
1.643(i)-2 applies.
    (c) Use of trust property generally treated as a distribution--(1) 
In general. Except as provided in Sec.  1.643(i)-2, any direct or 
indirect use of property of a foreign trust, other than a loan of cash 
or marketable securities, by any U.S. grantor or beneficiary of the 
trust or any U.S. person related to a U.S. grantor or beneficiary is 
treated as a section 643(i) distribution to the U.S. grantor or 
beneficiary in the taxable year in which the use occurs. For these 
purposes, use of property of a nongrantor trust by a grantor trust or 
by a disregarded entity is treated as use by the owner of the grantor 
trust or of the disregarded entity, respectively. For example, use of 
trust property by a single member LLC treated as a disregarded entity 
would be treated as use by the owner of the LLC.
    (2) Indirect use of trust property--(i) In general. Indirect use of 
property of a foreign trust includes use by an agent or nominee of a 
U.S. grantor or beneficiary of the trust or an agent or nominee of a 
U.S. person related to a U.S. grantor or beneficiary. Indirect use of 
trust property also includes use by a foreign person, other than a 
nonresident alien individual beneficiary of the trust, if the foreign 
person is related to a U.S. grantor or beneficiary of the trust, unless 
paragraph (c)(2)(ii) of this section applies.
    (ii) Limitation. The use of trust property described in the second 
sentence of paragraph (c)(2)(i) of this section is not treated as a 
section 643(i) distribution to the U.S. grantor or beneficiary if the 
U.S. grantor or beneficiary:
    (A) Satisfies the information reporting requirements of Sec.  
1.6048-4 with respect to the use; and
    (B) Includes an explanatory statement attached to the U.S. 
grantor's or beneficiary's Federal income tax return that demonstrates 
to the satisfaction of the Commissioner that the use of trust property 
would have been allowed without regard to the fact that the U.S. 
grantor or beneficiary is a grantor or beneficiary of the foreign 
trust.
    (iii) Effect of indirect use of trust property. In the case of the 
use of trust property by a foreign person related to the U.S. grantor 
or beneficiary described in paragraph (c)(2)(i) of this section, such 
foreign person is treated as an agent of the U.S. grantor or 
beneficiary.

[[Page 39460]]

    (d) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.643(i)-2 through 1.643(i)-5:
    (1) Beneficiary. The term beneficiary means a person to whom or for 
whose benefit, under the terms of the trust instrument or applicable 
local law, at any time during the term of the trust or upon 
termination, trust income or corpus may be paid (including pursuant to 
a power of appointment that has been exercised in favor of that person) 
or accumulated, directly or indirectly. All references to a U.S. 
beneficiary mean a beneficiary who is a U.S. person.
    (2) Cash. The term cash includes foreign currencies and cash 
equivalents.
    (3) Disregarded entity. The term disregarded entity means an entity 
that, under Sec. Sec.  301.7701-1 through 301.7701-3 of this chapter, 
is disregarded as an entity separate from its owner.
    (4) Foreign person. The term foreign person means any person who is 
not a U.S. person within the meaning of section 7701(a)(30).
    (5) Grantor trust. The term grantor trust means a trust or any 
portion of a trust that is treated as owned by any person under subpart 
E of part I of subchapter J of chapter 1 of the Internal Revenue Code.
    (6) Loan of cash. Except as provided in Sec.  1.643(i)-2(a)(1), the 
term loan of cash includes an extension of credit.
    (7) Marketable securities. The term marketable securities means 
marketable securities within the meaning of section 731(c)(2)(A), but 
not including foreign currencies.
    (8) Nongrantor trust. The term nongrantor trust means a trust or 
any portion of a trust that is not treated as owned by any person under 
subpart E of part I of subchapter J of chapter 1 of the Internal 
Revenue Code.
    (9) Related. A person will be considered to be related to another 
person if the relationship between such persons would result in a 
disallowance of losses under section 267 or 707(b). In applying section 
267 for purposes of the previous sentence, section 267(c)(4) is applied 
as if the family of an individual includes the spouses of the members 
of the individual's family.
    (10) Section 643(i) distribution. The term section 643(i) 
distribution means a transaction described in paragraph (b) or (c) of 
this section.
    (11) U.S. grantor. The term U.S. grantor means a U.S. person 
described in Sec.  1.671-2(e).
    (12) U.S. person--(i) In general. Subject to paragraph (d)(12)(ii) 
of this section, the term U.S. person means a United States person as 
defined in section 7701(a)(30) but does not include an entity that is 
exempt from tax under chapter 1 of the Internal Revenue Code.
    (ii) Special rules--(A) Dual resident taxpayers. If a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1) of this 
chapter) computes U.S. income tax liability as a nonresident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter, the 
dual resident taxpayer is not treated as a U.S. person for purposes of 
section 643(i) with respect to the portion of the taxable year the dual 
resident taxpayer was treated as a nonresident alien for purposes of 
computing U.S. income tax liability.
    (B) Dual status taxpayers. Except as provided in paragraph (b)(3) 
of this section, if a taxpayer abandons U.S. citizenship or residence 
during the tax year or acquires U.S. citizenship or residence during 
the taxable year as provided in Sec.  1.6012-1(b)(2)(ii), the taxpayer 
is not treated as a U.S. person with respect to the portion of the 
taxable year the taxpayer was treated as a nonresident alien for 
purposes of computing U.S. income tax liability.


Sec.  1.643(i)-2  Exceptions

    (a) In general. A loan of cash or use of trust property will not be 
treated as a section 643(i) distribution if the loan of cash or use of 
trust property is one of the following:
    (1) Loan of cash in exchange for a qualified obligation. A loan of 
cash that is in exchange for a qualified obligation (within the meaning 
of paragraph (b)(2)(iii) of this section).
    (2) Compensated use of trust property--(i) In general. Use of trust 
property, other than a loan of cash or marketable securities, to the 
extent that the trust is paid the fair market value of such use within 
a reasonable period from the start of the use of the property. A 
determination as to the fair market value of the use of such property 
and as to whether a fair market value payment is made within a 
reasonable period must be based on all the facts and circumstances, 
including the type of property used and the period of use. In 
appropriate cases, such as rental of real property, payments may be 
made on a periodic basis consistent with arm's length dealings between 
unrelated parties.
    (ii) Safe harbor. For purposes of paragraph (a)(2)(i) of this 
section, a payment is made within a reasonable period if the payment is 
made or periodic payments commence within 60 days of the start of the 
use of trust property.
    (3) De minimis use of trust property. Use of trust property, other 
than a loan of cash or marketable securities, if such use is de 
minimis. Use of trust property will be considered de minimis if 
aggregate use by members of the group consisting of the U.S. grantors, 
U.S. beneficiaries, and the U.S. persons related to any U.S. grantor or 
beneficiary does not exceed 14 days during the calendar year.
    (4) Certain loans made by a foreign corporation. A loan of cash 
that is made by a foreign corporation to a U.S. beneficiary of the 
foreign trust to the extent the aggregate amount of all such loans to 
the beneficiary does not exceed undistributed earnings and profits of 
the foreign corporation attributable to amounts that are, or have been, 
included in the beneficiary's gross income under section 951, 951A, or 
1293.
    (b) Qualified obligations--(1) In general. The rules in this 
paragraph (b) apply to determine whether a loan of cash is in exchange 
for a qualified obligation.
    (2) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.643(i)-1 and 1.643(i)-3 through 1.643(i)-
5:
    (i) Obligation. The term obligation means any instrument or 
contractual arrangement that constitutes indebtedness under general 
principles of Federal income tax law (for example, a bond, note, 
debenture, certificate, bill receivable, account receivable, note 
receivable, open account, or other evidence of indebtedness), and any 
annuity contract that would not otherwise be classified as indebtedness 
under general principles of Federal income tax law.
    (ii) Obligor. The term obligor means the person who issues an 
obligation to a foreign trust in exchange for a loan of cash.
    (iii) Qualified obligation--(A) General requirements. The term 
qualified obligation means an obligation that at all times satisfies 
all of the following requirements:
    (1) The obligation is reduced to writing in an express written 
agreement.
    (2) The term of the obligation does not exceed five years. For 
purposes of determining the term of an obligation, the obligation's 
maturity date is the last possible date that the obligation can be 
outstanding under the terms of the obligation.
    (3) All payments on the obligation must be made in cash in U.S. 
dollars.
    (4) The obligation is issued at par and provides for stated 
interest at a fixed rate or a qualified floating rate within the 
meaning of Sec.  1.1275-5(b).
    (5) The yield to maturity of the obligation is not less than 100 
percent

[[Page 39461]]

of the applicable Federal rate and not greater than 130 percent of the 
applicable Federal rate. The applicable Federal rate for an obligation 
is the applicable Federal rate in effect under section 1274(d) for the 
day on which the obligation is issued, as published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter). The yield 
to maturity and the applicable Federal rate must be based on the same 
compounding period. If an obligation is a variable rate debt instrument 
that provides for stated interest at a qualified floating rate, the 
equivalent fixed rate debt instrument rules in Sec.  1.1274-2(f)(1) or 
Sec.  1.1275-5(e), whichever is applicable, apply to determine the 
obligation's yield to maturity.
    (6) All stated interest on the obligation is qualified stated 
interest within the meaning of Sec.  1.1273-1(c).
    (B) Additional requirements to remain a qualified obligation. An 
obligation will remain a qualified obligation only if, for the first 
year and each succeeding year that the obligation remains outstanding, 
the following requirements are satisfied:
    (1) The U.S. grantor or beneficiary timely extends the period for 
assessment of any income tax attributable to the obligation and any 
consequent income tax changes for each year that the obligation is 
outstanding to a date not earlier than three years after the maturity 
date of the obligation. This extension of the period for assessment is 
not necessary with respect to the taxable year of the U.S. grantor or 
beneficiary in which the maturity date of the obligation falls, 
provided that the obligation is paid in cash in U.S. dollars within 
that year. The period of assessment is extended by completing and 
filing Part III of Form 3520, Annual Return to Report Transactions with 
Foreign Trusts and Receipt of Certain Foreign Gifts, for every year 
that the obligation is outstanding. The waiver in Part III of Form 3520 
shall also contain such other terms with respect to assessment as may 
be considered necessary by the Commissioner to ensure the assessment 
and collection of the correct tax liability for each year for which the 
waiver is required. When Part III of Form 3520 is properly executed and 
filed, the consent to extend the period for assessment of tax will be 
deemed to be agreed upon and executed by the Commissioner for purposes 
of Sec.  301.6501(c)-1(d).
    (2) The U.S. grantor or beneficiary timely reports the status of 
the obligation, including principal and interest payments, on Part III 
of Form 3520 for each year that the obligation is outstanding.
    (3) The obligor timely makes all payments of principal and interest 
on the obligation according to the terms of the obligation (which may 
include a reasonable grace period of no more than thirty days for a 
late payment).
    (3) Modification of a qualified obligation. If the terms of a 
qualified obligation are modified and the modification is treated as an 
exchange under Sec.  1.1001-3, the new obligation that is deemed issued 
in the exchange under Sec.  1.1001-3 must satisfy all the requirements 
in paragraph (b)(2)(iii) of this section to be a qualified obligation 
using the original obligation's issue date. If the modification is not 
treated as an exchange under Sec.  1.1001-3, then the obligation must 
be retested as of the date of the modification to determine whether the 
obligation, as modified, continues to satisfy the requirements in 
paragraph (b)(2)(iii) of this section to be a qualified obligation.
    (4) Additional loans. If a qualified obligation is outstanding and 
the obligor directly or indirectly issues an additional obligation to 
the foreign trust in exchange for cash, the outstanding obligation is 
deemed to have the maturity date of the additional obligation in 
determining whether the outstanding obligation exceeds the specified 
five-year term. The outstanding obligation must be retested as of the 
issue date of the additional obligation to determine whether it would 
have satisfied, as of the outstanding obligation's issue date, all the 
requirements in paragraph (b)(2)(iii) of this section to be a qualified 
obligation. If there is more than one qualified obligation outstanding, 
the determination is made based on the outstanding obligation with the 
earliest issue date. The additional obligation also must be separately 
tested to see if it satisfies the requirements in paragraph (b)(2)(iii) 
of this section to be a qualified obligation.
    (5) Anti-abuse rule. Notwithstanding paragraphs (b)(3) and (4) of 
this section, if the Commissioner determines, based on all of the facts 
and circumstances, that two or more obligations issued by a U.S. 
obligor are structured with a principal purpose to avoid the 
application of section 643(i), the Commissioner may treat the 
obligations as a single obligation that is not a qualified obligation.
    (6) Obligations that cease to be qualified--(i) In general. If an 
obligation ceases to be a qualified obligation (for example, because an 
obligation is modified so that the term of the obligation exceeds 5 
years), the U.S. grantor or beneficiary is treated as receiving a 
section 643(i) distribution from the trust.
    (ii) Amount of section 643(i) distribution. Except as otherwise 
provided in this paragraph (b)(6)(ii), the amount of the section 643(i) 
distribution treated as received pursuant to paragraph (b)(6)(i) of 
this section is equal to the obligation's outstanding stated principal 
amount plus any accrued but unpaid qualified stated interest (within 
the meaning of Sec.  1.1273-1(c)) as of the date of the event that 
causes the obligation to no longer be a qualified obligation. In the 
case of an obligation that ceases to be a qualified obligation because 
the Commissioner treats two or more obligations as a single obligation 
pursuant to paragraph (b)(5) of this section, the amount of the section 
643(i) distribution will not exceed the sum of the outstanding stated 
principal amount plus any accrued but unpaid qualified stated interest 
on each of the obligations as of the date determined by the 
Commissioner under paragraph (b)(6)(iii) of this section.
    (iii) Date of section 643(i) distribution. In general, the U.S. 
grantor or beneficiary is treated as receiving a section 643(i) 
distribution on the date of the event that causes an obligation to no 
longer be a qualified obligation. However, based on all of the facts 
and circumstances, if an obligation (or obligations) is structured with 
a principal purpose to avoid the application of section 643(i), the 
Commissioner may deem a section 643(i) distribution to have occurred on 
any date on or after the issue date of the obligation(s).
    (c) Trust property attributable to nongrantor trust portion--(1) In 
general. A loan or use of trust property from a partial nongrantor 
trust must be apportioned between the nongrantor and grantor portions 
of the trust in a manner that is reasonable in light of all the facts 
and circumstances, including the terms of the governing instrument, 
local law, and the practice of the trustee if it is reasonable and 
consistent.
    (2) Specific property. If a loan of cash or marketable securities, 
or a use of trust property, can be made from only one portion of the 
foreign trust because the type of property loaned or used is held only 
by that portion, then the loan or use of property is deemed to be 
attributable to that portion.
    (d) Reporting. A loan of cash or marketable securities from, or the 
use of any property of, a foreign grantor or nongrantor trust to or by 
a U.S. person is a distribution for purposes of Sec.  1.6048-4(b)(3) or 
(4), as applicable, and must be reported by the U.S.

[[Page 39462]]

person, and if the trust is a foreign nongrantor trust, by the U.S. 
grantor or beneficiary, under Sec.  1.6048-4(a), irrespective of 
whether the loan or use of trust property is a section 643(i) 
distribution.
    (e) Examples. The following examples illustrate the rules of 
paragraphs (b) through (d) of this section:
    (1) Example 1: Loan of cash not in exchange for qualified 
obligation. Y, a nonresident alien, created and funded a foreign 
nongrantor trust, FT, for the benefit of X, a U.S. person. X is the 
sole beneficiary of FT. In Year 1, FT makes a loan of cash to X in 
exchange for a demand note that permits FT to require repayment by X at 
any time. The demand note issued by X is not a qualified obligation 
within the meaning of paragraph (b)(2)(iii) of this section because X's 
obligation to FT could remain outstanding for more than five years. 
Accordingly, the qualified obligation exception in paragraph (a)(1) of 
this section does not apply. Under Sec.  1.643(i)-1(b) and Sec.  
1.643(i)-3(a), X is treated as receiving a section 643(i) distribution 
from FT. X must determine the tax consequences of the distribution 
under Sec.  1.643(i)-3(c). Under Sec.  1.6048-4(a), X is required to 
report the section 643(i) distribution on Part III of Form 3520 for 
Year 1, as a distribution from a foreign trust.
    (2) Example 2: Beneficiary fails to extend period of assessment and 
fails to report loan on Form 3520. Y, a nonresident alien, created and 
funded a foreign nongrantor trust for the benefit of X, a U.S. person. 
On June 30, Year 1, FT makes a loan of cash to X in exchange for an 
obligation that satisfies the requirements of paragraph (b)(2)(iii)(A) 
of this section. However, X fails to timely file Form 3520 and did not 
request an extension to file. As a result, X has failed to extend the 
period for assessment of any income tax attributable to the loan 
through the filing of Form 3520 by its due date as required under 
paragraph (b)(2)(iii)(B)(1) of this section. X also has failed to 
report the status of the loan on Form 3520 as required under paragraph 
(b)(2)(iii)(B)(2) of this section. Either one of X's failures is 
sufficient to cause the loan to be treated as a section 643(i) 
distribution under Sec.  1.643(i)-1(b). Because the loan fails to 
continue to be treated as a qualified obligation, the loan is treated 
as a section 643(i) distribution from FT as of April 15, Year 2, the 
date that X's Form 3520 was due.
    (3) Example 3: Effect of subsequent obligation on original 
obligation. Y, a nonresident alien, created and funded a foreign 
nongrantor trust for the benefit of X, a U.S. person. On January 1, 
Year 1, FT makes a loan of cash to X in exchange for Note 1, an 
obligation with a maturity date of January 1, Year 6, that satisfies 
the requirements of paragraph (b)(2)(iii) of this section. On June 30, 
Year 1, FT makes an additional loan of cash to X in exchange for Note 
2, an obligation with a maturity date of June 30, Year 6. Under 
paragraph (b)(4) of this section, Note 1 will be deemed to have a 
maturity date of June 30, Year 6 (i.e., a greater than five-year term) 
and will cease to be a qualified obligation. Under paragraph (b)(6)(ii) 
of this section, X will be treated as receiving a section 643(i) 
distribution equal to Note 1's outstanding stated principal amount plus 
any accrued but unpaid qualified stated interest (within the meaning of 
Sec.  1.1273-1(c)) as of June 30, Year 1. Note 2 will be separately 
tested to determine whether it satisfies the requirements of paragraph 
(b)(2)(iii) of this section.
    (4) Example 4: Anti-abuse rule. Y, a nonresident alien, created and 
funded a foreign nongrantor trust for the benefit of X, a U.S. person. 
On January 1, Year 1, FT makes a loan of cash to X in exchange for Note 
1, an obligation with a maturity date of January 1, Year 4 that 
satisfies the requirements of paragraph (b)(2)(iii) of this section. On 
January 1, Year 4, FT makes another loan of cash to X in exchange for 
Note 2, an obligation with a maturity date of January 1, Year 7, but 
otherwise has the same terms as Note 1. Based on all of the facts and 
circumstances, the Commissioner determines under paragraph (b)(5) of 
this section that Notes 1 and 2 are structured with a principal purpose 
to avoid the application of section 643(i). Therefore, under paragraph 
(b)(5) and paragraph (b)(6)(ii) and (iii) of this section, the 
Commissioner may treat Notes 1 and 2 as a single obligation (with a 
six-year term) that is not a qualified obligation and may treat X as 
receiving a section 643(i) distribution equal to the combined 
outstanding stated principal amounts of Note 1 and Note 2 plus any 
accrued but unpaid qualified stated interest as of any date determined 
by the Commissioner.
    (5) Example 5: Allocation of trust property attributable to partial 
grantor trust. In Year 1, Y, a nonresident alien, creates and settles a 
foreign trust, FT, for the benefit of X, a U.S. beneficiary. Y funds 
the trust with a vacation home valued at $500,000 and $500,000 cash. 
Under the trust document, Y has the power to revoke the trust as to the 
vacation home and any income earned by the vacation home at any time 
without the consent of any person. This power to revoke results in Y 
being treated as the owner of the portion of the trust comprising the 
vacation home (the grantor trust portion) under section 676 (after 
application of Sec.  1.672(f)-3(a)). Y has no powers that would cause Y 
to be treated as the owner of the portion of the trust comprising the 
cash Y contributed or any income earned by that cash. X uses the 
vacation home for 2 months in Year 2 and does not compensate the trust 
for the use of the vacation home. Under paragraph (c)(2) of this 
section, the use of the vacation home will be deemed to be attributable 
to the grantor trust portion and thus will not be treated as a section 
643(i) distribution to X. Under paragraph (d) of this section, X must 
comply with the reporting requirements of Sec.  1.6048-4 with respect 
to the use of the vacation home. Under Sec.  1.6048-4(b)(4), X is 
required to report the use of the vacation home on Part III of Form 
3520 for Year 2 as a distribution from FT.


Sec.  1.643(i)-3  Consequences of section 643(i) distribution.

    (a) Amount treated as section 643(i) distribution--(1) Loan of 
cash. Except as provided otherwise, in the case of a loan of cash 
treated as a section 643(i) distribution, the amount of the section 
643(i) distribution is the issue price of the loan, as determined under 
Sec.  1.446-2(d)(1), Sec.  1.1273-2 or Sec.  1.1274-2 (whichever is 
applicable), as of the date (described in Sec.  1.643(i)-2(b)(6)) the 
loan is treated as a section 643(i) distribution.
    (2) Loan of marketable securities. In the case of a loan of 
marketable securities treated as a section 643(i) distribution, the 
amount of the section 643(i) distribution is the fair market value of 
the securities as of the date the loan is treated as a section 643(i) 
distribution.
    (3) Uncompensated use of trust property. In the case of the use of 
trust property treated as a section 643(i) distribution, the amount of 
the section 643(i) distribution is the fair market value of the use of 
the property less the amount of any payments made within a reasonable 
period (described in Sec.  1.643(i)-2(a)(2)) for the use of such 
property. The fair market value of the use of the property is based on 
all the facts and circumstances, including the type of property used 
and the period of use.
    (b) Allocation of section 643(i) distribution among multiple U.S. 
grantors and beneficiaries. If a U.S. person who is not a U.S. grantor 
or beneficiary of a foreign trust but who is related to more than one 
U.S. grantor or beneficiary of the trust receives a loan of cash or 
marketable securities, or uses

[[Page 39463]]

trust property, that is treated as a section 643(i) distribution, then 
each U.S. grantor and beneficiary who is related to the U.S. person 
receiving the loan or using trust property is treated as receiving an 
equal share of the section 643(i) distribution. For purposes of this 
allocation, the term U.S. beneficiary includes only those beneficiaries 
who must or may receive a current distribution from the foreign trust.
    (c) Tax consequences of a section 643(i) distribution--(1) In 
general. A U.S. grantor or beneficiary who is treated as receiving a 
section 643(i) distribution must determine the tax consequences of the 
distribution under either the actual calculation method (as defined in 
Sec.  1.6048-4(d)(2)) or the default calculation method (as defined in 
Sec.  1.6048-4(d)(3)). A U.S. grantor or beneficiary may not use the 
actual calculation method to determine the tax consequences of a 
section 643(i) distribution in a tax year in which the U.S. grantor or 
beneficiary has not received a Foreign Nongrantor Trust Beneficiary 
Statement (see Sec.  1.6048-4(d)(2)) from the foreign trust before 
completing the U.S. grantor's or beneficiary's return, knows or has 
reason to know that the information in the Foreign Nongrantor Trust 
Beneficiary Statement is incorrect, or previously has used the default 
calculation method for the same trust. A U.S. grantor or beneficiary 
who previously has used the default calculation method must 
consistently use the default calculation method to determine the tax 
consequences of any subsequent distribution (within the meaning of 
Sec.  1.6048-4(b)) from the same trust in all future years, except in 
the year in which the trust terminates. See Sec.  1.6048-4(d)(3)(iii).
    (2) Consequences to foreign trust--(i) Treatment of amount under 
section 661(a)(2). In the case of a section 643(i) distribution, 
regardless of whether a U.S. grantor or beneficiary uses the default 
calculation method or the actual calculation method of computing the 
tax consequences of a distribution, the foreign trust must treat the 
section 643(i) distribution as an amount properly paid, credited, or 
required to be distributed by the trust as described in section 
661(a)(2).
    (ii) Distribution of marketable securities. If the section 643(i) 
distribution is of marketable securities, the trust will be deemed to 
have made an election to have section 643(e)(3) apply with respect to 
all section 643(i) distributions of marketable securities made by the 
trust during the taxable year, and any resulting capital gain is 
included in the trust's distributable net income pursuant to section 
643(a)(6)(C).
    (iii) Foreign Nongrantor Trust Beneficiary Statement. The foreign 
trust may issue a Foreign Nongrantor Trust Beneficiary Statement (as 
described in Sec.  1.6048-4(c)(2)) to each U.S. person who receives a 
loan of cash or marketable securities, or uses trust property other 
than a loan of cash or marketable securities, during the taxable year 
of the trust, without regard to whether a U.S. person would be required 
to take the amount of the loan or use of trust property into account as 
a section 643(i) distribution. If a U.S. person to whom a statement is 
issued is not a U.S. grantor or beneficiary but is related to a U.S. 
grantor or beneficiary, the foreign trust may issue a duplicate 
statement to the U.S. grantor or beneficiary.
    (3) Consequences to U.S. grantor or beneficiary--(i) Actual 
calculation method. If a U.S. grantor or beneficiary is eligible to 
use, and uses, the actual calculation method, the U.S. grantor or 
beneficiary must treat a section 643(i) distribution as an amount 
properly paid, credited, or required to be distributed by the trust as 
described in section 662(a)(2) using information about the foreign 
trust as provided in the Foreign Nongrantor Trust Beneficiary Statement 
and applying the rules of subparts C and D of part I of subchapter J of 
chapter 1 of the Internal Revenue Code.
    (ii) Default calculation method. Under the default calculation 
method, a U.S. grantor or beneficiary must apply the rules provided in 
Sec.  1.6048-4(d)(3).
    (d) Subsequent transactions for loans or use of trust property--(1) 
In general. Any subsequent transaction regarding the principal of any 
loan of cash or marketable securities treated as a section 643(i) 
distribution (including complete or partial repayment, satisfaction, 
cancellation, discharge, or otherwise, but not including the payment of 
interest) or the return of trust property the use of which was treated 
as a section 643(i) distribution has the consequences described in 
paragraphs (d)(2) and (3) of this section.
    (2) Consequences to foreign trust. Any subsequent transaction 
regarding the principal of any loan of cash or marketable securities or 
the return of trust property treated as a section 643(i) distribution 
has no tax consequences to the trust. However, any payment to the trust 
other than the repayment of principal of any loan treated as a section 
643(i) distribution, including the payment of interest, is treated as 
income to the trust.
    (3) Consequences to obligor--(i) In general. Any subsequent 
transaction regarding the principal of any loan of cash or marketable 
securities or the return of trust property treated as a section 643(i) 
distribution is treated as a transfer that is not a gratuitous transfer 
by a U.S. person for purposes of Sec.  1.671-2(e)(2)(i) and chapter 1 
of the Internal Revenue Code.
    (ii) Satisfaction of loan with property. Any transfer of property 
to a foreign trust in satisfaction of any amount due under a loan of 
cash or marketable securities treated as a section 643(i) distribution 
causes the obligor to recognize as gain or loss the difference between 
the fair market value of the property transferred and the adjusted 
basis of such property in the hands of the obligor in accordance with 
the rules of section 1001 and the regulations under section 1001 in 
this part.


Sec.  1.643(i)-4  Examples.

    (a) Scope. The examples in this section illustrate the rules of 
Sec. Sec.  1.643(i)-1 through 1.643(i)-3.
    (b) Example 1: Loan to contingent remainder beneficiary treated as 
loan to U.S. beneficiary. Y, a nonresident alien, created and funded a 
foreign nongrantor trust, FT, for the benefit of Y's two children from 
Y's first marriage, A and B, who are both nonresident aliens. FT's 
governing trust instrument provides that, upon the death of the second 
to die of A and B, the trust may make a distribution to any of Y's 
surviving children, in the discretion of the trustee. In Year 1, X, a 
U.S. person who is Y's daughter from Y's second marriage, receives a 
loan of $100,000 from FT in exchange for an obligation that is not a 
qualified obligation within the meaning of Sec.  1.643(i)-2(b)(2)(iii). 
Under Sec.  1.643(i)-1(d)(1), X is a U.S. beneficiary of FT because X 
is a U.S. person to whom, at some point before the termination of the 
trust, the trust income or corpus may be paid at the discretion of the 
trustee. Under Sec. Sec.  1.643(i)-1(b)(1) and 1.643(i)-3(a)(1), X is 
treated as receiving a section 643(i) distribution from FT in the 
amount of $100,000. X must determine the tax consequences of the 
distribution under Sec.  1.643(i)-3(c). Under Sec.  1.6048-4(a), X is 
required to report the section 643(i) distribution on Part III of Form 
3520 for Year 1 as a distribution from a foreign trust.
    (c) Example 2: Loan from foreign nongrantor trust to a foreign 
grantor trust treated as section 643(i) distribution to U.S. owner. The 
facts are the same as in paragraph (b) of this section (Example 1), 
except that instead of a loan to X, in Year 1, FT makes a loan of 
$100,000 to GT, a foreign grantor trust treated as wholly owned by X, 
in

[[Page 39464]]

exchange for an obligation that is not a qualified obligation within 
the meaning of Sec.  1.643(i)-2(b)(2)(iii). Under Sec.  1.643(i)-
1(d)(1), X is a U.S. beneficiary of FT as explained in paragraph (b) of 
this section (Example 1). Under Sec. Sec.  1.643(i)-1(b)(1) and 
1.643(i)-3(a)(1), X, who is treated as the owner of GT, is treated as 
receiving a section 643(i) distribution from FT in the amount of 
$100,000. X must determine the tax consequences of the distribution 
under Sec.  1.643(i)-3(c). Under Sec.  1.6048-4(a), X is required to 
report the section 643(i) distribution on Part III of Form 3520 for 
Year 1 as a distribution from a foreign trust.
    (d) Example 3: Loan by a person related to a foreign nongrantor 
trust treated as a section 643(i) distribution. X, a U.S. person, is a 
beneficiary of FT, a foreign nongrantor trust. FT owns 55% of the stock 
of FC, a foreign corporation that is not a controlled foreign 
corporation within the meaning of section 957 or a passive foreign 
investment company within the meaning of section 1297. FC is related to 
FT within the meaning of Sec.  1.643(i)-1(d)(9). On January 2, Year 1, 
FC lends cash to X in exchange for an obligation that is not a 
qualified obligation within the meaning of Sec.  1.643(i)-2(b)(2)(iii). 
Under Sec.  1.643(i)-1(b)(2)(iii), FC is treated as the agent of FT 
with respect to the loan, and under Sec.  1.643(i)-1(b)(1) and (2)(i), 
X is treated as receiving the loan from FT on January 2, Year 1. 
Nevertheless, under Sec.  1.643(i)-1(b)(2)(ii), the loan is not treated 
as a section 643(i) distribution if X satisfies the reporting 
requirements of Sec.  1.6048-4 and attaches a statement to X's income 
tax return that demonstrates to the satisfaction of the Commissioner 
that the loan would have been made without regard to X's relationship 
with FT. Otherwise, X is treated as receiving a section 643(i) 
distribution and must determine the tax consequences of the 
distribution under Sec.  1.643(i)-3(c). Regardless of whether X claims 
the exception described in Sec.  1.643(i)-1(b)(2)(ii), under Sec.  
1.6048-4(a), X is required to report the loan on Part III of Form 3520 
for Year 1 as a distribution from a foreign trust.
    (e) Example 4: Guaranteed loan by an unrelated person treated as a 
section 643(i) distribution. X is a U.S. beneficiary of FT, a foreign 
nongrantor trust. On January 2, Year 1, X borrows $100,000 from Bank in 
exchange for an obligation that is not a qualified obligation within 
the meaning of Sec.  1.643(i)-2(b)(2)(iii), and FT provides a guarantee 
(within the meaning of Sec.  1.679-3(e)(4)) for the loan. Under Sec.  
1.643(i)-1(b)(1) and (2)(i), X is treated as receiving a loan from FT 
on January 2, Year 1, in the amount of $100,000 because FT guaranteed 
the loan from Bank to X. On January 2, Year 1, X is treated as 
receiving a section 643(i) distribution. X must determine the tax 
consequences of the distribution under Sec.  1.643(i)-3(c). Under Sec.  
1.6048-4(a), X is required to report the section 643(i) distribution on 
Part III of Form 3520 as a distribution from a foreign trust.
    (f) Example 5: Loan to a foreign person related to a U.S. 
beneficiary. X is a U.S. beneficiary of FT, a foreign nongrantor trust. 
X is also the sole shareholder of CFC, a foreign corporation, treated 
as a controlled foreign corporation under section 957. On January 2, 
Year 1, FT lends $100,000 to CFC in exchange for an obligation that is 
not a qualified obligation within the meaning of Sec.  1.643(i)-
2(b)(2)(iii). CFC is related to X within the meaning of Sec.  1.643(i)-
1(d)(9). Under Sec.  1.643(i)-1(b)(1) and (2)(i), X is treated as 
receiving a loan from FT on January 2, Year 1, in the amount of 
$100,000 because FT made the loan to CFC, a foreign person related to 
X. Under Sec.  1.643(i)-1(b)(2)(ii), the loan is not treated as a 
section 643(i) distribution if X reports the loan consistent with the 
requirements of Sec.  1.6048-4 and attaches a statement to X's income 
tax return that demonstrates to the satisfaction of the Commissioner 
that the loan from FT to CFC would have been made without regard to X's 
relationship with FT. Otherwise, X is treated as receiving a section 
643(i) distribution and must determine the tax consequences of the 
distribution under Sec.  1.643(i)-3(c). Regardless of whether X claims 
the limitation described in Sec.  1.643(i)-1(b)(2)(ii), under Sec.  
1.6048-4(a), X is required to report the loan on Part III of Form 3520 
for Year 1 as a distribution from a foreign trust.
    (g) Example 6: Loan to wholly owned corporation of U.S. 
beneficiary. Y, a nonresident alien, created and funded a foreign 
nongrantor trust, FT, for the benefit of Y's child, X, a U.S. person. X 
is a U.S. beneficiary within the meaning of Sec.  1.643(i)-1(d)(1). X 
wholly owns XYZ Corp, a domestic corporation. On July 1, Year 1, FT 
lends $100,000 to XYZ Corp in exchange for an obligation that is not a 
qualified obligation within the meaning of Sec.  1.643(i)-2(b)(2)(iii). 
Under Sec.  1.643(i)-1(d)(9) and (12), XYZ Corp is a U.S. person 
related to X. Under Sec.  1.643(i)-1(b)(1) and (2)(i) and Sec.  
1.643(i)-3(a)(1), X is treated as receiving a section 643(i) 
distribution from FT in the amount of $100,000. X must determine the 
tax consequences of the distribution under Sec.  1.643(i)-3(c). Under 
Sec. Sec.  1.6048-4(a), X and XYZ Corp are required to report the loan 
on Part III of Form 3520 for Year 1 as a distribution from a foreign 
trust.
    (h) Example 7: Subsequent transactions with respect to loan treated 
as a section 643(i) distribution. The facts are the same as in 
paragraph (g) of this section (Example 6). In Year 1, XYZ Corp makes a 
payment to FT that it characterizes in part as a partial repayment of 
principal and in part as interest on its obligation to FT. Under Sec.  
1.643(i)-3(d)(3)(i), the portion of the payment that is characterized 
as a repayment of principal will be treated as a transfer that is not a 
gratuitous transfer by a U.S. person for purposes of Sec.  1.671-
2(e)(2)(i) and chapter 1 of the Internal Revenue Code. Under Sec.  
1.643(i)-3(d)(2), the transfer of principal will have no tax 
consequences to FT. Furthermore, under Sec.  1.643(i)-3(d)(2), the 
portion of the payment that is characterized as interest by XYZ Corp 
will be treated as income to FT.
    (i) Example 8: Uncompensated use of trust property. Y, a 
nonresident alien, created and funded a foreign nongrantor trust, FT, 
for the benefit of Y's daughter, A, a U.S. person. A is a U.S. 
beneficiary of FT within the meaning of Sec.  1.643(i)-1(d)(1). FT owns 
real property that could be rented to an unrelated person at fair 
market value for $10,000 a month. During all of Year 1, A lives in the 
property rent-free. Under Sec. Sec.  1.643(i)-1(c) and Sec.  1.643(i)-
3(a)(3), A is treated as receiving a section 643(i) distribution from 
FT in Year 1 in the amount of $120,000 (12 x $10,000). A must determine 
the tax consequences of the distribution under Sec.  1.643(i)-3(c). 
Under Sec.  1.6048-4(a), A must report the section 643(i) distribution 
on Part III of Form 3520 for Year 1 as a distribution from FT.
    (j) Example 9: Partially compensated use of trust property. The 
facts are the same as in paragraph (i) of this section (Example 8) 
except that A pays FT $2,000 on the first of each month for the use of 
the property even though the fair market value is $10,000. Under 
Sec. Sec.  1.643(i)-1(c), 1.643(i)-2(a)(2), and 1.643(i)-3(a)(3), A is 
treated as receiving a section 643(i) distribution in Year 1 from FT in 
the amount of $96,000 (12 x ($10,000-$2,000)). A must determine the tax 
consequences of the distribution under Sec.  1.643(i)-3(c). Under 
Sec. Sec.  1.6048-4(a), A must report the entire fair market value of 
$120,000 on Part III of Form 3520 for Year 1 as a distribution from FT 
even through only a portion of the fair market value is treated as a 
section 643(i) distribution due to partial compensation.
    (k) Example 10: Uncompensated use of trust property treated as 
distribution

[[Page 39465]]

from accumulated income. On January 1, Year 1, Y, a nonresident alien, 
creates and funds a foreign nongrantor trust, FT, for the benefit of 
Y's son, X, a U.S. person. X is a U.S. beneficiary of FT within the 
meaning of Sec.  1.643(i)-1(d)(1). FT has $60,000 of distributable net 
income (DNI), as defined under section 643(a), in Year 1, $80,000 of 
DNI in Year 2, and $90,000 of DNI in Year 3. FT has never made any 
distributions. FT owns real property that could be rented to an 
unrelated person for $10,000 a month. During all of Year 3, X occupies 
the property rent free. Under Sec.  1.643(i)-1(c) and Sec.  1.643(i)-
3(a)(3), X is treated as receiving a section 643(i) distribution from 
FT in Year 3 in the amount of $120,000, the fair market value use of 
the trust property (12 x $10,000). Under Sec.  1.6048-4(a), X must 
report the section 643(i) distribution on Part III of Form 3520 for 
Year 3 as a distribution from FT. X receives a Foreign Nongrantor Trust 
Beneficiary Statement from FT and uses the actual calculation method 
under Sec.  1.643(i)-3(c)(3)(i) to determine the tax consequences of 
the section 643(i) distribution. The $120,000 is treated as an amount 
properly paid, credited, or required to be distributed by the trust as 
described in section 662(a)(2). As a result of X's uncompensated use of 
FT's property, X's section 643(i) distribution consists of a 
distribution of DNI of $90,000 (FT's DNI in Year 3) and an accumulation 
distribution of $30,000 under subpart D of subchapter J of chapter 1 of 
the Internal Revenue Code.
    (l) Example 11: Use of property of partial grantor trust not 
treated as section 643(i) distribution. X and Y are married. X is a 
U.S. person and Y is a nonresident alien. X and Y have three children, 
A, B, and C. A and B are both nonresident aliens. C is a U.S. person. 
In Year 1, X and Y created a foreign trust, FT, for the benefit of A 
and B to which X contributed a vacation home and Y contributed cash and 
securities. Neither X nor Y retained any powers described in sections 
673 through 677. In Year 2, C lived in the vacation home rent free. 
Although C is not a beneficiary of FT under the terms of the trust, 
under Sec.  1.679-2(a)(5), C's uncompensated use of the vacation home 
causes FT to be treated as having a U.S. beneficiary. Thus, under Sec.  
1.679-1(a), X will be treated as the owner of the portion of FT 
attributable to the vacation home. Under Sec.  1.643(i)-2(c)(2), C's 
use of the vacation home will be treated as the use of property from 
the grantor trust portion of FT. C will not be treated as receiving a 
section 643(i) distribution. Under Sec. Sec.  1.6048-4(a), C must 
report the use of the vacation home on Part III of Form 3520 for Year 2 
as a distribution from FT.
    (m) Example 12: Use of trust property by exempt entity not treated 
as section 643(i) distribution. In Year 1, X, a nonresident alien, 
creates a foreign nongrantor trust, FT, and funds the trust with cash 
and a valuable painting. In Year 1, pursuant to the terms of the trust 
instrument, FT lends the painting to E, a U.S. organization described 
in section 501(c)(3) with a valid determination letter from the 
Commissioner. E exhibits the painting and does not reimburse FT for the 
use of the painting. E is not a U.S. person within the meaning of Sec.  
1.643(i)-1(d)(12) because E is an entity that is exempt from tax under 
chapter 1 of the Internal Revenue Code. Accordingly, E's use of the 
painting is not a section 643(i) distribution under Sec.  1.643(i)-
1(c). E's use of the painting, however, is a distribution within the 
meaning of Sec.  1.6048-4(b). Nevertheless, under Sec.  1.6048-5(d), E 
is not required to report the use of the painting on Part III of Form 
3520 because E is a section 501(c)(3) entity that has received a 
determination letter from the Commissioner that recognizes that E is 
exempt from Federal income tax under section 501(a) as an organization 
described in section 501(c)(3), and the determination letter has not 
been revoked.


Sec.  1.643(i)-5  Applicability date.

    The rules of Sec. Sec.  1.643(i)-1 through 1.643(i)-4 apply to 
loans of cash or marketable securities made from, and to the use of any 
other property of, a foreign trust after the [date of publication of 
the final regulations in the Federal Register].
0
Par. 3. Section 1.679-0 is amended by:
0
a. Revising entry for Sec.  1.679-1(c)(2).
0
b. Adding new entry for Sec.  1.679-2(a)(5).
0
c. Redesignating the entry for Sec.  1.679-2(b)(3) as the entry for 
Sec.  1.679-2(b)(4).
0
d. Adding new entry for Sec.  1.679-2(b)(3).
0
e. Adding new entries for Sec.  1.679-2(b)(4)(i) through (vi).
0
f. Adding new entry for Sec.  1.679-2(d).
0
g. Revising the entries for Sec.  1.679-4(d)(1) through (6).
0
h. Removing the entry for Sec.  1.679-4(d)(7).
0
i. Revising the entry for Sec.  1.679-7.
    The revisions and additions read as follows:


Sec.  1.679-0  Outline of major topics.

* * * * *
Sec.  1.679-1 U.S. transferor treated as owner of foreign trust.

    (c) * * *
    (2) U.S. person.
    (i) In general.
    (ii) Special rules.
    (A) Dual resident taxpayers.
    (B) Dual status taxpayers.
* * * * *
    (6) Obligation.

Sec.  1.679-2 Trusts treated as having a U.S. beneficiary.

    (a) * * *
    (5) Loan or uncompensated use of trust property treated as paid 
or accumulated for the benefit of a U.S. person.
    (i) In general.
    (ii) Indirect loans.
    (iii) Exceptions.
    (iv) Safe harbors.
    (A) Reasonable period.
    (B) De minimis use.
    (v) Interaction with section 643(i).
    (vi) Examples.
    (A) Example 1: Loan of cash to U.S. person.
    (B) Example 2: Use of trust property by U.S. person.
    (C) Example 3: Use of trust property by church.
    (D) Example 4: Indirect loan of cash to a U.S. person.
    (E) Example 5: Interaction with section 643(i) and with section 
6048(c) information reporting.
* * * * *
    (b) * * *
    (3) Loans to, or uncompensated use of trust property by, 
indirect beneficiaries.
    (4) * * *
    (i) Example 1. Trust benefiting foreign corporation.
    (ii) Example 2. Trust benefiting another trust.
    (iii) Example 3. Trust benefiting another trust after 
transferor's death.
    (iv) Example 4. Indirect benefit through use of debit card.
    (v) Example 5. Other indirect benefit.
    (vi) Example 6. Indirect benefit through an indirect loan.
* * * * *
    (d) Presumption that foreign trust has U.S. beneficiary.
    (1) In general.
    (2) Authority of Commissioner to request information.

Sec.  1.679-4 Exceptions to general rule.

* * * * *
    (d) * * *
    (1) In general.
    (i) Requirements of the obligation.
    (ii) Additional requirements to remain a qualified obligation.
    (2) Modification of a qualified obligation.
    (3) Additional loans.
    (4) Anti-abuse rule.
    (5) Obligations that cease to be qualified.
    (i) In general.
    (ii) Amount transferred to the trust.
    (iii) Timing of transfers resulting from failed qualified 
obligations.
    (6) Examples.
    (i) Example 1: Demand loan.
    (ii) Example 2: Private annuity.
    (iii) Example 3: Transfer to unrelated foreign trust in exchange 
for an obligation.

[[Page 39466]]

    (iv) Example 4: Transfer for an obligation with term in excess 
of 5 years.
    (v) Example 5: Transfer for a qualified obligation.
    (vi) Example 6: Effect of modification treated as an exchange.
    (vii) Example 7: Effect of subsequent obligation on original 
obligation.
* * * * *
Sec.  1.679-7 Applicability dates.
* * * * *
0
Par. 4. Section 1.679-1 is amended by revising paragraphs (c)(2) and 
(c)(6) to read as follows:


Sec.  1.679-1  U.S. transferor treated as owner of foreign trust.

* * * * *
    (c) * * *
    (2) U.S. person--(i) In general. Subject to paragraph (c)(2)(ii) of 
this section, the term U.S. person means a United States person as 
defined in section 7701(a)(30).
    (ii) Special rules--(A) Dual resident taxpayers. If a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1) of this 
chapter) computes U.S. income tax liability as a nonresident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter, the 
dual resident taxpayer will not be treated as a U.S. person for 
purposes of section 679 with respect to the portion of the taxable year 
the dual resident taxpayer was treated as a nonresident alien for 
purposes of computing U.S. income tax liability.
    (B) Dual status taxpayers. If a taxpayer abandons U.S. citizenship 
or residence during the tax year or acquires U.S. citizenship or 
residence during the taxable year as provided in Sec.  1.6012-
1(b)(2)(ii), the taxpayer will not be treated as a U.S. person with 
respect to the portion of the taxable year the taxpayer was treated as 
a nonresident alien for purposes of computing U.S. income tax 
liability.
* * * * *
    (6) Obligation. The term obligation means any instrument or 
contractual arrangement that constitutes indebtedness under general 
principles of Federal income tax law (for example, a bond, note, 
debenture, certificate, bill receivable, account receivable, note 
receivable, open account, or other evidence of indebtedness), and an 
annuity contract that would not otherwise be classified as indebtedness 
under general principles of Federal income tax law.
* * * * *
0
Par. 5. Section 1.679-2 is amended by:
0
a. Adding paragraph (a)(5).
0
b. Redesignating paragraph (b)(3) as paragraph (b)(4).
0
c. Adding new paragraph (b)(3).
0
c. In newly redesignated paragraph (b)(4), designating Examples 1 
through 5 as paragraphs (b)(4)(i) through (v).
0
d. Adding paragraph (b)(4)(vi).
0
e. Adding paragraph (d).
    The revisions and additions read as follows:


Sec.  1.679-2  Trusts treated as having a U.S. beneficiary.

    (a) * * *
    (5) Loan or uncompensated use of trust property treated as paid or 
accumulated for the benefit of a U.S. person--(i) In general. Except as 
provided in paragraph (a)(5)(iii) of this section, any direct or 
indirect loan of cash or marketable securities from a foreign trust or 
portion of a foreign trust (whether from trust corpus or income) as 
described in paragraph (a)(5)(ii) to, or the direct or indirect use of 
any other property of a foreign trust or portion of a foreign trust by, 
any U.S. person (whether or not a beneficiary under the terms of the 
trust) is treated as causing trust income or corpus to be paid or 
accumulated for the benefit of a U.S. person for purposes of paragraph 
(a)(1) of this section. For these purposes, a loan from a foreign trust 
to, or the use of property of a foreign trust by, a grantor trust (as 
defined in Sec.  1.643(i)-1(d)(5)) or a disregarded entity (as defined 
in Sec.  1.643(i)-1(d)(3)) is treated as a loan to or use by the owner 
of the grantor trust or of the disregarded entity, respectively. For 
example, a loan to a single member LLC treated as a disregarded entity 
is treated as a loan to the owner of the LLC.
    (ii) Indirect loans. For purposes of paragraph (a)(5)(i) of this 
section, an indirect loan of cash or marketable securities from a 
foreign trust or portion of a foreign trust includes:
    (A) Loans of cash or marketable securities made by any person to a 
U.S. person, if the foreign trust provides a guarantee (within the 
meaning of Sec.  1.679-3(e)(4)) for the loan; and
    (B) Loans of cash or marketable securities made from a foreign 
trust to a U.S. person through an intermediary, such as an agent or 
nominee of the foreign trust, or from a person related (within the 
meaning of Sec.  1.643(i)-1(d)(9)) to the foreign trust.
    (iii) Exceptions. Paragraph (a)(5)(i) of this section does not 
apply if--
    (A) The U.S. person who receives the loan of cash or marketable 
securities, or who uses trust property, is an entity described in 
section 501(c)(3),
    (B) The loan of cash received by the U.S. person is in exchange for 
a qualified obligation within the meaning of Sec.  1.643(i)-
2(b)(2)(iii) (but without regard to Sec.  1.643(i)-2(b)(2)(iii)(B)(1) 
and (2)), or
    (C) The U.S. person who uses trust property, other than a loan of 
cash or marketable securities, pays the trust the fair market value of 
the use of such property within a reasonable period from the date of 
the start of the use of the property. A determination as to the fair 
market value of the use of such property and as to whether a fair 
market value payment is made within a reasonable period will be based 
on all the facts and circumstances, including the type of property used 
and the period of use. In appropriate cases, such as rental of real 
property, payments may be made on a periodic basis, if doing so would 
be consistent with arm's-length dealings between unrelated parties.
    (iv) Safe harbors. The following safe harbors apply for purposes of 
paragraph (a)(5)(iii)(C) of this section.
    (A) Reasonable period. A payment is made within a reasonable period 
if the payment is made or periodic payments commence within 60 days of 
the start of the use of trust property.
    (B) De minimis use. Use of trust property will be disregarded if 
the aggregate use by all U.S. persons (within the meaning of Sec.  
1.679-1(c)(2)) does not exceed 14 days during the calendar year.
    (v) Interaction with section 643(i). If a foreign trust or a 
portion of a foreign trust is treated as having a U.S. beneficiary 
pursuant to the rules of this paragraph (a)(5) and a U.S. transferor is 
thus treated as the owner of the foreign trust or a portion of the 
foreign trust under section 679, section 643(i) does not apply to the 
trust or portion of the trust of which the U.S. transferor is treated 
as the owner.
    (vi) Examples. The following examples illustrate the rules of 
paragraph (a)(5) of this section. In these examples, X, Y, and E are 
U.S. persons (within the meaning of Sec.  1.679-1(c)(2)), and FT is a 
foreign trust. In addition, FT's trust instrument provides that no U.S. 
person can benefit either as to income or corpus of FT.
    (A) Example 1: Loan of cash to U.S. person. In Year 1, X transfers 
cash and real property to FT. X is not treated as the owner of any 
portion of FT under sections 673 through 679. In Year 2, Y receives a 
loan of cash from FT that is not in exchange for a qualified obligation 
within the meaning of Sec.  1.643(i)-2(b)(2)(iii) and thus does not 
qualify for the exception under paragraph (a)(5)(iii)(B) of this 
section. Y is not an entity described in section 501(c)(3) and thus 
does not qualify for the exception under paragraph (a)(5)(iii)(A) of 
this section. Under

[[Page 39467]]

paragraph (a)(5) of this section, the loan is treated as paid or 
accumulated for the benefit of a U.S. person for purposes of paragraph 
(a)(1) of this section, and under Sec.  1.679-1(a), X is treated as the 
owner of FT. Under paragraph (c)(1) of this section, FT is treated as 
acquiring a U.S. beneficiary in Year 2.
    (B) Example 2: Use of trust property by U.S. person. The facts are 
the same as in paragraph (a)(5)(vi)(A) of this section (Example 1) 
except that, instead of receiving a loan of cash in Year 2, Y occupies 
real property owned by FT in exchange for monthly payments of $2,000. 
FT could rent the property to an unrelated party at fair market value 
for $10,000 a month. Under paragraph (a)(5) of this section, Y's use of 
FT's property is treated as paid or accumulated for the benefit of a 
U.S. person for purposes of paragraph (a)(1) of this section because Y 
has not paid fair market value for the use of the real property. Under 
Sec.  1.679-1(a), X is treated as the owner of FT. Under paragraph 
(c)(1) of this section, FT is treated as acquiring a U.S. beneficiary 
in Year 2.
    (C) Example 3: Use of trust property by church. In Year 1, X 
transfers cash and a valuable painting to FT. X is not treated as the 
owner of any portion of FT under sections 673 through 679. In Year 2, 
FT lends the painting to E, a U.S. church described in section 
501(c)(3). E's use of the painting is not treated as paid or 
accumulated for the benefit of a U.S. person for purposes of paragraph 
(a)(1) of this section because the exception in paragraph 
(a)(5)(iii)(A) of this section applies, and thus FT is not treated as 
having a U.S. beneficiary in Year 2.
    (D) Example 4: Indirect loan of cash to a U.S. person. In Year 1, X 
transfers property to FT. In Year 2, Y borrows $100,000 from Bank in 
exchange for an obligation that is not a qualified obligation within 
the meaning of Sec.  1.643(i)-2(b)(2)(iii) and thus does not qualify 
for the exception under paragraph (a)(5)(iii)(B) of this section. FT 
provides a guarantee (within the meaning of Sec.  1.679-3(e)(4)) for 
the loan. Under paragraph (a)(5)(ii)(A) of this section, Y is treated 
as receiving a loan from FT because FT guaranteed the loan from Bank to 
Y. Under paragraph (a)(5) of this section, the loan is treated as paid 
or accumulated for the benefit of a U.S. person for purposes of 
paragraph (a)(1) of this section. Under Sec.  1.679-1(a), X is treated 
as the owner of FT. Under paragraph (c)(1) of this section, FT is 
treated as acquiring a U.S. beneficiary in Year 2.
    (E) Example 5: Interaction of grantor trust rules with section 
643(i) and with section 6048(c) information reporting. In Year 1, X 
created and funded a foreign nongrantor trust, FT. During Year 1 and 
Year 2, FT accumulates income in the amount of $110,000. Before Year 3, 
neither X nor any other person is treated as owning FT under the rules 
of sections 673 through 679. In Year 3, Y receives a loan of $100,000 
cash from FT that is not in exchange for a qualified obligation within 
the meaning of Sec.  1.643(i)-2(b)(2)(iii) and thus does not qualify 
for the exception under paragraph (a)(5)(iii)(B) of this section. Under 
paragraph (a)(5) of this section, the loan to Y is treated as paid for 
the benefit of a U.S. person for purposes of paragraph (a)(1) of this 
section. Under Sec.  1.679-1(a), X is now treated as the owner of FT. 
Under paragraph (a)(5)(v) of this section, section 643(i) does not 
apply to the loan from FT to Y. Under paragraph (c)(1) of this section, 
FT is treated as acquiring a U.S. beneficiary in Year 3. Pursuant to 
Sec.  1.6048-4(b)(3), Y is treated as receiving a distribution from FT 
and must comply with the reporting requirements in Sec.  1.6048-4 with 
respect to the loan.
    (b) * * *
    (3) Loans to, or uncompensated use of trust property by, indirect 
beneficiaries. For purposes of paragraphs (a)(1) and (a)(5) of this 
section, a loan of cash or marketable securities or the use of trust 
property shall be treated as paid or accumulated for the benefit of a 
U.S. person if--
    (i) The loan is made to, or the trust property is used by, a 
foreign entity described in paragraph (b)(1) of this section; or
    (ii) The loan is made through, or the use of trust property is made 
available to, an intermediary described in paragraph (b)(2) of this 
section, or such loan or use of trust property is made by any other 
means where a U.S. person may obtain an actual or constructive benefit.
    (4) * * *
    (vi) Example 6. Indirect benefit through an indirect loan. A, a 
U.S. person, transfers property to FT. The trust instrument provides 
that no U.S. person can benefit either as to income or corpus. However, 
FT maintains an account with FB, a foreign bank, and FB issues a loan 
to B, a U.S. person, against the account maintained by FT. Under 
paragraphs (a)(1), (a)(5), and (b)(3) of this section, FT is treated as 
having a U.S. beneficiary.
* * * * *
    (d) Presumption that foreign trust has U.S. beneficiary--(1) In 
general. If a U.S. person directly or indirectly transfers property to 
a foreign trust other than a trust described in Sec.  1.679-4(a)(2) or 
(3), the Commissioner may treat the trust as having a U.S. beneficiary 
for purposes of Sec.  1.679-1(a), unless the U.S. person--
    (i) Satisfies the reporting requirements of Sec.  1.6048-2 with 
respect to the transfer; and
    (ii) Includes an explanatory statement attached to the U.S. 
person's Federal income tax return that demonstrates to the 
satisfaction of the Commissioner that the trust satisfies the 
requirements of paragraph (a)(1) of this section immediately after the 
transfer.
    (2) Authority of Commissioner to request information. The 
Commissioner may request information related to the trust described in 
paragraph (d)(1) of this section and its potential beneficiaries to 
determine whether the trust satisfies the requirements of paragraph 
(a)(1) of this section. Unless such additional information is provided 
upon the Commissioner's written notice and request to the U.S. person, 
the trust will be deemed to have a U.S. beneficiary. The U.S. person 
will have 60 days (90 days if the notice is addressed to a person 
outside the United States) to respond to the notice and request.
0
Par. 6. Section 1.679-4 is amended by revising paragraph (d) to read as 
follows:


Sec.  1.679-4  Exceptions to general rule.

* * * * *
    (d) Qualified obligations--(1) In general--(i) Requirements of the 
obligation. For purposes of this section, an obligation is treated as a 
qualified obligation only if the obligation at all times satisfies all 
of the following requirements--
    (A) The obligation is reduced to writing in an express written 
agreement;
    (B) The term of the obligation does not exceed five years. For 
purposes of determining the term of an obligation, the obligation's 
maturity date is the last possible date that the obligation can be 
outstanding under the terms of the obligation;
    (C) All payments on the obligation must be made in cash in U.S. 
dollars;
    (D) The obligation is issued at par and provides for stated 
interest at a fixed rate or a qualified floating rate within the 
meaning of Sec.  1.1275-5(b);
    (E) The yield to maturity of the obligation is not less than 100 
percent of the applicable Federal rate and not greater than 130 percent 
of the applicable Federal rate. The applicable Federal rate for an 
obligation is the applicable Federal rate in effect under section 
1274(d) for the day on which the obligation is issued, as published in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter). The

[[Page 39468]]

yield to maturity and the applicable Federal rate must be based on the 
same compounding period. If an obligation is a variable rate debt 
instrument that provides for stated interest at a qualified floating 
rate, the equivalent fixed rate debt instrument rules in Sec.  1.1274-
2(f)(1) or Sec.  1.1275-5(e), whichever is applicable, apply to 
determine the obligation's yield to maturity; and
    (F) All stated interest on the obligation is qualified stated 
interest within the meaning of Sec.  1.1273-1(c).
    (ii) Additional requirements to remain a qualified obligation. An 
obligation will remain a qualified obligation only if, for the first 
year and each succeeding year that the obligation remains outstanding, 
the trust timely makes all payments of principal and interest on the 
obligation according to the terms of the obligation (which may include 
a reasonable grace period of no more than thirty days for a late 
payment) and the U.S. transferor fulfills the requirements of this 
paragraph (d)(1)(ii):
    (A) The U.S. transferor timely extends the period for assessment of 
any income tax attributable to the obligation and any consequent income 
tax changes for each year that the obligation is outstanding to a date 
not earlier than three years after the maturity date of the obligation. 
This extension of the period for assessment is not necessary with 
respect to the taxable year of the U.S. transferor in which the 
maturity date of the obligation falls, provided that the obligation is 
paid in cash in U.S. dollars within that year. The period of assessment 
is extended by completing and filing Part I of Form 3520, Annual Return 
to Report Transactions with Foreign Trusts and Receipt of Certain 
Foreign Gifts, for every year that the obligation is outstanding. Part 
I of Form 3520 also may contain such other terms with respect to 
assessment as may be considered necessary by the Commissioner to ensure 
the assessment and collection of the correct tax liability for each 
year for which the extension of the period of assessment is required. 
When Part I of Form 3520 is properly executed and filed, the consent to 
extend the period for assessment of tax will be deemed to be agreed 
upon and executed by the Commissioner for purposes of Sec.  
301.6501(c)-1(d); and
    (B) The U.S. transferor timely reports the status of the 
obligation, including principal and interest payments, on Part I of 
Form 3520 for each year that the obligation is outstanding.
    (2) Modification of a qualified obligation. If the terms of a 
qualified obligation are modified and the modification is treated as an 
exchange under Sec.  1.1001-3, the new obligation that is deemed issued 
in the exchange under Sec.  1.1001-3 must satisfy all the requirements 
in paragraph (d)(1) of this section to be a qualified obligation using 
the original obligation's issue date. If the modification is not 
treated as an exchange under Sec.  1.1001-3, then the obligation must 
be retested as of the date of the modification to determine whether the 
obligation, as modified, continues to satisfy the requirements in 
paragraph (d)(1) of this section to be a qualified obligation.
    (3) Additional loans. If a qualified obligation is outstanding and 
the U.S. transferor directly or indirectly obtains an additional 
obligation issued by the foreign trust in exchange for cash, or if the 
U.S. transferor directly or indirectly obtains an additional obligation 
issued by a person related to the trust, the outstanding obligation is 
deemed to have the maturity date of the additional obligation in 
determining whether the outstanding obligation exceeds the specified 
five-year term. The outstanding obligation must be retested as of the 
issue date of the additional obligation to determine whether it would 
have satisfied, as of the outstanding obligation's issue date, all the 
requirements in paragraph (d)(1) of this section to be a qualified 
obligation. If there is more than one qualified obligation outstanding, 
the determination is made based on the outstanding obligation with the 
earliest issue date. The additional obligation also must be separately 
tested to see if it satisfies the requirements of (d)(1) of this 
section to be a qualified obligation.
    (4) Anti-abuse rule. Notwithstanding paragraphs (2) and (3) of this 
section, if the Commissioner determines, based on all the facts and 
circumstances, that two or more obligations issued by a foreign trust 
or a person related to the trust are structured with a principal 
purpose to avoid the application of section 679, the Commissioner may 
treat the obligations as a single obligation that is not a qualified 
obligation.
    (5) Obligations that cease to be qualified--(i) In general. If an 
obligation ceases to be a qualified obligation (for example, because an 
obligation is modified so that the term exceeds 5 years), the U.S. 
transferor is treated as making a transfer to the foreign trust.
    (ii) Amount transferred to the trust. The amount that the U.S. 
transferor is treated as having transferred to the trust will be equal 
to the obligation's outstanding stated principal amount plus any 
accrued but unpaid qualified stated interest (within the meaning of 
Sec.  1.1273-1(c)) as of the date of the event that causes the 
obligation to no longer be a qualified obligation. In the case of an 
obligation that ceases to be a qualified obligation because the 
Commissioner treats two or more obligations as a single obligation 
pursuant to paragraph (d)(4) of this section, the U.S. transferor is 
treated as making a transfer to the trust in an amount not to exceed 
the sum of the outstanding stated principal amount of the obligations 
plus any accrued but unpaid qualified stated interest for each of the 
obligations as of the date determined by the Commissioner under 
paragraph (d)(5)(iii) of this section.
    (iii) Timing of transfers resulting from failed qualified 
obligations. In general, a U.S. transferor is treated as making a 
transfer to the foreign trust on the date of the event that causes an 
obligation to no longer be a qualified obligation. However, based on 
all of the facts and circumstances, if an obligation (or obligations) 
is structured with a principal purpose to avoid the application of 
section 679, the Commissioner may deem a transfer to have occurred on 
any date on or after the issue date of the obligation(s).
    (6) Examples. The following example illustrates the rules of this 
paragraph (d). In these examples, A and B are U.S. residents and FT is 
a foreign trust.
    (i) Example 1: Demand loan. A is a related person (as defined in 
Sec.  1.679-1(c)(5)) with respect to FT. A transfers $50,000 to FT in 
exchange for a demand note that permits A to require repayment by FT at 
any time. Because FT's obligation to A could remain outstanding for 
more than five years, the obligation is not a qualified obligation 
within the meaning of paragraph (d)(1) of this section and, pursuant to 
paragraph (c) of this section, it is not taken into account for 
purposes of determining whether A's transfer is eligible for the fair 
market value exception of paragraph (a)(4) of this section. 
Accordingly, Sec.  1.679-1 applies to treat A as the owner of the 
portion of FT attributable to the full $50,000 transfer to FT.
    (ii) Example 2: Private annuity. A is a related person (as defined 
in Sec.  1.679-1(c)(5)) with respect to FT. A transfers $40,000 to FT 
in exchange for an annuity from FT that will pay A $100x per year for 
the rest of A's life. Because FT's obligation to A could remain 
outstanding for more than five years, the obligation is not a qualified 
obligation within the meaning of paragraph (d)(1) of this section and, 
pursuant to paragraph (c) of this section, it is not taken into account 
for purposes of determining whether A's transfer is eligible for the 
fair market value exception of paragraph (a)(4) of this section. 
Accordingly, Sec.  1.679-1 applies

[[Page 39469]]

to treat A as the owner of the portion of FT attributable to the full 
$40,000 transfer to FT.
    (iii) Example 3: Transfer to unrelated foreign trust in exchange 
for an obligation. B is not a related person (as defined in Sec.  
1.679-1(c)(5)) with respect to FT. B transfers $10,000 to FT in 
exchange for an obligation of the trust. The term of the obligation is 
fifteen years. Because B is not a related person with respect to FT, 
paragraph (c) of this section does not apply. The fair market value of 
the obligation received by B is taken into account for purposes of the 
fair market value exception of paragraph (a)(4) of this section even 
though the obligation is not a qualified obligation within the meaning 
of paragraph (d)(1) of this section.
    (iv) Example 4: Transfer for an obligation with term in excess of 5 
years. A is a related person (as defined in Sec.  1.679-1(c)(5)) with 
respect to FT. A transfers property that has a fair market value of 
$50,000 to FT in exchange for an obligation of FT. The term of the 
obligation is ten years. Because the term of the obligation exceeds 
five years, the obligation is not a qualified obligation within the 
meaning of paragraph (d)(1) of this section, and pursuant to paragraph 
(c) of this section, it is not taken into account for purposes of 
determining whether A's transfer is eligible for the fair market value 
exception of paragraph (a)(4) of this section. Accordingly, Sec.  
1.679-1 applies to treat A as the owner of the portion of FT 
attributable to the full $50,000 transfer to FT.
    (v) Example 5: Transfer for a qualified obligation. The facts are 
the same as in paragraph (d)(6)(iv) of this section (Example 4), except 
that the term of the obligation is three years. Assuming the other 
requirements of paragraph (d)(1) of this section are satisfied, the 
obligation is a qualified obligation, and its stated principal amount 
is taken into account for purposes of determining whether A's transfer 
is eligible for the fair market value exception of paragraph (a)(4) of 
this section.
    (vi) Example 6: Effect of modification treated as an exchange. A is 
a related person (as defined in Sec.  1.679-1(c)(5)) with respect to 
FT. A transfers property that has a fair market value of $10,000 to FT 
in exchange for an obligation with a term of four years that satisfies 
the requirements of paragraph (d)(1) of this section. Two years later, 
a significant modification of the obligation within the meaning of 
Sec.  1.1001-3, including an extension of the obligation by an 
additional term of three years, occurs, and the modification is treated 
as an exchange under Sec.  1.1001-3. The new obligation that is deemed 
issued in the exchange under Sec.  1.1001-3 must satisfy the 
requirements of paragraph (d)(1) of this section to be a qualified 
obligation as of the original obligation's issue date. Because the new 
obligation would not satisfy the five-year requirement of paragraph 
(d)(1), the obligation ceases to be treated as a qualified obligation.
    (vii) Example 7: Effect of subsequent obligation on original 
obligation. A is a related person (as defined in Sec.  1.679-1(c)(5)) 
with respect to FT. On January 1, Year 1, A transfers $100,000 to FT in 
exchange for Obligation 1 from FT, an obligation with a maturity date 
of January 1, Year 6, that satisfies the requirements of paragraph 
(d)(1) of this section. On June 30, Year 1, A transfers an additional 
$50,000 to FT in exchange for Obligation 2, an obligation with a 
maturity date of June 30, Year 6, that independently satisfies the 
requirements of paragraph (d)(1) of this section. Under paragraph 
(d)(3) of this section, Obligation 1 will be deemed to have a maturity 
date of June 30, Year 6 (i.e., a greater than five-year term) and will 
cease to be a qualified obligation under paragraph (d)(1) of this 
section. Pursuant to paragraph (c) of this section, because Obligation 
1 is not a qualified obligation, it is not taken into account for 
purposes of determining whether A's transfer of $100,000 is eligible 
for the fair market value exception of paragraph (a)(4) of this 
section. Accordingly, Sec.  1.679-1 applies to treat A as the owner of 
the portion of FT attributable to the $100,000 transferred to FT. 
Obligation 2 is separately tested to determine whether it satisfies the 
qualified obligation rules of paragraph (d)(1) of this section and to 
the extent it does, A is treated as eligible for the fair market value 
exception of paragraph (a)(4) of this section and is not treated as the 
owner of the portion of FT attributable to the $50,000 transferred to 
FT.
0
Par. 7. Section 1.679-7 is amended by:
0
a. Revising the section heading.
0
b. Adding paragraphs (b)(4) through (b)(7).
    The revision and additions read as follows:


Sec.  1.679-7  Applicability dates.

* * * * *
    (b) * * *
    (4) The amendments to Sec. Sec.  1.679-1(c)(2) and 1.679-1(c)(6) 
apply for taxable years beginning after the [date of publication of the 
final regulations in the Federal Register].
    (5) The rules of Sec.  1.679-2(a)(5) apply to loans and the use of 
trust property after the [date of publication of the final regulations 
in the Federal Register].
    (6) The rules of Sec.  1.679-2(d) apply to transfers of property 
after the [date of publication of the final regulations in the Federal 
Register].
    (7) Section 1.679-4(d) applies to obligations issued or modified 
after the [date of publication of the final regulations in the Federal 
Register]. If an obligation issued on or before the [date of 
publication of the final regulations in the Federal Register] is 
modified after that date, and the modification is a significant 
modification under Sec.  1.1001-3, the new obligation that is deemed 
issued in the exchange is treated as issued after the [date of 
publication of the final regulations in the Federal Register]. If the 
modification is not a significant modification under Sec.  1.1001-3, 
then the original obligation must be retested as of the date of the 
modification to determine whether the obligation, as modified, 
satisfies the requirements in paragraph (d)(1), as amended, to be a 
qualified obligation.
0
Par. 8. Section 1.6039F-1 is added to read as follows:


Sec.  1.6039F-1  U.S. recipients of foreign gifts.

    (a) Reporting of foreign gifts--(1) In general. Except as provided 
in paragraph (c) of this section, and subject to paragraph (a)(2) and 
(3) of this section, each U.S. person (within the meaning of section 
7701(a)(30)) who receives a foreign gift (within the meaning of 
paragraph (b) of this section) during a taxable year must report such 
gift (including the additional information required under paragraph (c) 
of this section if, after applying the aggregation rules, the foreign 
gift exceeds certain reporting thresholds) on Part IV of Form 3520, 
Annual Return To Report Transactions With Foreign Trusts and Receipt of 
Certain Foreign Gifts, by the fifteenth day of the fourth month after 
the close of the U.S. person's taxable year. In the case of a U.S. 
person who has been granted an extension of time to file the U.S. 
person's income tax return pursuant to section 6081, an extension of 
time for filing Form 3520 is granted to the fifteenth day of the tenth 
month following the close of the U.S. person's taxable year. No further 
extension of time to file Form 3520 is allowed. For special rules 
concerning the treatment of dual resident taxpayers (within the meaning 
of Sec.  301.7701(b)-7(a)(1) of this chapter) and dual status taxpayers 
(described in Sec.  1.6012-1(b)(2)(ii)) as U.S. persons for purposes of 
this section, see paragraph (f) of this section.
    (2) Reporting by U.S. citizens and residents residing abroad. In 
the case of a U.S. person who is an individual and

[[Page 39470]]

who qualifies for an automatic extension to file their income tax 
return under section 6081 and Sec.  1.6081-5(a)(5) because the U.S. 
person resides outside of the United States and Puerto Rico and the 
U.S. person's main place of business or post of duty is outside of the 
United States and Puerto Rico, the U.S. person must report the foreign 
gifts received by the U.S. person during the taxable year on Part IV of 
Form 3520 by the fifteenth day of the sixth month after the close of 
the U.S. person's taxable year. If the U.S. person has been granted an 
extension of time to file the U.S. person's income tax return pursuant 
to section 6081, an extension of time for filing Form 3520 is granted 
to the fifteenth day of the tenth month following the close of the U.S. 
person's taxable year. No additional extension of time to file Form 
3520 is allowed.
    (3) Reporting for deceased U.S. persons. In the case of a deceased 
U.S. person, the executor (within the meaning of section 2203) of the 
U.S. person's estate must report the foreign gifts received by the U.S. 
person during the U.S. person's final taxable year on Part IV of Form 
3520 by the fifteenth day of the fourth month following the close of 
the 12-month period which began with the first day of the U.S. person's 
final taxable year. If the executor of the U.S. person's estate has 
been granted an extension of time to file the U.S. person's final 
income tax return pursuant to section 6081, an extension of time for 
filing Form 3520 is granted to the fifteenth day of the tenth month 
following the close of the 12-month period which began with the first 
day of the U.S. person's final taxable year. No additional extension of 
time to file Form 3520 is allowed.
    (b) Definition of foreign gift--(1) In general. The term foreign 
gift means any amount received from a non-U.S. person that the 
recipient (including a spouse) treats as a gift, bequest, devise, or 
inheritance for income tax purposes, but does not include any qualified 
transfer within the meaning of section 2503(e)(2) (relating to certain 
transfers for educational or medical expenses) or any transfer that is 
treated as a distribution (within the meaning of Sec.  1.6048-4(b)) 
from a foreign trust and that is reported on a return under Sec.  
1.6048-4. A U.S. person who receives a transfer from a foreign trust 
must treat that transfer as a distribution from the trust that is 
reportable under Sec.  1.6048-4, rather than as a foreign gift that is 
reportable under paragraph (a) of this section, even if the U.S. person 
treats the transfer as a gift for another purpose (such as computing 
the person's Federal income tax liability). For example, although a 
covered gift or bequest described in section 2801(e) is a foreign gift, 
a U.S. person who receives a covered gift or bequest from a foreign 
trust must report the covered gift or bequest as a distribution (within 
the meaning of Sec.  1.6048-4(b)) under Sec.  1.6048-4.
    (2) Anti-avoidance rule. The term foreign gift includes any amount 
received by a U.S. person from a non-U.S. person that meets all of the 
following requirements--
    (i) Based on all the facts and circumstances, the Commissioner 
determines that the amount received is in substance a gift;
    (ii) The recipient does not treat the amount received as a gift, 
bequest, devise, or inheritance; and
    (iii) The recipient does not treat the amount received as taxable 
income (such as a purported loan).
    (c) Exceptions--(1) Section 501(c) recipient. Paragraph (a) of this 
section does not apply if the recipient of the foreign gift is an 
organization described in section 501(c) and exempt from tax under 
section 501(a).
    (2) Reporting threshold rules--(i) Foreign gifts from foreign 
individuals or foreign estates--(A) Reporting threshold. Except as 
provided in paragraph (c)(2)(ii) of this section, paragraph (a) of this 
section does not apply to a foreign gift received by a U.S. person from 
a non-U.S. person who is an individual (a foreign individual) or a 
foreign estate (within the meaning of section 7701(a)(31)(A)) if, 
during the U.S. person's taxable year, the aggregate amount of foreign 
gifts received, directly or indirectly, from that foreign individual or 
foreign estate (the transferor) does not exceed $100,000, as modified 
by cost-of-living adjustments pursuant to paragraph (c)(2)(v) of this 
section.
    (B) Aggregation rule. To determine whether paragraph (c)(2)(i)(A) 
of this section applies to foreign gifts received from a transferor, 
each U.S. person must aggregate foreign gifts, including covered gifts 
and bequests described in section 2801(e), received from all foreign 
individuals, foreign estates, and any other foreign person (such as 
corporations or partnerships) that the U.S. person knows or has reason 
to know are related to the transferor within the meaning of Sec.  
1.643(i)-1(d)(9). If the aggregate amount of all these foreign gifts 
exceeds the $100,000 reporting threshold, the U.S. person must 
separately identify each foreign gift in excess of $5,000 received from 
the transferor and from each foreign person related to the transferor 
and must provide identifying information (for example, name and 
address) about the transferor and each such foreign person, including a 
foreign individual or a foreign estate.
    (ii) Covered gifts and bequests. Subject to paragraph (h)(2) of 
this section, paragraph (a) of this section does not apply to a foreign 
gift that is a covered gift or bequest described in section 2801(e) if 
the aggregate amount of covered gifts and bequests received by the U.S. 
person during the calendar year does not exceed the section 2801(c) 
amount, which is the dollar amount of the per-donee exclusion in effect 
under section 2503(b). For purposes of this paragraph (c)(2)(ii), the 
aggregate amount of covered gifts and bequests received by the U.S. 
person during the calendar year does not include transfers from a 
foreign trust (as described in paragraph (b)(1) of this section), as 
such transfers are reportable as distributions (within the meaning of 
Sec.  1.6048-4(b)) under Sec.  1.6048-4.
    (iii) Other foreign gifts--(A) Reporting threshold. Paragraph (a) 
of this section does not apply to a foreign gift received by a U.S. 
person from a foreign corporation or a foreign partnership if, during 
the U.S. person's taxable year, the aggregate amount of foreign gifts 
from that corporation or partnership (the transferor), when aggregated 
with foreign gifts received from other foreign persons that the U.S. 
person knows or has reason to know are related to the transferor as 
described in paragraph (c)(2)(iii)(B) of this section, does not exceed 
$10,000, as modified by cost-of-living adjustments pursuant to 
paragraph (c)(2)(v) of this section.
    (B) Aggregation rule. To determine whether paragraph (c)(2)(iii)(A) 
of this section applies to foreign gifts from a transferor, the U.S. 
person must aggregate foreign gifts received from all foreign 
corporations, foreign partnerships, and any other foreign person that 
the U.S. person knows or has reason to know are related to the 
transferor within the meaning of Sec.  1.643(i)-1(d)(9). If the 
aggregate amount of these foreign gifts exceeds the reporting 
threshold, the U.S. person must separately identify each foreign gift 
from the transferor and from each foreign person related to the 
transferor and provide identifying information (for example, name and 
address) about the transferor and each such foreign person, including a 
foreign individual or foreign estate.
    (iv) Joint returns. In the case of married U.S. persons who file 
joint income tax returns under section 6013 for a tax year, the 
reporting threshold under paragraph (c)(2)(i)(A) of this section 
applies separately to each spouse. Thus, married U.S. persons who

[[Page 39471]]

file a joint income tax return will not be subject to paragraph (a) of 
this section if the aggregate amount of foreign gifts received by each 
spouse, directly or indirectly from any one foreign individual or 
foreign estate, taking into account the aggregation rule of paragraph 
(c)(2)(i)(B) of this section, does not exceed $100,000 during the 
taxable year.
    (v) Cost-of-living adjustments. The reporting thresholds under 
paragraph (c)(2)(i)(A) and under paragraph (c)(2)(iii)(A) of this 
section are increased by an amount equal to the product of the amounts 
specified in such paragraphs and the cost-of-living adjustment for the 
taxable year of the gift under section 1(f)(3), except that paragraph 
(A)(ii) thereof is applied by substituting ``1995'' for ``2016.''
    (d) Valuation principles. The amount of a foreign gift is the value 
of the property at the time of its transfer. The value of the property 
is the price at which such property would change hands between a 
willing buyer and a willing seller, neither being under any compulsion 
to buy or to sell, and both having reasonable knowledge of relevant 
facts. Accordingly, the value of the property is determined in 
accordance with the Federal gift tax valuation principles of section 
2512 and sections 2701 through 2704 (chapter 14 of the Internal Revenue 
Code) and the regulations under section 2512 and sections 2701 through 
2704 in this part.
    (e) Penalty for failure to file information--(1) In general. If a 
U.S. person fails to furnish information required under paragraph (a) 
of this section with respect to any foreign gift by the due date 
provided under paragraph (a)--
    (i) The tax consequences of the receipt of such foreign gift may be 
determined by the Commissioner based on all the facts and 
circumstances, and
    (ii) Notwithstanding the tax consequences under paragraph (e)(1)(i) 
of this section, such U.S. person must pay (upon notice and demand by 
the Commissioner and in the same manner as tax) an amount equal to 5 
percent of the amount of such foreign gift for each month (or portion 
thereof) for which the failure to report the foreign gift as a gift on 
Form 3520 continues (not to exceed 25 percent of such amount in the 
aggregate).
    (2) Reasonable cause exception. Paragraph (e)(1) of this section 
will not apply to any failure to report a foreign gift if the U.S. 
person submits a reasonable cause statement to the Commissioner under 
penalties of perjury and demonstrates to the satisfaction of the 
Commissioner that the failure is due to reasonable cause and not due to 
willful neglect. The determination of whether a taxpayer acted with 
reasonable cause and not with willful neglect is made under the 
principles set out in Sec.  1.6664-4 and Sec.  301.6651-1(c). This 
determination is made on a case-by-case basis, taking into account all 
pertinent facts and circumstances.
    (f) Special rules--(1) Dual resident taxpayers. If a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1) of this 
chapter) computes U.S. income tax liability as a nonresident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter, the 
dual resident taxpayer will not be treated as a U.S. person for 
purposes of section 6039F with respect to the portion of the taxable 
year the dual resident taxpayer was treated as a nonresident alien for 
purposes of computing U.S. income tax liability.
    (2) Dual status taxpayers. If a taxpayer abandons U.S. citizenship 
or residence during the taxable year or acquires U.S. citizenship or 
residence during the taxable year as provided in Sec.  1.6012-
1(b)(2)(ii), the taxpayer will not be treated as a U.S. person with 
respect to the portion of the taxable year the taxpayer is treated as a 
nonresident alien for purposes of computing U.S. income tax liability.
    (g) Examples. The following examples illustrate the rules of this 
section. In these examples and unless otherwise stated, assume that the 
reporting threshold under paragraph (c)(2)(i)(A) of this section is 
$100,000:
    (1) Example 1: Qualified transfer exception. X, a U.S. person, 
attends Private University, an accredited college in the United States. 
X's grandparents, who are not U.S. persons, pay X's tuition directly to 
Private University. The tuition payment is a qualified transfer within 
the meaning of section 2503(e)(2). Under paragraph (b)(1) of this 
section, X is not treated as receiving a foreign gift from X's 
grandparents. Accordingly, X is not required to report the tuition 
payment under paragraph (a) of this section.
    (2) Example 2: Charitable donee. XYZ, a U.S. person, is an 
organization described in section 501(c) and is exempt from tax under 
section 501(a). XYZ receives a bequest of $200,000 from a foreign 
estate. Because XYZ meets the exception under paragraph (c)(1) of this 
section for organizations described in section 501(c) and exempt from 
tax under section 501(a), XYZ is not required to report the bequest 
under paragraph (a) of this section.
    (3) Example 3: Gift from dual resident taxpayer. X is a lawful 
permanent resident of the United States within the meaning of Sec.  
301.7701(b)-1(b) of this chapter and is a resident of Country F under 
the domestic law of Country F. X is a resident of Country F under the 
residence article of the U.S.-Country F income tax treaty and notifies 
the United States by taking such a position on Form 1040NR and Form 
8833 for Year 1. Pursuant to Sec.  301.7701(b)-7 of this chapter, X is 
treated as a nonresident alien for purposes of computing X's U.S. 
income tax liability for Year 1. During Year 1, X makes a gift of 
$150,000 to Y, a U.S. citizen. Under paragraph (f)(1) of this section, 
X is not treated as a U.S. person for purposes of this section. Because 
X is not treated as a U.S. person for Year 1, the gift is a foreign 
gift within the meaning of paragraph (b) of this section. Y must report 
the foreign gift on Part IV of Form 3520 under paragraph (a) of this 
section.
    (4) Example 4: Gifts from related foreign individuals. X, a U.S. 
citizen, is married to Y, a nonresident alien. Y has three brothers, A, 
B, and C, who also are nonresident aliens. In Year 1, Y makes a gift of 
$90,000 to X, A makes a gift of $40,000 to X, B makes two gifts to X 
(one of $4,000 and one of $3,000), and C makes a gift of $4,000 to X. X 
knows or has reason to know that A, B, and C are related to Y within 
the meaning of Sec.  1.643(i)-1(d)(9). X treats all five transfers as 
gifts. Under paragraphs (c)(2)(i)(A) and (B) of this section, to 
calculate the $100,000 reporting threshold, X must aggregate foreign 
gifts from Y, A, B, and C. For Year 1, X must report the receipt of 
$141,000 in foreign gifts. In addition, under paragraphs (a) and 
(c)(2)(i)(B) of this section, X must separately identify and report 
information regarding the $90,000 foreign gift from Y, the $40,000 
foreign gift from A, and the aggregated $7,000 foreign gifts from B 
because each person's foreign gift for Year 1 exceeds $5,000. X is not 
required to identify the $4,000 gift from C separately because it does 
not exceed $5,000.
    (5) Example 5: Covered gift within meaning of section 2801(e). Z is 
a resident of Country F and relinquishes U.S. citizenship on July 1, 
Year 1, becoming a covered expatriate within the meaning of section 
877A(g)(1). On December 31, Year 10, a date after the date final 
regulations under section 2801 are published in the Federal Register, Z 
gives $50,000 to Z's son, X, who is a U.S. person. The transfer is a 
covered gift within the meaning of section 2801(e) and a foreign gift 
within the meaning of paragraph (b) of this section. Because the value 
of the foreign

[[Page 39472]]

gift exceeds the threshold specified in paragraph (c)(2)(ii) of this 
section (assuming that for Year 10 this amount is under $50,000), X 
must report receipt of the foreign gift on Part IV of Form 3520 under 
paragraph (a) of this section. X also is subject to tax and separate 
reporting requirements under section 2801.
    (6) Example 6: Gifts from foreign individual and related 
corporation. X, a U.S. citizen, is married to Y, a nonresident alien. Y 
is the sole shareholder of FC, a foreign corporation. During Year 1, Y 
makes a gift of $11,000 to X, and FC makes a gift of $9,000 to X. 
Because X knows or has reason to know that Y and FC are related, X must 
aggregate the gifts from Y and FC ($20,000). Although the $20,000 
aggregate amount deemed received from Y does not exceed the $100,000 
reporting threshold with respect to foreign gifts from foreign 
individuals, the $20,000 aggregate amount received from FC exceeds the 
applicable reporting threshold for foreign gifts from foreign 
corporations under paragraph (c)(2)(iii) of this section for Year 1 
(assume that for Year 1 this amount is $18,000). Accordingly, X must 
report receipt of the foreign gift on Part IV of Form 3520 under 
paragraph (a) of this section. In addition, X must separately identify 
each foreign gift from Y and FC and must provide identifying 
information about Y and FC.
    (7) Example 7: Penalties for failure to report information. The 
facts are the same as in paragraph (g)(6) of this section (Example 6). 
X fails to report the amounts received from Y and FC on Form 3520 and 
does not demonstrate to the satisfaction of the Commissioner that such 
failure is due to reasonable cause and not due to willful neglect. 
Under paragraph (e)(1)(i) of this section and Sec.  1.672(f)-4(a)(2), 
the Commissioner may determine that, based on all the facts and 
circumstances, the gift of $9,000 from FC to X should be treated as a 
dividend from FC to X and included in X's gross income. Under paragraph 
(e)(1)(i) of this section, the Commissioner also may determine that 
there are no tax consequences to X upon receiving the gift of $11,000 
from Y. Without regard to the tax consequences determined under 
paragraph (e)(1)(i) of this section, under paragraph (e)(1)(ii) of this 
section, X must pay (upon notice and demand by the Commissioner and in 
the same manner as tax) $1,000, an amount equal to 5 percent of the 
aggregate amount of $20,000 for each month for which the failure to 
disclose the foreign gifts on Form 3520 continues (not to exceed 
$5,000, an amount equal to 25 percent of the aggregate amount of 
$20,000).
    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, the rules of this section apply to 
amounts received after the [date of publication of the final 
regulations in the Federal Register].
    (2) Covered gifts and bequests. Paragraph (c)(2)(ii) of this 
section is effective on the date final regulations under section 2801 
are published in the Federal Register and applies to covered gifts or 
bequests received on or after that date.
0
Par. 9. Sections 1.6048-1 through 1.6048-7 are added to read as 
follows:


Sec.  1.6048-1  Scope.

    (a) In general. Sections 1.6048-1 through 1.6048-7 provide rules 
concerning information that must be reported under section 6048 with 
respect to foreign trusts. This section provides general definitions 
for purposes of Sec. Sec.  1.6048-1 through 1.6048-7. Section 1.6048-2 
provides rules requiring a responsible party to provide notice of a 
reportable event that occurs during the taxable year with respect to a 
foreign trust. Section 1.6048-3 provides rules applicable to a U.S. 
owner of a foreign trust to ensure that the trust provides certain 
information about the trust's activities and operations for the year to 
the Commissioner and to any U.S. person (within the meaning of section 
7701(a)(30)) who is treated as an owner of the trust or who receives a 
distribution from the trust. Section 1.6048-4 provides rules requiring 
a U.S. person to report the receipt of a distribution from a foreign 
trust during the U.S. person's taxable year. Section 1.6048-5 provides 
exceptions to the rules of Sec. Sec.  1.6048-2 through 1.6048-4. 
Section 1.6048-6 provides certain special rules, including rules 
concerning dual resident taxpayers (within the meaning of Sec.  
301.7701(b)-7(a)(1) of this chapter) and dual status taxpayers 
(described in Sec.  1.6012-1(b)(2)(ii)) who compute their U.S. income 
tax liability as nonresident aliens for part or all of the taxable 
year. Section 1.6048-7 provides applicability dates. For civil 
penalties that apply for failure to comply with the requirements of 
Sec. Sec.  1.6048-2 through 1.6048-4, see Sec.  1.6677-1. For penalties 
that apply to understatements of tax that are attributable to 
transactions involving undisclosed foreign financial assets, including 
assets with respect to which information was required to be provided 
under section 6048 but was not provided, see section 6662(b)(7) and 
(j). For suspension of the statute of limitations when required 
information has not been provided under section 6048, see section 
6501(c)(8).
    (b) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.6048-2 through 1.6048-7:
    (1) Executor. The term executor means an executor within the 
meaning of section 2203.
    (2) Foreign person. The term foreign person means any person who is 
not a U.S. person within the meaning of paragraph (b)(4) of this 
section.
    (3) Foreign trust. The term foreign trust means a foreign trust 
within the meaning of Sec.  301.7701-7.
    (4) Grantor trust. The term grantor trust means a trust or any 
portion of a trust that is treated as owned by any person under subpart 
E of part I of subchapter J of chapter 1 of the Internal Revenue Code.
    (5) Grantor trust rules. The term grantor trust rules means the 
rules under subpart E of part I of subchapter J of chapter 1 of the 
Internal Revenue Code.
    (6) Nongrantor trust. The term nongrantor trust means a trust or 
any portion of a trust that is not treated as owned by any person under 
subpart E of part I of subchapter J of chapter 1 of the Internal 
Revenue Code.
    (7) U.S. person. The term U.S. person means any person who is a 
U.S. person within the meaning of section 7701(a)(30) but not including 
certain dual resident taxpayers and dual status taxpayers as described 
in Sec.  1.6048-6(a).


Sec.  1.6048-2  Notice of reportable events.

    (a) In general--(1) Filing requirement. Unless an exception in 
Sec.  1.6048-5 applies, a responsible party (as defined in paragraph 
(c) of this section) must provide written notice of any reportable 
event (as defined in paragraph (b) of this section) that occurs during 
the taxable year of the U.S. person described in paragraph (b) of this 
section on Part I of Form 3520, Annual Return To Report Transactions 
With Foreign Trusts and Receipt of Certain Foreign Gifts. If a 
responsible party must report a reportable event with regard to more 
than one foreign trust during the taxable year, the responsible party 
must file a separate Form 3520 for each such foreign trust. See 
Sec. Sec.  1.679-1 and 1.684-1 for additional rules regarding transfers 
to foreign trusts by U.S. persons. See Sec.  1.6048-6(d) for 
information reporting by married U.S. persons who file a joint income 
tax return.
    (2) Due dates--(i) General rule. Subject to paragraph (a)(2)(ii) 
and (iii) of this section, the responsible party must file Form 3520 by 
the fifteenth day of

[[Page 39473]]

the fourth month after the close of the responsible party's taxable 
year. If the responsible party has been granted an extension of time to 
file the responsible party's income tax return pursuant to section 
6081, an extension of time for filing Form 3520 is granted to the 
fifteenth day of the tenth month following the close of the responsible 
party's taxable year. No additional extension of time to file Form 3520 
is allowed beyond the fifteenth day of the tenth month following the 
close of the responsible party's taxable year.
    (ii) Filing by U.S. persons residing outside the United States. In 
the case of a grantor or transferor (described in paragraph (c)(1) or 
(c)(2) of this section, respectively) who qualifies for an automatic 
extension to file the grantor's or transferor's income tax return under 
section 6081 and Sec.  1.6081-5(a)(5) because the grantor or transferor 
resides outside of the United States and Puerto Rico and the grantor's 
or transferor's main place of business or post of duty is outside of 
the United States and Puerto Rico, the grantor or transferor must file 
Form 3520 by the fifteenth day of the sixth month after the close of 
the grantor's or transferor's taxable year. If the grantor or 
transferor has been granted an extension of time to file the grantor's 
or transferor's income tax return pursuant to section 6081, an 
extension of time for filing Form 3520 is granted to the fifteenth day 
of the tenth month following the close of the grantor's or transferor's 
taxable year. No additional extension of time to file Form 3520 is 
allowed.
    (iii) Filing by executor of grantor's or transferor's estate. In 
the case of a deceased grantor or transferor, the executor of the 
grantor's or transferor's estate (within the meaning of paragraph 
(c)(3) of this section) must file Form 3520 by the fifteenth day of the 
fourth month following the close of the 12-month period which began 
with the first day of the grantor's or transferor's final taxable year. 
If the executor of the grantor's or transferor's estate has been 
granted an extension of time to file the grantor's or transferor's 
final income tax return pursuant to section 6081, an extension of time 
for filing Form 3520 is granted to the fifteenth day of the tenth month 
following the close of the 12-month period which began with the first 
day of the grantor's or transferor's final taxable year. No additional 
extension of time to file Form 3520 is allowed.
    (b) Reportable event. Subject to Sec.  1.6048-5, for purposes of 
this section, the term reportable event means any of the events 
described in paragraphs (b)(1) through (3):
    (1) The creation of any foreign trust by any U.S. person.
    (2) Any direct, indirect, or constructive transfer, within the 
meaning of Sec.  1.679-3 or Sec.  1.684-2, of property (including cash) 
to a foreign trust by a U.S. person, including a transfer by reason of 
death. In addition, a reportable event includes an outbound migration 
of a domestic trust, as described in Sec.  1.684-4, without regard to 
whether any gain is taxable under Sec.  1.684-1, and a U.S. person's 
transfer of property in exchange for any obligation of the foreign 
trust or of a person related to the trust, as described in Sec.  1.679-
4, without regard to whether the obligation is a qualified obligation.
    (3) The death of a citizen or resident of the United States if--
    (i) The decedent was treated as the owner of any portion of a 
foreign trust under subpart E of part I of subchapter J of chapter 1 of 
the Internal Revenue Code, or
    (ii) Any portion of a foreign trust was included in the gross 
estate of the decedent for Federal estate tax purposes.
    (c) Responsible party. For purposes of this section, the term 
responsible party means each of the following:
    (1) The grantor (within the meaning of Sec.  1.671-2(e)) in the 
case of the creation of an inter vivos trust.
    (2) The transferor in the case of a reportable event described in 
paragraph (b)(2) of this section other than a transfer by reason of 
death.
    (3) The executor of the deceased grantor's or transferor's estate 
in any other case (whether or not the executor is a U.S. person).
    (d) Examples. The following examples illustrate the rules of this 
section.
    (1) Example 1: Creation and funding of foreign trust. A, an 
attorney, creates a foreign trust, FT, on behalf of B, A's client. A 
and B are both U.S. persons. Shortly thereafter, B transfers $100x to 
FT. A and B are both grantors of FT under Sec.  1.671-2(e), even though 
only B transferred property to FT. Under paragraph (b)(1) of this 
section, the creation of FT is a reportable event, and under paragraph 
(c)(1) of this section, A and B are responsible parties. Under 
paragraph (b)(2) of this section, the funding of FT is a reportable 
event, and under paragraph (c)(2) of this section, B is the responsible 
party. Accordingly, under paragraph (a) of this section, A must report 
the creation of FT and B must report the creation and the transfer to 
FT, respectively, on Part I of Form 3520.
    (2) Example 2: Transfers to two foreign trusts. The facts are the 
same as in paragraph (d)(1) of this section (Example 1). B also 
transfers $100x to a second foreign trust, FT2, during the same taxable 
year. Under paragraph (a)(1) of this section, B must file two Forms 
3520, one for the creation and funding of FT and one for the funding of 
FT2.
    (3) Example 3: Transfer by domestic trust to foreign trust. Under 
the grantor trust rules, B is treated as the owner of a domestic trust, 
DT. B is a U.S. person and funds DT with $1,000x. Subsequently, B 
causes DT to transfer $600x to FT, an existing foreign trust. Under 
Sec.  1.679-3(b), B is treated as transferring $600x to FT. Under 
paragraph (b)(2) of this section, the transfer is a reportable event. 
Under paragraph (c)(2) of this section, B is a responsible party. 
Accordingly, under paragraph (a) of this section, B is required to 
report the transfer to FT on Part I of Form 3520.
    (4) Example 4: Transfer by reason of death. C, a U.S. person who 
files on a calendar year basis, is treated as the owner of a domestic 
trust, DT, under the grantor trust rules. The trust instrument provides 
that, upon C's death, DT will terminate and the trustee must distribute 
the trust corpus to a foreign trust, FT, for the benefit of C's 
children. C dies in Year 1. The trustee of DT distributes the trust 
corpus to FT in Year 1. The transfer to FT is a reportable event under 
paragraph (b)(2) of this section as a transfer by reason of C's death. 
Under paragraph (c)(3) of this section, the executor of C's estate is 
the responsible party. Accordingly, under paragraph (a) of this 
section, the executor of C's estate is required to report the transfer 
on Part I of Form 3520 by April 15, Year 2, the fifteenth day of the 
fourth month after the close of the 12-month period which began with 
the first day of C's final taxable year, as described in paragraph 
(a)(2)(ii) of this section. If C's executor is granted an extension of 
time to file C's final income tax return, then C's Form 3520 will have 
a 6-month extension and be due by October 15, Year 2.
    (5) Example 5: Death of U.S. citizen who was the owner of a foreign 
trust. The facts are the same as in paragraph (d)(4) of this section 
(Example 4), except that C dies in Year 1 while C is treated as the 
owner of FT. Under paragraph (b)(3)(i) of this section, C's death is a 
reportable event. Under paragraph (c)(3) of this section, the executor 
of C's estate is a responsible party. Accordingly, under paragraph (a) 
of this section, the executor of C's estate is required to report C's 
death on Form 3520 by April 15, Year 2, the fifteenth day of the fourth 
month after the close of the 12-month period which began with the first

[[Page 39474]]

day of C's final taxable year, as described in paragraph (a)(2)(ii) of 
this section. If C's executor is granted an extension of time to file 
C's final income tax return for the year of decedent's death, then C's 
Form 3520 will also have an extension and be due by October 15, Year 2.
    (6) Example 6: Transfer in exchange for less than fair market 
value. X, a U.S. person, sells property worth $1,000x to a foreign 
trust, FT, in exchange for $100x in cash. Under Sec.  1.671-
2(e)(2)(ii), the $900x excess amount is a gratuitous transfer by X to 
FT. Under Sec.  1.679-3(a), X is treated as making a transfer of $900x 
to FT. Under paragraph (b)(2) of this section, the transfer is a 
reportable event. Under paragraph (c)(2) of this section, X is a 
responsible party. Accordingly, under paragraph (a) of this section, X 
is required to report the $900x transfer to FT on Part I of Form 3520.
    (7) Example 7: Creation and funding of trust in Puerto Rico by U.S. 
citizen. X is a U.S. citizen and a bona fide resident of Puerto Rico. X 
creates and funds a trust, T, in Puerto Rico. T is subject to the 
primary jurisdiction of the Puerto Rican courts. Because T fails the 
court test of Sec.  301.7701-7(a)(i), it is classified as a foreign 
trust under Sec.  301.7701-7. Under paragraph (b)(1) and (2) of this 
section, the creation and funding of T are reportable events. Under 
paragraph (c)(1) and (2) of this section, X is a responsible party. 
Accordingly, under paragraph (a) of this section, X is required to 
report the creation and funding of T on Part I of Form 3520.
    (8) Example 8: Indirect transfer. X, a U.S. person, creates FT, a 
foreign trust, for the benefit of X's children, who are U.S. citizens. 
On July 1, Year 1, X transfers ABC stock to X's brother, Y, a 
nonresident alien, for no consideration. Y immediately sells the ABC 
stock and uses the proceeds to purchase DEF stock. On January 5, Year 
2, Y transfers the DEF stock to FT. X is related to Y within the 
meaning of Sec.  1.679-3(c)(4). X cannot demonstrate to the 
satisfaction of the Commissioner that Y, as the intermediary, has a 
relationship with the beneficiaries of the trust that establishes a 
reasonable basis for concluding that the intermediary would make a 
transfer to FT, that Y acted independently of X, or that Y is not an 
agent of X. Thus, the transfer is deemed to be for the principal 
purpose of tax avoidance under Sec.  1.679-3(c)(2). Under Sec.  1.679-
3(c)(1), X is treated as having made an indirect transfer of the DEF 
stock to FT on January 5, Year 2. Under Sec.  1.679-3(c)(3), Y is 
treated as an agent of X, and the DEF stock is treated as transferred 
to FT by X. Under paragraph (b)(2) of this section, the transfer is a 
reportable event. Under paragraph (c)(2) of this section, X is a 
responsible party. Accordingly, under paragraph (a) of this section, X 
is required to report the transfer on Part I of Form 3520.
    (9) Example 9: Constructive transfer. FT, a foreign trust, owes 
$100x to F Corp, an unrelated foreign corporation, for the performance 
of services by F Corp for the benefit of FT. In satisfaction of FT's 
liability to F Corp, X, a U.S. person, transfers to F Corp property 
with a fair market value of $100x. By satisfying FT's obligation, under 
Sec.  1.679-3(d)(1), X is treated as having made a constructive 
transfer of property to FT. Under paragraph (b)(2) of this section, the 
transfer is a reportable event. Under paragraph (c)(2) of this section, 
X is a responsible party. Accordingly, under paragraph (a) of this 
section, X is required to report the transfer on Part I of Form 3520.
    (10) Example 10: Partial guarantee of foreign trust obligations. F 
Corp, a foreign corporation, lends $100x to FT, a foreign trust, in 
exchange for FT's obligation to repay the loan. Knowing that F Corp 
would not have made the loan without a guarantee, X, a U.S. person 
related to FT under Sec.  1.679-1(c)(5), gratuitously guarantees the 
repayment of $60x of FT's obligation. Under Sec.  1.679-3(e), X is 
treated as having transferred $60x to FT. Under paragraph (b)(2) of 
this section, the transfer is a reportable event. Under paragraph 
(c)(2) of this section, X is a responsible party. Accordingly, under 
paragraph (a) of this section, X is required to report the transfer on 
Part I of Form 3520.
    (11) Example 11: Dual resident taxpayer. The facts are the same as 
in paragraph (d)(10) of this section (Example 10) except that X is a 
dual resident taxpayer (within the meaning of Sec.  301.7701(b)-
7(a)(1)) who computes his U.S. tax liability as a nonresident alien for 
the taxable year during which he is treated as making the transfer. 
Pursuant to Sec.  1.6048-6(a)(1), X is not treated as a U.S. person for 
that taxable year and is not required to report the transfer on Part I 
of Form 3520.
    (12) Example 12: Outbound migration of domestic nongrantor trust. 
X, a U.S. person, transfers property to an irrevocable domestic trust, 
DT, for the sole benefit of X's daughter. DT is not treated as owned by 
X or any other person under the grantor trust rules. DB, a domestic 
bank, resigns as trustee when X dies, and FB, a foreign bank, becomes 
the replacement trustee under the terms of the trust. Pursuant to Sec.  
301.7701-7(d), DT becomes a foreign trust, FT. Under Sec.  1.684-4(a), 
DT is treated as having transferred all of its assets to FT and is 
required to recognize gain on the transfer under Sec.  1.684-1(a). 
Under paragraph (b)(2) of this section, the transfer is a reportable 
event. Under paragraph (c)(2) of this section, DT is the responsible 
party. Accordingly, under paragraph (a) of this section, DT is required 
to report the transfer on Part I of a Form 3520.
    (13) Example 13: Outbound migration of domestic grantor trust. On 
January 2, Year 1, X, a U.S. person, transfers property with a fair 
market value of $100x and an adjusted basis of $40x to a revocable 
domestic trust, DT, for the benefit of A, a U.S. person. X is treated 
as the owner of DT under section 676. On January 15, Year 2, when the 
fair market value of all property transferred to DT by X is $150x, DT 
acquires a foreign trustee who has the power to determine whether and 
when distributions will be made to A. Under sections 7701(a)(30)(E) and 
7701(a)(31)(B) and Sec.  301.7701-7(d)(1)(ii)(A) and (d)(2)(i), DT 
becomes a foreign trust, FT, on January 15, Year 2. Under Sec.  1.684-
2(d), X is treated as transferring property with a fair market value of 
$150x to FT on January 15, Year 2, without regard to whether FT is a 
foreign grantor trust. Under paragraph (b)(2) of this section, the 
transfer is a reportable event. Under paragraph (c)(2) of this section, 
X is the responsible party. Under paragraph (a) of this section, X is 
required to report the transfer on Part I of Form 3520.


Sec.  1.6048-3  U.S. owners of foreign trusts.

    (a) U.S. owner requirement to ensure foreign trust information is 
provided--(1) In general. Unless an exception in Sec.  1.6048-5 
applies, any U.S. person who is treated as an owner (U.S. owner) of a 
foreign trust or of any portion of a foreign trust under subpart E of 
part I of subchapter J of chapter 1 of the Internal Revenue Code during 
any taxable year is responsible for ensuring that, by the fifteenth day 
of the third month after the end of the foreign trust's taxable year, 
with a maximum extension of a 6-month period pursuant to section 6081, 
the foreign trust--
    (i) Files Form 3520-A, Annual Information Return of Foreign Trust 
With a U.S. Owner (under section 6048(b)), under an identification 
number assigned to the trust (or portion of the trust) with the 
Commissioner in accordance with the instructions for Form 3520-A, and 
attaches copies of the statements required by paragraphs (a)(1)(ii) and 
(iii) of this section,
    (ii) Furnishes a Foreign Grantor Trust Owner Statement in 
accordance with

[[Page 39475]]

the instructions for Form 3520-A for the taxable year to each U.S. 
owner; and
    (iii) Furnishes a Foreign Grantor Trust Beneficiary Statement in 
accordance with the instructions for Form 3520-A for the taxable year 
to each U.S. person, other than the U.S. owner, to whom the trust has 
made a distribution (within the meaning of Sec.  1.6048-4(b)), either 
directly or indirectly, during the trust's taxable year (each a U.S. 
beneficiary).
    (2) Substitute Form 3520-A filed by the U.S. owner. If the foreign 
trust does not comply with the requirements of paragraph (a)(1) of this 
section, the U.S. owner must--
    (i) Complete and file Part II of Form 3520, Annual Return To Report 
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, 
in accordance with the instructions for Form 3520 by the due date of 
the U.S. owner's Form 3520, as described in Sec.  1.6048-2(a)(2) but as 
if ``U.S. owner'' replaces ``responsible party'' in Sec.  1.6048-
2(a)(2)(i) and as if ``U.S. owner'' replaces ``grantor or transferor'' 
in Sec.  1.6048-2(a)(2)(ii) and (iii), as applicable; and
    (ii) Complete Form 3520-A and related statements for each U.S. 
owner and U.S. beneficiary on behalf of the foreign trust and file them 
with the U.S. owner's Part II of Form 3520 by the due date of the U.S. 
owner's Form 3520 as provided in paragraph (a)(2)(i) of this section. 
Further, unless paragraph (a)(3) of this section applies, the U.S. 
owner must furnish the Foreign Grantor Trust Beneficiary Statement in 
accordance with the instructions for Form 3520-A to each U.S. 
beneficiary by the due date of the U.S. owner's Form 3520.
    (3) Certain fixed investment trusts. A U.S. owner who is subject to 
the rules of this section is not required to provide information about 
the other persons who are treated as owners of the foreign trust if the 
foreign trust meets all requirements to qualify as a widely held fixed 
investment trust within the meaning of Sec.  1.671-5(b)(22) other than 
the requirement that it be a U.S. person under section 7701(a)(30)(E).
    (b) Consistency rule--(1) In general. Subject to paragraph (b)(2) 
of this section, U.S. owners or U.S. beneficiaries who receive a 
Foreign Grantor Trust Owner Statement or Foreign Grantor Trust 
Beneficiary Statement from a foreign trust must treat any item reported 
by the trust to such U.S. person in a manner that is consistent with 
the trust's treatment of such item on the Foreign Grantor Trust Owner 
Statement or Foreign Grantor Trust Beneficiary Statement.
    (2) Notification of inconsistent treatment. If a U.S. owner's or 
U.S. beneficiary's treatment on such U.S. owner's or U.S. beneficiary's 
return is (or may be) inconsistent with the treatment of the item 
reported on a Foreign Grantor Trust Owner Statement or Foreign Grantor 
Trust Beneficiary Statement, then the U.S. owner or U.S. beneficiary 
must notify the Commissioner about the inconsistent treatment. The 
notification of inconsistent treatment must be made on a Form 8082, 
Notice of Inconsistent Treatment or Administrative Adjustment Request 
(AAR). Rules similar to the rules of section 6034A(c) (generally 
requiring beneficiaries of estates or trusts to file their returns in a 
manner that is consistent with information received from the estate or 
trust) will apply, including the rules for any adjustments required to 
make the treatment of reported items consistent in the case of a U.S. 
owner's or U.S. beneficiary's failure to notify the Commissioner about 
the inconsistent treatment.
    (c) Income tax determinations for foreign grantor trusts without 
U.S. agents. If a foreign trust with a U.S. owner does not have a U.S. 
agent as described in paragraph (d) of this section, or if otherwise 
provided pursuant to paragraph (d)(5) of this section, then the amounts 
required to be taken into account with respect to the trust by the U.S. 
owner under the grantor trust rules are determined by the Commissioner 
based on all the facts and circumstances.
    (d) Authorization of a U.S. agent--(1) In general. Paragraph (c) 
does not apply if a U.S. owner of a foreign trust ensures that the 
foreign trust authorizes a U.S. person to act as the trust's limited 
agent as described in paragraph (d)(2) of this section solely for 
purposes of applying sections 7602, 7603, and 7604 with respect to--
    (i) Any request by the Commissioner to examine records or produce 
testimony related to the proper treatment of amounts required to be 
taken into account under the grantor trust rules, or
    (ii) Any summons by the Commissioner for such records or testimony.
    (2) Requirements. In order to authorize a U.S. person to act as an 
agent under paragraph (d)(1) of this section, a U.S. owner of a foreign 
trust must ensure that the trust and the agent enter into a binding 
authorization agreement that is executed by the foreign trust and the 
U.S. agent before the due date of Form 3520-A or substitute Form 3520-A 
(as described in Sec.  1.6048-3(a)(1) and (2), respectively) for the 
taxable year that the U.S. owner is considered the owner of the trust. 
The authorization must remain in effect for as long as the statute of 
limitations remains open for the U.S. owner's relevant taxable year. If 
the agent resigns or liquidates or if the agent's responsibility is 
terminated, the U.S. owner of the foreign trust must ensure that the 
foreign trust notifies the Commissioner within 90 days, by filing an 
amended Form 3520-A. This notification must contain the name, address 
and Taxpayer Identification Number of the new U.S. agent.
    (3) Limitations. The appearance of persons or production of records 
by reason of a U.S. person being an agent described in paragraph (d)(1) 
of this section will not subject such persons or records to legal 
process for any purpose other than determining the correct treatment of 
the amounts to be taken into account by the U.S. owner under paragraph 
(c) of this section.
    (4) No office, permanent establishment, or trade or business. A 
foreign trust that appoints a U.S. agent described in paragraph (d)(1) 
of this section will 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 agent's activities 
as an agent pursuant to this section.
    (5) Summons issued to a U.S. agent--(i) In general. Paragraph (c) 
of this section applies if a summons is issued to a U.S. person (either 
directly or as a limited agent of a foreign trust who is appointed 
pursuant to paragraph (d)(1) of this section) or to a foreign trust 
(where service of the summons can be effectuated) to produce any 
records or testimony in order to determine the amounts required to be 
taken into account under the grantor trust rules, and if--
    (A) The summons is not quashed in a proceeding, if any, begun not 
later than the 90th day after the summons was issued and is not 
determined to be invalid in a proceeding, if any, begun under section 
7604 to enforce the summons; and
    (B) The Commissioner has sent by certified or registered mail a 
notice to the U.S. person or foreign trust of its determination that 
the U.S. person or foreign trust has not substantially and timely 
complied with the summons, and a proceeding to review the determination 
is not begun any later than 90 days after the notice is mailed. If such 
a proceeding is not begun on or before such 90th day, the determination 
by the Commissioner will be binding.
    (ii) Enforcement proceeding not required. The Commissioner is not 
required to begin an enforcement

[[Page 39476]]

proceeding to enforce the summons in order to apply the rules of 
paragraph (d)(5) of this section.
    (iii) Suspension of statute of limitations. If the U.S. person or 
foreign trust to which a summons is issued brings a proceeding to quash 
the summons not later than the 90th day after the summons was issued, 
or begins a proceeding to review a determination under paragraph 
(d)(5)(i)(B) of this section not later than the 90th day after the day 
on which the notice referred to in paragraph (d)(5)(i)(B) of this 
section was mailed, the running of any period of limitation under 
section 6501 (relating to assessment and collection of tax) or under 
section 6531 (relating to criminal prosecutions) for the taxable year 
or years to which the summons that is the subject of such proceeding 
relates will be suspended for the period during which the proceeding, 
and appeals therein, are pending. In no event will any such period 
expire before the 90th day after the day on which there is a final 
determination in the proceeding.
    (e) Examples. The following examples illustrate the rules of this 
section.
    (1) Example 1: Fixed investment trust. X, a U.S. person, is treated 
as an owner of a foreign trust, FT, that would be a widely held fixed 
investment trust within the meaning of Sec.  1.671-5(b)(22) if it were 
a domestic trust. FT does not file a Form 3520-A for Year 1. Under 
paragraph (a)(2) of this section, X is required to complete and file 
Part II of Form 3520 by the due date for X's Year 1 Form 3520. In 
addition, under paragraph (a)(2) of this section, X is required to 
complete a substitute Form 3520-A and related statements and file them 
with X's Year 1 Form 3520. Under paragraph (a)(4) of this section, X is 
not required to provide information about the other owners of FT.
    (2) Example 2: Substitute Form 3520-A. X, a U.S. person, is treated 
as the owner of a foreign trust, FT. FT's taxable year ends on December 
31. On November 1, Year 1, FT makes a distribution to Y, a U.S. 
beneficiary of the trust. FT fails to comply with the requirements of 
paragraph (a)(1) of this section for its taxable year ending December 
31, Year 1. Under paragraph (a)(2) of this section, X is required to 
complete and file Part II of Form 3520 by the due date for X's Year 1 
Form 3520. In addition, under paragraph (a)(2) of this section, X is 
required to complete a substitute Form 3520-A and related statements 
and file them with X's Year 1 Form 3520. X must furnish a Foreign 
Grantor Trust Beneficiary Statement to Y by the due date for X's Year 1 
Form 3520.
    (3) Example 3: Failures to appoint U.S. agent and to respond to 
summons. X, a U.S. person, is treated as the owner of a foreign trust, 
FT. FT does not appoint a U.S. agent described in paragraph (d)(1) of 
this section. The Commissioner issues a summons to X for the production 
of records of FT related to the proper treatment of amounts required to 
be taken into account by X under the grantor trust rules. Neither X nor 
FT responds to the summons. Under paragraph (c) of this section, the 
Commissioner may determine the amount that X must take into account 
under the grantor trust rules based on all the facts and circumstances.
    (4) Example 4: Multiple trusts and multiple transactions. X, a U.S. 
person, is treated as the owner of two foreign trusts, FT1 and FT2. 
During Year 1, X transfers cash to FT1 and receives a distribution from 
FT2. FT1 and FT2 fail to comply with the requirements of paragraph 
(a)(1) of this section for their taxable years ending in Year 1. Under 
Sec.  1.6048-2 and paragraph (a)(2) of this section, X must report X's 
transfer to, and ownership of, FT1 on one Form 3520, and under Sec.  
1.6048-4 and paragraph (a)(2) of this section, X must report X's 
ownership of, and distribution from, FT2 on a second Form 3520. In 
addition, under paragraph (a)(2)(ii) of this section, X must complete a 
substitute Form 3520-A for each trust, FT1 and FT2, and file them with 
X's Year 1 Form 3520 for each trust.
    (5) Example 5: Dual resident taxpayer. (i) X is a lawful permanent 
resident of the United States within the meaning of Sec.  301.7701(b)-
1(b) of this chapter and a tax resident of Country F under the domestic 
tax law of Country F. X is treated as a resident of Country F under the 
residence article of the U.S.-Country F income tax treaty (the treaty). 
Pursuant to Sec.  301.7701(b)-7 of this chapter, X is treated as a 
nonresident alien for purposes of computing X's U.S. income tax 
liability for Year 1. During Year 1, X transfers $100x to a foreign 
trust, FT, for the benefit of X's children, who are U.S. citizens. 
Under Sec.  1.6048-6(a), X is not treated as a U.S. person and is not 
required to report the transfer under Sec.  1.6048-2 on a Form 3520 for 
Year 1.
    (ii) In Year 2, X waives any benefits to which X would have been 
entitled under the treaty and computes X's U.S. income tax liability as 
a resident alien. Under Sec.  1.679-5(a), X is treated as having made a 
transfer to FT on January 1, Year 2, in the amount of the fair market 
value of FT as of that date. Under Sec.  1.679-1(a), X is treated as 
the owner of FT as of January 1, Year 2. Under Sec.  1.6048-2(a), X is 
required to file a Form 3520 for Year 2 on which X reports the transfer 
to FT. If FT fails to comply with the requirements of paragraph (a)(1) 
of this section for FT's taxable year ending in Year 2, under paragraph 
(a)(2) of this section, X also must complete and file Part II of Form 
3520, and complete and file a substitute Form 3520-A with the related 
statements attached to X's Year 2 Form 3520.


Sec.  1.6048-4  Reporting by U.S. persons receiving distributions from 
foreign trusts.

    (a) Reporting of trust distributions. Unless an exception in Sec.  
1.6048-5 applies, any U.S. person who receives directly or indirectly 
any distribution from a foreign trust (without regard to whether any 
person is treated as the owner of the foreign trust under the rules of 
subpart E of part I of subchapter J of chapter 1) must file Part III of 
Form 3520, Annual Return To Report Transactions With Foreign Trusts and 
Receipt of Certain Foreign Gifts, by the due date of the U.S. person's 
Form 3520, as described in Sec.  1.6048-2(a)(2) by replacing 
``responsible party'' with ``U.S. person'' in Sec.  1.6048-2(a)(2)(i) 
and by replacing ``grantor or transferor'' with ``U.S. person'' in 
Sec.  1.6048-2(a)(2)(ii) and (iii), as applicable. See Sec.  1.6048-
6(d) for information reporting by married U.S. persons who file a joint 
income tax return.
    (b) Distribution--(1) In general. Except as provided in paragraphs 
(b)(5)(ii) and (b)(6)(ii) of this section, a distribution means any 
transfer of property (including cash) from a foreign trust received 
directly or indirectly by a U.S. person to the extent such property 
exceeds the fair market value of any property or services received by 
the foreign trust in exchange for the property transferred, without 
regard to whether any portion of the foreign trust is treated as owned 
by the grantor or another person under the rules of subpart E of part I 
of subchapter J of chapter 1, whether the recipient is designated as a 
beneficiary by the terms of the foreign trust, or whether the 
distribution has any income tax consequences. A distribution includes 
any amount, including without limitation a gift or bequest described in 
section 663(a), actually or constructively received by a U.S. person. 
For these purposes, a transfer of property from a foreign trust to a 
grantor trust or to a disregarded entity (as defined in Sec.  1.643(i)-
1(d)(3) of this chapter) is treated as a distribution to the owner of 
the grantor trust or of the disregarded entity, respectively. For 
example, a

[[Page 39477]]

transfer of property from a foreign trust to a single member LLC 
treated as a disregarded entity is treated as a distribution to the 
owner of the LLC. For distributions through intermediaries, see 
paragraph (b)(2) of this section; for distributions from entities owned 
by a foreign trust, see paragraph (b)(3) of this section; for inbound 
migrations of foreign trusts, see paragraph (b)(4) of this section; for 
loans of cash or marketable securities, see paragraph (b)(5) of this 
section; for use of trust property, see paragraph (b)(6) of this 
section; and for the receipt of covered gifts or bequests from a 
foreign trust, see paragraph (b)(7) of this section.
    (2) Distributions from foreign trusts through intermediaries--(i) 
In general. A distribution includes any transfer of property from a 
foreign trust received by a U.S. person through an intermediary, 
nominee, or agent. In such a case, except as otherwise provided in 
paragraph (b)(2)(ii) of this section, the intermediary, nominee, or 
agent is treated as an agent of the foreign trust and the property is 
treated as distributed from the foreign trust to the U.S. person in the 
year the property is received by or made available by the intermediary, 
nominee, or agent to the U.S. person.
    (ii) Special rule. If the Commissioner determines that the 
intermediary, nominee, or agent is an agent of the U.S. person, the 
property is treated as distributed from the foreign trust to the U.S. 
person in the year the property is received by the intermediary, 
nominee, or agent. In such case, the intermediary, nominee, or agent is 
not treated as distributing the property to the U.S. person when the 
property is subsequently received by or made available by the 
intermediary, nominee, or agent to the U.S. person.
    (iii) Reporting indirect transfers of property. An indirect 
transfer of property from a foreign trust must be reported on Part III 
of Form 3520 without regard to whether the receipt of such property 
would be treated as having any income tax consequences to the U.S. 
person receiving such property, to a U.S. grantor or beneficiary of the 
foreign trust, or to a U.S. owner of the foreign trust.
    (3) Distributions from entities owned by a foreign trust. A 
distribution includes any transfer of property from an entity in which 
a foreign trust directly or indirectly holds an ownership interest that 
is received by a U.S. person who is a related person (as defined in 
Sec.  1.679-1(c)(5)) with respect to the foreign trust. In such case, 
the transfer of the property by the entity owned by the foreign trust 
to the U.S. person is treated as a distribution of such property by the 
entity to the foreign trust followed by a distribution of the property 
from the foreign trust to the U.S. person, unless the U.S. person 
demonstrates to the satisfaction of the Commissioner that the 
distribution from the entity is properly attributable to the U.S. 
person's ownership interest in the entity.
    (4) Inbound migrations of foreign trusts. A distribution includes 
an inbound migration of a foreign trust. An inbound migration of a 
foreign trust occurs when a foreign trust becomes a domestic trust. In 
such case, the foreign trust is treated as distributing the trust 
corpus and income to the domestic trust on the date the foreign trust 
becomes a domestic trust.
    (5) Loans of cash or marketable securities--(i) In general. A 
distribution includes any loan of cash or marketable securities made 
from a foreign trust (whether from trust corpus or income) directly or 
indirectly to a U.S. person. For these purposes, a loan to a grantor 
trust or to a disregarded entity (as defined in Sec.  1.643(i)-1(d)(3) 
of this chapter) will be treated as a loan to the owner of the grantor 
trust or of the disregarded entity, respectively. For example, a loan 
to a single member LLC treated as a disregarded entity will be treated 
as a loan to the owner of the LLC. Loans from a foreign trust include:
    (A) A loan of cash or marketable securities made by any person to a 
U.S. person, if the foreign trust provides a guarantee (within the 
meaning of Sec.  1.679-3(e)(4)) for the loan, and
    (B) A loan of cash or marketable securities made by any 
intermediary, nominee or agent of a foreign trust to a U.S. person.
    (ii) Section 643(i) loans of cash or marketable securities. A 
distribution includes a direct or indirect loan of cash or marketable 
securities from a foreign nongrantor trust to any U.S. grantor or 
beneficiary (within the meaning of Sec.  1.643(i)-1(d)(11) or (1), 
respectively) or a U.S. person related (within the meaning of Sec.  
1.643(i)-1(d)(9)) to a U.S. grantor or beneficiary regardless of 
whether the loan was made in exchange for a qualified obligation within 
the meaning of Sec.  1.643(i)-2(b)(2)(iii). For these purposes, 
indirect loans include loans described in Sec.  1.643(i)-1(b)(2).
    (iii) Reporting loans of cash or marketable securities. A loan of 
cash or marketable securities made from a foreign trust must be 
reported by the U.S. person described under paragraph (b)(5)(i) of this 
section and by the U.S. grantor or beneficiary described under 
paragraph (b)(5)(ii) of this section on Part III of Form 3520, Annual 
Return to Report Transactions with Foreign Trusts and Receipt of 
Certain Foreign Gifts, without regard to whether the loan would be 
treated as having any income tax consequences to a U.S. grantor or 
beneficiary (within the meaning of Sec.  1.643(i)-1(d)(11) or (1), 
respectively) of the foreign trust.
    (6) Use of trust property--(i) In general. A distribution includes 
the fair market value of the direct or indirect use of any property of 
a foreign trust by a U.S. person. For these purposes, use of property 
of a foreign trust by a grantor trust or by a disregarded entity (as 
defined in Sec.  1.643(i)-1(d)(3)) will be treated as the use of trust 
property by the owner of the grantor trust or of the disregarded 
entity, respectively. For example, use of trust property by a single 
member LLC treated as a disregarded entity will be treated as use of 
trust property by the owner of the LLC.
    (ii) Section 643(i) use of trust property. A distribution includes 
the fair market value of the direct or indirect use of any property of 
a foreign nongrantor trust by a U.S. grantor or beneficiary (within the 
meaning of Sec.  1.643(i)-1(d)(11) or (1), respectively) or a U.S. 
person related (within the meaning of Sec.  1.643(i)-1(d)(9)) to a U.S. 
grantor or beneficiary without regard to whether the foreign trust is 
paid the fair market value for such use. For these purposes, indirect 
use of trust property includes the use described in Sec.  1.643(i)-
1(c)(2).
    (iii) Reporting use of trust property. The use of trust property 
must be reported by the U.S. person described under paragraph (b)(6)(i) 
of this section and by the U.S. grantor or beneficiary described under 
paragraph (b)(6)(ii) of this section on Part III of Form 3520, Annual 
Return to Report Transactions with Foreign Trusts and Receipt of 
Certain Foreign Gifts, without regard to whether the use of trust 
property would be treated as having any income tax consequences to a 
U.S. grantor or beneficiary (within the meaning of Sec.  1.643(i)-
1(d)(11) or (1), respectively) of the foreign trust.
    (7) Certain covered gifts or bequests. A distribution includes any 
covered gift or bequest (described in section 2801(e)) that is received 
as a distribution from a foreign trust.
    (c) Statements provided by foreign trust--(1) Foreign grantor trust 
with U.S. owner--(i) Owner statement. Pursuant to Sec.  1.6048-
3(a)(1)(ii), a U.S. owner of a foreign trust (or portion of a foreign 
trust) should receive a Foreign Grantor Trust Owner Statement.
    (ii) Statement for U.S. person receiving a distribution. Pursuant 
to

[[Page 39478]]

Sec.  1.6048-3(a)(1)(iii), a U.S. person, other than a U.S. owner, who 
receives a distribution from a foreign grantor trust (or portion of a 
foreign grantor trust) should receive a Foreign Grantor Trust 
Beneficiary Statement.
    (2) Foreign nongrantor trust. A foreign nongrantor trust may issue, 
by the fifteenth day of the third month after the end of the trust's 
taxable year, a Foreign Nongrantor Trust Beneficiary Statement to each 
U.S. person who receives a distribution from the foreign trust during 
the trust's taxable year.
    (3) Foreign grantor trust with foreign owner. A foreign trust that 
is treated as owned by a foreign person under the grantor trust rules 
may issue, by the fifteenth day of the third month after the end of the 
trust's taxable year, a Foreign-Owned Grantor Trust Beneficiary 
Statement to each U.S. person who receives a distribution.
    (d) Tax consequences of distributions--(1) In general. Subject to 
paragraph (e) of this section, a U.S. person (other than a U.S. person 
described in Sec.  1.6048-4(c)(1)(i)) who receives a distribution 
(other than a distribution described in Sec.  1.6048-4(b)(5) or (6) 
that is not treated as a section 643(i) distribution under Sec.  
1.643(i)-1) from a foreign trust must determine the tax consequences of 
the distribution as follows, unless the distribution is received in a 
year that the foreign trust terminates. For rules determining the tax 
consequences of a distribution in the year a foreign trust terminates, 
see paragraphs (d)(3)(i)(B) and (d)(3)(iii) of this section.
    (i) A U.S. person who receives a Foreign Grantor Trust Beneficiary 
Statement or a Foreign-Owned Grantor Trust Beneficiary Statement before 
the due date of the U.S. person's income tax return (including 
extensions) must determine the income tax consequences of the 
distribution from the trust as a distribution being made from a grantor 
trust.
    (ii) A U.S. person who receives a Foreign Nongrantor Trust 
Beneficiary Statement before the due date of the U.S. person's income 
tax return (including extensions) may determine the income tax 
consequences of the distribution under either the actual calculation 
method described in paragraph (d)(2) of this section or the default 
calculation method described in paragraph (d)(3) of this section, 
unless the U.S. person knows or has reason to know that the information 
in the statement is incorrect or the U.S. person has previously used 
the default calculation method with respect to distributions from the 
same foreign trust.
    (iii) In all other cases, including when a U.S. person does not 
receive a statement described in Sec.  1.6048-4(c) before the due date 
of the U.S. person's income tax return (including extensions), the U.S. 
person must use the default calculation method described in paragraph 
(d)(3) of this section.
    (2) Actual calculation method. Under the actual calculation method, 
the tax consequences of the distribution are determined by using actual 
information about the foreign trust as provided in the Foreign 
Nongrantor Trust Beneficiary Statement described in Sec.  1.6048-
4(c)(2) and applying the rules of subparts C and D of Part I of 
subchapter J of chapter 1 of the Internal Revenue Code.
    (3) Default calculation method--(i) Consequences to U.S. person who 
receives a distribution from a foreign trust--(A) In general. Under the 
default calculation method, the tax consequences of the distribution 
are determined by allocating the distribution between a distribution of 
current income and a distribution of accumulated income under the rules 
of this paragraph (d)(3). The portion of the distribution that is 
treated as a distribution of current income is 125% of the average 
distribution that the U.S. person received from the foreign trust 
during the immediately preceding three taxable years (or the number of 
years during which the trust has been a foreign trust, if fewer than 
three years). The remainder of the distribution, if any, is treated as 
an accumulation distribution within the meaning of section 665(b) that 
is subject to an interest charge under section 668. For purposes of 
computing the interest charge (in the absence of actual information 
provided on a statement described in Sec.  1.6048-4(c)), the U.S. 
person must assume that the applicable number of years the trust has 
been in existence is ten years and that no taxes described in section 
665(d) have been imposed on the trust in any applicable previous year 
(even if a distribution had been made and tax under section 665(d) had 
been imposed).
    (B) Year of trust termination. Unless paragraph (d)(3)(iii) of this 
section applies, the tax consequences of a distribution in the year a 
foreign trust terminates are determined by treating the distribution as 
an accumulation distribution within the meaning of section 665(b) that 
is subject to an interest charge under section 668 for any amount in 
excess of the portion of the distribution that is treated as a 
distribution of current income described in paragraph (d)(3)(i)(A) of 
this section.
    (ii) Consequences to trust. A foreign trust must determine the 
income tax consequences of distributions to U.S. persons by applying 
the applicable rules of part I of subchapter J of chapter 1 of the 
Internal Revenue Code.
    (iii) Actual calculation method in year of foreign trust 
termination after using the default calculation method. A U.S. person 
who has previously used the default calculation method with respect to 
distributions from a foreign trust may, for the year in which the 
foreign trust terminates, determine the tax consequences of a 
distribution from the same trust by using the actual calculation method 
provided that, before the due date of the U.S. person's income tax 
return (including extensions), the trust provides to the U.S. person 
complete and accurate information about all previous distributions from 
such foreign trust. The U.S. person must use this information to 
recalculate the tax effect of all previous distributions from such 
foreign trust under the actual calculation method in order to determine 
the portion attributable to current income, accumulated income, and 
principal in the year that the foreign trust terminates. A U.S. person 
described in this paragraph (d)(3)(iii) may not use the actual 
calculation method for the year that the foreign trust terminates if 
the U.S. person knows or has reason to know that the information 
provided by the foreign trust is incorrect.
    (iv) Example. The following example illustrates the rules of 
paragraph (d)(3)(i) of this section. B, a U.S. person, is a beneficiary 
of a foreign nongrantor trust, FT, that was established in Year 1. In 
Year 2, Year 3, and Year 4, B received distributions from FT of $100x, 
$200x, and $300x respectively. In Year 5, B receives a $400x 
distribution from FT. To determine the tax consequences of the Year 5 
distribution, B applies the default calculation method. Under the 
default calculation method, the average distribution that B received 
from FT during the preceding three years is $200x and 125% of such 
average distribution is $250x. Therefore, $250x of the Year 5 
distribution is treated as a distribution of current income and the 
remaining $150x is treated as an accumulation distribution. The $150x 
that is treated as an accumulation distribution is subject to an 
interest charge under section 668. B must report the distribution and 
the default calculation on Part III of Form 3520 for Year 5.
    (e) Distribution treated as accumulation distribution if records 
are not provided. If adequate records are not

[[Page 39479]]

provided to the Commissioner to determine the proper treatment of any 
distribution from a foreign trust (within the meaning of paragraph (b) 
of this section) other than a loan or use of trust property that is not 
treated as a section 643(i) distribution under Sec.  1.643(i)-1, the 
entire distribution will be treated as an accumulation distribution 
includible in the gross income of the U.S. person who received the 
distribution under chapter 1 of the Internal Revenue Code. However, if 
the trustee of a foreign trust authorizes a U.S. person to act as the 
trust's limited agent under rules prescribed in Sec.  1.6048-3(d), then 
the tax consequences of the distribution may be determined under the 
rules described in paragraph (d)(1) of this section.
    (f) Interaction with Sec.  1.6039F-1. If a U.S. person receives a 
distribution from a foreign trust, the U.S. person must report the 
distribution under paragraph (a) of this section and not under Sec.  
1.6039F-1(a), regardless of whether the distribution is taxable to the 
U.S. person receiving the distribution. See Sec.  1.6039F-1(b).
    (g) Examples. The following examples illustrate the rules of this 
section. In each example, X is a U.S. citizen, FT is a foreign trust, 
and FC is a foreign corporation.
    (1) Example 1: Payment of liability treated as distribution. X owes 
$1,000x to Y for services that Y performed for X. In satisfaction of 
X's liability to Y, FT transfers to Y property with a fair market value 
of $1,000x. Under paragraph (b)(1) of this section, FT's transfer of 
property to Y is constructively received by X from FT, and is a 
distribution in the amount of $1,000x to X for purposes of this 
section. Under paragraph (a) of this section, X must report the 
distribution on Part III of Form 3520.
    (2) Example 2: Assumption of liability treated as distribution. The 
facts are the same as in paragraph (g)(1) of this section (Example 1) 
except that FT assumes X's liability to pay Y. The result is the same 
as in paragraph (g)(1) of this section (Example 1).
    (3) Example 3: Trust's partial guarantee of U.S. person's 
obligation treated as distribution from foreign trust. Y lends $1,000x 
of cash to X in exchange for X's obligation to repay the loan. X is a 
U.S. person. FT guarantees the repayment of $600x of X's obligation. 
Under paragraph (b)(5)(i)(A) of this section, FT's guarantee of X's 
obligation is a distribution from FT to X in the amount of $600x. Under 
paragraph (a) of this section, X must report the distribution on Part 
III of Form 3520.
    (4) Example 4: Section 643(i) loan not in exchange for qualified 
obligation. X's sister, A, and A's husband, B, are both U.S. citizens. 
X, A, and B are U.S. persons within the meaning of Sec.  1.643(i)-
1(d)(12), and X is related to B under Sec.  1.643(i)-1(d)(9). B is a 
beneficiary of FT, a nongrantor trust. In Year 1, FT lends $100x to X 
in exchange for a demand note that permits FT to require repayment by X 
at any time. The demand note issued by X is not a qualified obligation 
within the meaning of Sec.  1.643(i)-2(b)(2)(iii) because X's 
obligation to FT could remain outstanding for more than five years. 
Accordingly, the loan from FT to X is treated as a section 643(i) 
distribution of $100x to B under Sec.  1.643(i)-1(a). The loan is a 
distribution from FT to X and B under paragraph (b)(5)(ii) of this 
section. Under paragraphs (a) and (b)(5)(iii) of this section, X and B 
each must report the distribution on Part III of Form 3520.
    (5) Example 5: Section 643(i) loan in exchange for qualified 
obligation. The facts are the same as in paragraph (g)(4) of this 
section (Example 4) except that the loan cannot remain outstanding for 
more than five years and it is a qualified obligation within the 
meaning of Sec.  1.643(i)-2(b)(2)(iii). Although the loan is not a 
section 643(i) distribution within the meaning of Sec.  1.643(i)-1(a), 
the loan nevertheless is a distribution from FT to X and to B under 
paragraph (b)(5)(ii) of this section. Under paragraphs (a) and 
(b)(5)(iii) of this section, X and B each must report the distribution 
on Part III of Form 3520.
    (6) Example 6: Distribution through intermediary. Y, a nonresident 
alien, created FT in 1980 for the benefit of Y's children and their 
descendants, all of whom are U.S. persons. FT's trustee, T, determines 
that $100x of accumulated income should be distributed to X, one of Y's 
children. Pursuant to a plan with a principal purpose of avoiding the 
interest charge that would be imposed on an accumulation distribution 
from a foreign trust by section 668, T makes a gratuitous transfer from 
FT of $100x to N, a foreign person. N subsequently makes a gratuitous 
transfer of $100x to X. Under Sec.  1.643(h)-1(a)(1), FT is deemed to 
have made an accumulation distribution of $100x to X. The distribution 
through N as the intermediary is treated as a distribution under 
paragraph (b)(2)(i) of this section. Under paragraphs (a) and 
(b)(2)(iii) of this section, X must report the distribution on Part III 
of Form 3520.
    (7) Example 7: Excess payment in exchange for property. X transfers 
to FT property with a fair market value of $200x in exchange for a 
payment of $500x. Under paragraph (b)(1) of this section, the excess 
amount of $300x is treated as a distribution from FT to X. Under 
paragraph (a) of this section, X must report the distribution of $300x 
on Part III of Form 3520.
    (8) Example 8: Excess payment in exchange for services. X receives 
a payment of $100x from FT purportedly in exchange for X's performance 
of services as a trustee of FT. The fair market value of the services 
performed is $20x. Under paragraph (b)(1) of this section, X is treated 
as receiving a distribution of $80x from FT. Under paragraph (a) of 
this section, X must report the distribution of $80x on Part III of 
Form 3520.
    (9) Example 9: Distribution from entity owned by foreign trust. FT 
owns all of the outstanding stock of FC. FC distributes $100x directly 
to X, a related person within the meaning of Sec.  1.679-1(c)(5) with 
respect to FT. Because FT is the sole shareholder of FC, X is unable to 
demonstrate to the satisfaction of the Commissioner that the 
distribution is properly attributable to X's ownership interest in FC. 
Accordingly, under paragraph (b)(3) of this section, X is treated as 
receiving a distribution of $100x from FT. Under paragraph (a) of this 
section, X must report the distribution of $100x on Part III of Form 
3520.
    (10) Example 10: Distribution from entity co-owned by foreign 
trust. FC has 100 outstanding shares of stock. FT owns 25 shares of FC 
stock, X owns 50 shares, and N, a nonresident alien, owns the remaining 
25 shares. In Year 1, FC distributes a dividend of $25x to each of FT 
and N and $50x to X. Because the distribution was made to FT, X, and N 
in proportion to their ownership interests in FC and X reports $50x as 
a dividend on X's timely filed income tax return for Year 1, X is able 
to demonstrate to the satisfaction of the Commissioner that the 
distribution is properly attributable to X's ownership interest in FC. 
Accordingly, under paragraph (b)(3) of this section, X is not treated 
as receiving a reportable distribution of $50x from FT.
    (11) Example 11: Foreign trust becomes domestic trust. FB, a 
foreign bank, resigns as trustee of FT, and DB, a domestic bank, 
becomes the new trustee of FT. Pursuant to section 7701(a)(30)(E), FT 
becomes a domestic trust, DT. Under paragraph (b)(4) of this section, 
DT is treated as receiving a distribution of the trust corpus and 
income from FT. Under paragraph (a) of this section, DT must report the 
deemed distribution of the trust corpus and income on Part III of Form 
3520 for the

[[Page 39480]]

year in which the inbound migration occurs.
    (12) Example 12: Distribution received by domestic trust. T, as 
trustee of FT, has the power to decant. Exercising that power, T 
distributes the trust corpus and income of FT to DT, a domestic trust. 
Neither FT nor DT is a grantor trust. Under paragraph (b)(1) and (4) of 
this section, DT receives a distribution of the trust corpus and income 
from FT. Under paragraph (a) of this section, DT must report the 
distribution of the trust corpus and income on Part III of Form 3520 
for the year in which the decanting occurs.
    (13) Example 13: Distribution received by U.S. owner. X is treated 
as the owner of FT under section 679. X receives a distribution from 
FT. Under paragraph (a) of this section, X must report the distribution 
on Part III of Form 3520.
    (14) Example 14: Distribution from trust owned by another person. X 
receives a distribution from FT. Y, a nonresident alien, is treated as 
the owner of FT under the grantor trust rules. X receives a completed 
Foreign-Owned Grantor Trust Beneficiary Statement. Under paragraph (a) 
of this section and Sec.  1.6048-6(b), X must file Form 3520 for the 
year of the distribution.
    (15) Example 15: Use of default calculation method if statement not 
provided. The facts are the same as in paragraph (g)(14) (Example 14) 
except that X does not receive a Foreign-Owned Grantor Trust 
Beneficiary Statement from FT. Pursuant to paragraph (d)(3) of this 
section, X must determine the tax consequences of the distribution 
using the default calculation method. Under the default calculation 
method, X must include the distribution in income in accordance with 
rules prescribed in paragraph (d)(3) of this section and in the 
Instructions for Form 3520 for the applicable taxable year.
    (16) Example 16: Distribution attributable to covered gift. Z 
relinquishes Z's U.S. citizenship on September 15, Year 1. Z is a 
covered expatriate within the meaning of section 877A(g)(1). On August 
1, Year 2, Z creates and transfers $300x to a foreign trust, FT, for 
the benefit of Z's son, S, a U.S. citizen. On December 30, Year 3, S 
receives a $40x distribution from FT. Whether or not the entire amount 
of the distribution is a covered gift within the meaning of section 
2801(e), under paragraph (b)(7) of this section, the $40x is a 
distribution. Under paragraph (a) of this section, S must report the 
distribution on Part III of Form 3520. S also may have additional 
reporting requirements under section 2801 for the covered gift.


Sec.  1.6048-5  Exceptions.

    (a) Exceptions under section 6048(a)(3)(B). For purposes of Sec.  
1.6048-2, a reportable event does not include any of the following:
    (1) Any transfer of property to a foreign trust to the extent the 
transfer is a transfer for fair market value within the meaning of 
Sec.  1.679-4(b), provided that the transfer is not one made by a U.S. 
person that is a related person (as defined in Sec.  1.679-1(c)(5)) 
with respect to the foreign trust in exchange for an obligation of the 
trust or of a related person (without regard to whether such obligation 
is a qualified obligation described in Sec.  1.679-4(d));
    (2) Any transfer of property to a foreign trust described in 
section 402(b), 404(a)(4), or 404A; and
    (3) Any transfer of property to a foreign trust, provided that the 
trust has received a determination letter from the Commissioner that 
has not been revoked recognizing that the foreign trust is exempt from 
Federal income tax under section 501(a) as an organization described in 
section 501(c)(3).
    (b) Exceptions for certain tax-favored foreign trusts--(1) In 
general. Sections 6048(a) through 6048(c) and Sec. Sec.  1.6048-2 
through 1.6048-4 do not apply to any eligible individual's transactions 
with, or ownership of, a tax-favored foreign retirement trust as 
defined under paragraph (b)(2) of this section or a tax-favored foreign 
non-retirement savings trust as defined under paragraph (b)(3) of this 
section. For purposes of this paragraph (b)(1), an eligible individual 
means an individual who is, or at any time was, a U.S. person and who, 
for any period during which an amount of tax may be assessed under 
section 6501 (without regard to section 6501(c)(8)), is compliant (or 
comes into compliance) with all requirements for filing a Federal 
income tax return (or returns) covering the period such individual was 
a U.S. person, and to the extent required under U.S. tax law, has 
reported as income any contributions to, earnings of, or distributions 
from an applicable tax-favored foreign trust on the applicable return 
(including on an amended return).
    (2) Tax-favored foreign retirement trust. For purposes of this 
section, a tax-favored foreign retirement trust means a foreign trust 
that is created, organized, or otherwise established under the laws of 
a foreign jurisdiction (the trust's jurisdiction) as a trust, plan, 
fund, scheme, or other arrangement (collectively, a trust) to operate 
exclusively or almost exclusively to provide, or to earn income for the 
provision of, pension or retirement benefits and ancillary or 
incidental benefits, and that meets the following requirements 
established by the laws of the jurisdiction governing the trust:
    (i) The trust generally is exempt from income tax or otherwise is 
tax-favored under the laws of the trust's jurisdiction. For purposes of 
this section, a trust is tax-favored under the laws of the trust's 
jurisdiction if it meets any one or more of the following conditions:
    (A) Contributions to the trust that otherwise would be subject to 
tax are deductible or excluded from income, are taxed at a reduced 
rate, give rise to a tax credit, or otherwise are eligible for another 
tax benefit (such as a government subsidy or contribution); or
    (B) Taxation of investment income earned by the trust is deferred 
until distribution or the investment income is taxed at a reduced rate 
(including exempt from tax).
    (ii) Annual information reporting with respect to the trust (or of 
its participants or beneficiaries) is provided, or otherwise is 
available, to the relevant tax authorities in the trust's jurisdiction.
    (iii) Generally, only contributions with respect to income earned 
from the performance of personal services are permitted (with 
allowances made for limited contributions made by unemployed 
individuals).
    (iv) The trust meets either the value threshold in paragraph 
(b)(2)(iv)(1) or any one of the contribution limitations in paragraph 
(b)(2)(iv)(2) of this section:
    (1) Value threshold. The aggregate value of the trust(s) in the 
trust's jurisdiction is limited to no more than $600,000 at any point 
during the taxable year (as adjusted under paragraph (b)(2)(iv)(3) of 
this section) regardless of the number of trusts established.
    (2) Contribution limitations. The contributions to the trust(s) in 
the trust's jurisdiction are limited to any one of the following:
    (i) A percentage of earned income of the participant,
    (ii) An annual limit of $75,000 (as adjusted under paragraph 
(b)(2)(iv)(3) of this section) or less, or
    (iii) A lifetime limit of $1,000,000 (as adjusted under paragraph 
(b)(2)(iv)(3) of this section) or less.
    (3) Dollar limitations subject to adjustments--(i) The value 
threshold in paragraph (b)(2)(iv)(1) and contribution limits in 
paragraph (b)(2)(iv)(2) of this section are determined using the U.S. 
Treasury Bureau of Fiscal Service foreign currency conversion rate on 
July 1 of the tax year (available at https://fiscaldata.treasury.gov/
datasets/

[[Page 39481]]

treasury-reporting-rates-exchange/treasury-reporting-rates-of-
exchange).
    (ii) In the case of calendar years beginning on or after January 1, 
2025, the amounts under paragraph (b)(2)(iv)(1) and paragraph 
(b)(2)(iv)(2) of this section will be adjusted at the same time and in 
the same manner as the amounts are adjusted under section 415(d), 
except that the base period will be the calendar quarter beginning July 
1, 2024.
    (v) Withdrawals, distributions, or payments from the trust are 
conditioned upon reaching a specified retirement age, disability, or 
death, or penalties apply to withdrawals, distributions, or payments 
made before such conditions are met. A trust that otherwise meets the 
requirements of this paragraph (b)(2)(v), but that allows withdrawals, 
distributions, or payments for in-service loans or for reasons such as 
hardship, educational purposes, or the purchase of a primary residence, 
will be treated as meeting the requirements of this paragraph.
    (vi) In the case of an employer-maintained trust:
    (A) The trust is nondiscriminatory insofar as a wide range of 
employees, including rank and file employees, must be eligible to make 
or receive contributions or accrue benefits under the terms of the 
trust (alone or in combination with other comparable plans);
    (B) The trust (alone or in combination with other comparable plans) 
actually provides significant benefits for a substantial majority of 
eligible employees; and
    (C) The benefits actually provided under the trust to eligible 
employees are nondiscriminatory.
    (3) Tax-favored foreign non-retirement savings trust. For purposes 
of this section, a tax-favored foreign non-retirement savings trust 
means a foreign trust that is created, organized, or otherwise 
established under the laws of a foreign jurisdiction (the trust's 
jurisdiction) as a trust, plan, fund, scheme, or other arrangement 
(collectively, a trust) to operate exclusively or almost exclusively to 
provide, or to earn income for the provision of, medical, disability, 
or educational benefits, and that meets the following requirements 
established by the laws of the trust's jurisdiction:
    (i) The trust generally is exempt from income tax or otherwise is 
tax-favored under the laws of the trust's jurisdiction as defined in 
paragraph (b)(2)(i) of this section.
    (ii) Annual information reporting with respect to the trust (or of 
its participants or beneficiaries) is provided, or otherwise is 
available, to the relevant tax authorities in the trust's jurisdiction.
    (iii) Contributions to the trust are limited to $10,000 (multiplied 
by the cost-of-living adjustment determined under section 1(f)(3) for 
the calendar year by substituting ``calendar year 2020'' for ``calendar 
year 2016'' in section 1(f)(3)(A)(ii) and rounding to the nearest 
multiple of $1,000) or less annually, or $200,000 (multiplied by the 
cost-of-living adjustment determined under section 1(f)(3) for the 
calendar year by substituting ``calendar year 2020'' for ``calendar 
year 2016'' in section 1(f)(3)(A)(ii) and rounding to the nearest 
multiple of $1,000) or less on a lifetime basis, determined using the 
U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate 
on the last day of the tax year (available at https://fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-rates-of-exchange).
    (iv) Withdrawals, distributions, or payments from the trust are 
conditioned upon the provision of medical, disability, or educational 
benefits, or apply penalties to withdrawals, distributions, or payments 
made before such conditions are met.
    (4) Tax-favored foreign de minimis savings trusts. For purposes of 
this section, a tax-favored foreign de minimis savings trust means a 
foreign trust that is created, organized, or otherwise established 
under the laws of a foreign jurisdiction (the trust's jurisdiction) as 
a trust, plan, fund, scheme, or other arrangement (collectively, a 
trust) to operate as a savings vehicle, that is not treated as a tax-
favored foreign retirement trust, as described in paragraph (b)(2) or a 
tax-favored foreign non-retirement savings trust, as described in 
paragraph (b)(3), and that meets each of the following requirements:
    (i) The trust generally is exempt from income tax or otherwise is 
tax-favored under the laws of the trust's jurisdiction as defined in 
paragraph (b)(2)(i) of this section;
    (ii) Annual information reporting with respect to the trust (or of 
its participants or beneficiaries) is provided, or otherwise is 
available, to the relevant tax authorities in the trust's jurisdiction 
pursuant to the laws of the trust's jurisdiction; and
    (iii) The aggregate value of the trust(s) in the trust's 
jurisdiction is limited to no more than $50,000 at any point during the 
taxable year (multiplied by the cost-of-living adjustment determined 
under section 1(f)(3) for the calendar year by substituting ``[the year 
of the date of publication of the final regulations in the Federal 
Register]'' for ``calendar year 2016'' in section 1(f)(3)(A)(ii) and 
rounding to the nearest multiple of $1,000) regardless of the number of 
trusts established. The $50,000 is determined using the U.S. Treasury 
Bureau of Fiscal Service foreign currency conversion rate on the last 
day of the tax year (available at https://fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-rates-of-exchange).
    (5) Certain rollovers and transfers. A trust that otherwise meets 
the requirements of paragraphs (b)(2) or (b)(3) of this section will 
not fail to be treated as a tax-favored foreign retirement or non-
retirement savings trust within the meaning of this paragraph (b) 
solely because it may receive a rollover of assets or funds transferred 
from another tax-favored foreign retirement or non-retirement savings 
trust established and operated under the laws of the same jurisdiction, 
provided that the trust transferring assets or funds also meets the 
requirements of this paragraph (b)(2) or (b)(3), as applicable (but 
this paragraph does not apply to transfers between tax-favored 
retirement trusts and non-retirement savings trusts).
    (c) Exception for distributions from certain foreign compensatory 
trusts. Section 6048(c) does not apply to a distribution received by a 
U.S. person from a foreign trust described in Sec.  1.672(f)-3(c)(1) 
provided that the U.S. person includes in income any amounts 
accumulated on behalf of, or distributed by the trust, to the U.S. 
person to the extent such amounts are required to be included in income 
(other than amounts that are exempt from Federal income tax under a 
bilateral income tax treaty or any other bilateral agreement to which 
the United States is a party) of the U.S. person, including pursuant to 
section 409A(b).
    (d) Exception for certain distributions received by domestic 
section 501(c)(3) organizations. Section 6048(c) does not apply to a 
distribution from a foreign trust received by a domestic organization, 
provided that the organization has received a determination letter from 
the Commissioner that has not been revoked recognizing that the 
domestic organization is exempt from Federal income tax under section 
501(a) as an organization described in section 501(c)(3).
    (e) Exception for certain mirror code possession trusts. Sections 
6048(a) through 6048(c) do not apply to a trust located in a mirror 
code possession to the extent the responsible party (within the meaning 
of section 6048(a)(4)), U.S. owner, or U.S. recipient is a bona fide

[[Page 39482]]

resident (within the meaning of Sec.  1.937-1(b)) of such mirror code 
possession. For purposes of this paragraph (e), a mirror code 
possession is a possession of the United States where, under the income 
tax system of the possession, the income tax liability of the residents 
of the possession is determined by reference to the income tax laws of 
the United States as if the possession were the United States, and a 
trust is located in a mirror code possession if a court within the 
mirror code possession is able to exercise primary supervision over the 
administration of the trust and one or more bona fide residents of the 
mirror code possession have the authority to control all substantial 
decisions of the trust.


Sec.  1.6048-6  Special rules.

    (a) Special rules--(1) Dual resident taxpayers. If a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1) of this 
chapter) computes U.S. income tax liability as a nonresident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter, the 
dual resident taxpayer is not treated as a U.S. person for purposes of 
section 6048 with respect to the portion of the taxable year the dual 
resident taxpayer is treated as a nonresident alien for purposes of 
computing U.S. income tax liability.
    (2) Dual status taxpayers. If a taxpayer abandons U.S. citizenship 
or residence during the taxable year or acquires U.S. citizenship or 
residence during the taxable year as provided in Sec.  1.6012-
1(b)(2)(ii), the taxpayer will is not treated as a U.S. person for 
purposes of Sec. Sec.  1.6048-1 through 1.6048-7 with respect to the 
portion of the taxable year the taxpayer was treated as a nonresident 
alien for purposes of computing U.S. income tax liability.
    (b) Effect of ownership under the grantor trust rules. The fact 
that a portion of a foreign trust is treated as owned by the grantor or 
another person under subpart E of part I of subchapter J of chapter 1 
of the Internal Revenue Code is irrelevant for purposes of determining 
whether a U.S. person makes a transfer to, or receives a distribution 
from, a foreign trust that must be reported under Sec. Sec.  1.6048-2 
through 1.6048-4. See Sec.  1.6048-4(g)(13) and (14).
    (c) [Reserved]
    (d) Married U.S. persons filing a joint income tax return. Married 
U.S. persons who file a joint income tax return under section 6013 for 
a tax year, and each of whom is subject to the information reporting 
requirements under Sec. Sec.  1.6048-2(a) (as a grantor or transferor 
under Sec. Sec.  1.6048-2(c)(1) and (2) required to file Part I of Form 
3520), 1.6048-3(a)(2) (as a U.S. owner of a foreign trust required to 
file a substitute Form 3520-A), or 1.6048-4(a) (as a U.S. recipient of 
a distribution from a foreign trust required to file Part III of Form 
3520) for the same foreign trust, may together file a single Form 3520, 
Annual Return to Report Transactions with Foreign Trusts and Receipt of 
Certain Foreign Gifts, for that year at the time and in the manner 
described in Sec. Sec.  1.6048-2 through 1.6048-6. For purposes of 
filing a substitute Form 3520-A under Sec.  1.6048-3(a)(2), a separate 
Foreign Grantor Trust Owner statement must be completed and attached 
for each married U.S. person. See Sec.  1.6677-1(f) with respect to 
liability for penalties.


Sec.  1.6048-7  Applicability dates.

    (a) In general. The rules of Sec. Sec.  1.6048-1 through 1.6048-4 
and Sec.  1.6048-6 apply as follows:
    (1) Section 1.6048-1 applies after the [date of publication of the 
final regulations in the Federal Register].
    (2) To the extent related to Sec.  1.6048-2, including the relevant 
portions of Sec.  1.6048-6, the rules apply to reportable events 
occurring after the [date of publication of the final regulations in 
the Federal Register].
    (3) To the extent related to Sec.  1.6048-3, including the relevant 
portions of Sec.  1.6048-6, the rules apply to taxable years of U.S. 
persons beginning after the [date of publication of the final 
regulations in the Federal Register].
    (4) To the extent related to Sec.  1.6048-4, including the relevant 
portions of Sec.  1.6048-6, the rules apply to distributions received 
after the [date of publication of the final regulations in the Federal 
Register].
    (b) Special rule for Sec.  1.6048-5. Section 1.6048-5 applies as 
follows--
    (1) To the extent related to reportable events under section 
6048(a) and the regulations under section 6048 in this part, the rules 
apply to reportable events occurring after the [date that final 
regulations are published in the Federal Register].
    (2) To the extent related to ownership of a foreign trust under 
section 6048(b) and the regulations under section 6048 in this part, 
the rules apply to taxable years of U.S. owners beginning after the 
[date that final regulations are published in the Federal Register]; 
and
    (3) To the extent related to distributions from a foreign trust 
under section 6048(c) and the regulations under section 6048 in this 
part, the rules apply to distributions received after the [date that 
final regulations are published in the Federal Register].
0
Par. 10. Section 1.6677-1 is added to read as follows:


Sec.  1.6677-1  Failure to file information with respect to certain 
foreign trusts.

    (a) Civil penalty--(1) In general. In addition to any criminal 
penalty provided by law, and subject to the rules of paragraph (b) of 
this section (concerning reporting required under Sec.  1.6048-3) and 
the rules of paragraph (a)(3) of this section (regarding the maximum 
penalty that may be assessed), if any notice or return required to be 
filed by Sec. Sec.  1.6048-2 through 1.6048-4 is not timely filed, or 
contains incomplete or incorrect information, then with respect to each 
failure to comply with Sec. Sec.  1.6048-2 through 1.6048-4, the person 
required to file such notice or return must pay a penalty equal to the 
greater of $10,000 or 35 percent of the gross reportable amount (within 
the meaning of paragraph (c) of this section).
    (2) Penalty for continuing failure. Subject to the rules of 
paragraph (a)(3) of this section (regarding the maximum penalty that 
may be assessed), if any failure described in paragraph (a)(1) of this 
section continues for more than 90 days after the day on which the 
Commissioner mails notice of such failure to the person required to pay 
the penalty, the person must pay an additional penalty (in addition to 
the amount determined under paragraph (a)(1) of this section) of 
$10,000 for each 30-day period (or fraction thereof) during which the 
failure continues after the expiration of the 90-day period.
    (3) Maximum penalty--(i) Limited to gross reportable amount. At 
such time as the gross reportable amount with respect to any failure 
can be determined by the Commissioner, the aggregate amount of the 
penalties imposed under paragraphs (a)(1) and (2) of this section will 
be reduced as necessary to ensure that the amount does not exceed the 
gross reportable amount with respect to that failure (and to the extent 
that the aggregate amount already collected exceeds the gross 
reportable amount, the Commissioner will refund the excess amount 
pursuant to section 6402).
    (ii) Period of limitations on refund of excess amounts. The 
limitations period provided for claims for refund under section 6511(a) 
and (b) applies to the refund of any excess amount.
    (b) Special rules for returns under Sec.  1.6048-3. In the case of 
a Form 3520-A or a substitute Form 3520-A, including attached 
statements, that are required to be filed and furnished under Sec.  
1.6048-3(a)--
    (1) The U.S. person who is treated as the owner of the foreign 
trust (or a

[[Page 39483]]

portion of the foreign trust) is liable for the penalty imposed by 
paragraph (a) of this section for the failure to comply with Sec.  
1.6048-3(a), and
    (2) Paragraph (a) of this section is applied by substituting ``5 
percent'' for ``35 percent.''
    (c) Gross reportable amount--(1) In general. For purposes of 
paragraph (a) of this section, the term gross reportable amount means--
    (i) The gross value of the property involved in the reportable 
event (determined as of the date of the event) in the case of a failure 
relating to Sec.  1.6048-2,
    (ii) The gross value of the portion of the trust's assets at the 
close of the trust's taxable year treated as owned by the U.S. person 
in the case of each applicable failure relating to Sec.  1.6048-3, and
    (iii) The gross amount of the distribution in the case of a failure 
relating to Sec.  1.6048-4.
    (2) Gross value and gross amount. The gross value or gross amount 
of property is determined in accordance with the valuation principles 
of sections 2512 and 2031 and the regulations under sections 2512 and 
2031 in this part, though, in all events, without regard to any taxes, 
expenses, liabilities, or restrictions on the sale or use of the 
property.
    (d) Reasonable cause exception--(1) In general. Paragraph (a) of 
this section does not apply to any failure to file information with 
respect to a foreign trust if the person required to file such 
information submits a reasonable cause statement to the Commissioner 
under penalties of perjury and demonstrates to the satisfaction of the 
Commissioner that the failure is due to reasonable cause and not due to 
willful neglect. The determination of whether a taxpayer acted with 
reasonable cause and not with willful neglect is made under the 
principles set out in Sec.  1.6664-4 and Sec.  301.6651-1(c) of this 
chapter. This determination is made on a case-by-case basis, taking 
into account all pertinent facts and circumstances.
    (2) Examples of situations that do not satisfy the reasonable cause 
exception. Examples of facts that do not constitute reasonable cause 
for purposes of this paragraph (d) include but are not limited to the 
following:
    (i) The fact that a foreign jurisdiction would impose a civil or 
criminal penalty on such person (or any other person) for disclosing 
the required information.
    (ii) Refusal on the part of a foreign trustee to provide 
information for any reason, including difficulty in producing the 
required information or the existence of provisions in the trust 
instrument that prevent the disclosure of required information.
    (e) Deficiency procedures do not apply. Subchapter B of chapter 63 
(relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) does not apply in respect of the assessment or 
collection of any penalty imposed under this section.
    (f) Married U.S. persons filing a joint income tax return--(1) In 
general. For purposes of this section, married U.S. persons who file 
one Form 3520 with respect to the same foreign trust under Sec.  
1.6048-6(d) for a tax year are treated as if they are a single U.S. 
person for that year.
    (2) Anti-abuse rule. For purposes of this section, the Commissioner 
may treat married U.S. persons who file a joint income tax return under 
section 6013 for a tax year as a single U.S. person for that year, 
unless the Commissioner determines that, based on all the facts and 
circumstances, only one of the married individuals was subject to the 
information reporting requirement under Sec. Sec.  1.6048-2 through 
1.6048-4 (for example, because only one spouse had an interest in the 
property constituting the transfer to, or receipt from, a foreign 
trust).
    (3) Joint and several liability. If married U.S. persons are 
treated as a single U.S. person for a tax year, such married U.S. 
persons have joint and several liability with respect to any penalties 
imposed under this section.
    (g) Examples. The following examples illustrate the rules of this 
section. In each example, X is a U.S. person and FT is a foreign trust.
    (1) Example 1: Partial reporting. X transfers property worth 
$100,000 to FT but reports only $40,000 of that amount on Part I of 
Form 3520 pursuant to Sec.  1.6048-2. X does not demonstrate to the 
satisfaction of the Commissioner that X's failure to report the correct 
amount was due to reasonable cause and not due to willful neglect. 
Under paragraph (a)(1) of this section, penalties will be imposed only 
on the unreported $60,000.
    (2) Example 2: Maximum penalty limited to gross reportable amount. 
X receives a distribution of $100,000 from FT in Year 1 but fails to 
report the distribution as required by Sec.  1.6048-4(a). The 
Commissioner learns about the distribution but does not have enough 
information to determine the gross reportable amount. On January 2, 
Year 4, the Commissioner mails a notice of the reporting failure to X 
and assesses a penalty of $10,000 under paragraph (a)(1) of this 
section. X does not comply with X's reporting requirement within 90 
days after the day that the Commissioner mails the notice (by April 2, 
Year 4), so the Commissioner begins to assess additional penalties of 
$10,000 under paragraph (a)(2) of this section for each 30-day period 
(or fraction thereof), beginning on April 2, Year 4, during which the 
failure continues. By the time X complies with X's reporting 
requirement, the aggregate penalties assessed with respect to X's 
failure to report the distribution total $150,000. Under paragraph 
(a)(3)(i) of this section, the maximum penalty that the Commissioner 
may assess with respect to this failure is $100,000 (the applicable 
gross reportable amount determined under paragraph (c)(1)(iii) of this 
section), and the Commissioner must abate the excess $50,000 of 
assessed penalties.
    (3) Example 3: Maximum penalty limited to gross reportable amount 
below $10,000 minimum. Assume the same facts as in Example 2 above 
except that instead of a $100,000 distribution, X receives a 
distribution of $4,000 from FT. By the time X complies with X's 
reporting requirement, the aggregate penalties assessed with respect to 
X's failure to report the distribution total $20,000. Under paragraph 
(a)(3)(i) of this section, the maximum penalty that the Commissioner 
may assess with respect to this failure is $4,000 (the applicable gross 
reportable amount determined under paragraph (c)(1)(iii) of this 
section), and the Commissioner must abate the excess $16,000 of 
assessed penalties.
    (4) Example 4: Multiple failures over multiple years. X created FT 
in Year 1 and is treated as the owner of FT under the grantor trust 
rules. The trustee of FT fails to file a Form 3520-A with respect to FT 
for Year 2 and Year 3 as required by Sec.  1.6048-3(a)(1), and X fails 
to file a substitute Form 3520-A and a Form 3520 (as required by Sec.  
1.6048-3(a)(2)) for the same period. (In Year 4, X replaces the 
trustee, and the new trustee files a Form 3520-A for Year 4.) Under 
paragraphs (a)(1) and (b) of this section, X is subject to one penalty 
for Year 2 and one penalty for Year 3 for the failure to comply with 
Sec.  1.6048-3(a)(1) and (a)(2) for those years.
    (5) Example 5: Distribution from foreign-owned grantor trust 
through an intermediary. Y, a nonresident alien, is treated as the 
owner of FT under section 676, after the application of section 672(f). 
X receives a distribution from FT through an intermediary as described 
in Sec.  1.6048-4(b)(2)(i). X does not include the distribution in 
gross income and does not report the distribution on Part III of Form 
3520 as required by Sec.  1.6048-4(a). Even if the Commissioner

[[Page 39484]]

determines that X was not required to include the distribution in gross 
income, X is liable for penalties imposed by paragraph (a)(1) of this 
section based on the gross reportable amount determined under paragraph 
(c)(1)(iii) of this section because X is required to report indirect 
transfers of property under Sec.  1.6048-4(b)(2)(iv).
    (6) Example 6: Multiple failures in multiple years. (i) Facts. On 
December 31, Year 1, X creates FT and makes a gratuitous transfer of 
property with a value of $100,000 to FT. X is treated as the sole owner 
of FT under the grantor trust rules. During Year 2, X makes no 
transfers to FT and receives no distributions from FT. At the end of 
Year 2, the value of FT's assets is $110,000. During Year 3, X makes no 
transfers to FT, but X receives a distribution of $30,000. At the end 
of Year 3, the value of FT's assets is $85,000. X does not file any 
Forms 3520 or substitute Forms 3520-A for Year 1 through Year 3. The 
Trustee of FT does not file any Forms 3520-A for Year 1 through Year 3.
    (ii) Analysis-(A) Year 1. For Year 1, X is subject to two penalties 
under paragraphs (a)(1) and (b) of this section: a $35,000 penalty (the 
greater of $10,000 or $35,000 (35% of $100,000)) for failure to comply 
with Sec.  1.6048-2(a) and a $10,000 penalty (the greater of $10,000 or 
$5,000 (5% of $100,000)) for failure to comply with Sec.  1.6048-3(a). 
If X does not comply with X's reporting requirements for Year 1 within 
90 days after the day on which the Commissioner mails notice of the 
reporting failures to X, X will be subject to additional penalties 
under paragraph (a)(2) of this section of $10,000 per failure per 30-
day period (or fraction thereof) ($20,000 in the aggregate per 30-day 
period (or fraction thereof)) during which the failure continues. Under 
paragraph (a)(3)(i) of this section, the aggregate amount of the 
penalty imposed under paragraphs (a)(1) and (2) of this section with 
respect to each failure will not exceed the gross reportable amount for 
that failure.
    (B) Year 2. For Year 2, X is subject to one penalty under 
paragraphs (a)(1) and (b) of this section: a $10,000 penalty (the 
greater of $10,000 or $5,500 (5% of $110,000)) for failure to comply 
with Sec.  1.6048-3(a). If X does not comply with X's reporting 
requirements for Year 2 within 90 days after the day on which the 
Commissioner mails notice of the reporting failures to X, X will be 
subject to additional penalties under paragraph (a)(2) of this section 
of $10,000 per failure per 30-day period (or fraction thereof) ($10,000 
per 30-day period (or fraction thereof)) during which the failure 
continues. Under paragraph (a)(3)(i) of this section, the aggregate 
amount of the penalty imposed under paragraphs (a)(1) and (2) of this 
section with respect to each failure will not exceed the gross 
reportable amount for that failure.
    (C) Year 3. For Year 3, X is subject to two penalties under 
paragraphs (a)(1) and (b) of this section: a $10,000 penalty (the 
greater of $10,000 or 4,250 (5% of $85,000)) for failure to comply with 
Sec.  1.6048-3(a), and a penalty of $10,500 (the greater of $10,000 or 
$10,500 (35% of $30,000)) for failure to comply with Sec.  1.6048-4. If 
X does not comply with X's reporting requirements for Year 3 within 90 
days after the day on which the Commissioner mails notice of the 
reporting failures to X, X will be subject to additional penalties 
under paragraph (a)(2) of this section of $10,000 per failure per 30-
day period (or fraction thereof) ($20,000 in the aggregate per 30-day 
period (or fraction thereof)) during which the failure continues. Under 
paragraph (a)(3)(i) of this section, the aggregate amount of the 
penalty imposed under paragraphs (a)(1) and (2) of this section with 
respect to each failure will not exceed the gross reportable amount for 
that failure.
    (iii) Conclusion. X is subject to aggregate penalties of $75,500 
under paragraphs (a)(1) and (b) of this section: $45,000 for Year 1, 
$10,000 for Year 2, and $20,500 for Year 3. X may be subject to 
additional penalties under paragraph (a)(2) of this section if X fails 
to comply with X's reporting requirements within 90 days after the day 
on which the Commissioner mails notice of each failure to X. Under 
paragraph (a)(3)(i) of this section, the aggregate amount of the 
penalty imposed under paragraphs (a)(1) and (2) of this section with 
respect to each failure will not exceed the gross reportable amount for 
that failure.
    (7) Example 7: Interaction with Sec.  1.6039F-1. In Year 1, X 
receives $500,000 from FT that X treats as a gift. Under Sec.  1.6048-
4(d) and Sec.  1.6039F-1(b), X is required to report the amount as a 
distribution under Sec.  1.6048-4 and not as a foreign gift under Sec.  
1.6039F-1(a). However, based on the advice of X's tax advisor, X 
reports the distribution under Sec.  1.6039F-1(a) and not under Sec.  
1.6048-4. X's failure to report the distribution under Sec.  1.6048-4 
is subject to penalties under Sec.  1.6677-1(a) unless X demonstrates 
to the satisfaction of the Commissioner that such failure is due to 
reasonable cause and not due to willful neglect. The fact that X 
reported the distribution under Sec.  1.6039F-1(a) based on the advice 
of X's tax advisor is a factor that may be taken into account in 
determining whether X's failure to report the distribution under Sec.  
1.6048-4 was due to reasonable cause. X's reliance on X's tax advisor's 
advice can only constitute reasonable cause, however, if, under all the 
circumstances, the reliance was reasonable within the meaning of Sec.  
1.6664-4(c).
    (8) Example 8: Presumption that FT has a U.S. owner. X created FT 
in Year 1 and transferred $100,000 to FT. X reported the transfer to FT 
on Part I of Form 3520 for Year 1, but did not complete the other parts 
of Form 3520. X did not file any Forms 3520 with respect to FT in Year 
2 or subsequent years. FT has not filed any Forms 3520-A with respect 
to FT (and X has not filed any substitute Forms 3520-A). Pursuant to 
Sec.  1.679-2(d)(2), the Commissioner sends a written notice to X 
requesting additional information related to the trust and its 
potential beneficiaries. X does not respond. Under Sec.  1.679-2(d)(1), 
FT is treated as having a U.S. beneficiary. Under Sec.  1.679-1(a), X 
is treated as the owner of FT. Under paragraphs (a) and (b) of this 
section, X is subject to penalties for Year 1 and subsequent years for 
failure to comply with Sec.  1.6048-3(a).
    (9) Example 9: Penalty for failure to report loan that is not 
treated as a section 643(i) distribution. FT is not treated as being 
owned by X or any other person under the grantor trust rules. X 
receives a loan of cash from FT and in exchange issues an obligation to 
FT that is a qualified obligation within the meaning of Sec.  1.643(i)-
2(b)(2)(iii). Provided the obligation does not cease to be a qualified 
obligation, the loan will not be a section 643(i) distribution under 
Sec.  1.643(i)-1(a) and therefore will not be taxable to X. However, 
the loan is a distribution within the meaning of Sec.  1.6048-4(b)(3) 
that must be reported on Part III of Form 3520 under Sec.  1.6048-4(a). 
X fails to report the loan. X is subject to penalties under Sec.  
1.6677-1(a) unless X demonstrates to the satisfaction of the 
Commissioner that such failure is due to reasonable cause and not due 
to willful neglect.
    (10) Example 10: Joint and several penalties. X and Y are married 
U.S. persons who file a joint income tax return under section 6013. In 
Year 1, X and Y create FT and fund the trust with $100,000 for the 
benefit of their U.S. children. X and Y jointly file their income tax 
return for the Year 1 tax year but fail to file a Form 3520 reporting 
the transfer of assets to a foreign trust pursuant to Sec.  1.6048-2. 
In addition, FT has not filed any Forms 3520-A with respect to FT (and 
X and Y have not filed any substitute Forms 3520-A)

[[Page 39485]]

pursuant to Sec.  1.6048-3(a). For the Year 1 tax year, X and Y are 
jointly and severally liable for penalties under paragraph (a) of this 
section pursuant to paragraph (f)(2) and (3) of this section.
    (h) Applicability dates--(1) Reportable events. To the extent 
related to Sec.  1.6048-2, this section applies to reportable events 
occurring after the [date of publication of the final regulations in 
the Federal Register].
    (2) U.S owners of foreign trusts. To the extent related to Sec.  
1.6048-3, this section applies to taxable years of U.S. persons 
beginning after the [date of publication of the final regulations in 
the Federal Register].
    (3) Reporting by U.S. persons receiving distributions from foreign 
trusts. To the extent related to Sec.  1.6048-4, this section applies 
to distributions received after the [date of publication of the final 
regulations in the Federal Register].

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-09434 Filed 5-7-24; 8:45 am]
BILLING CODE 4830-01-P