< Back to H.R. 2356 (104th Congress, 1995–1996)

Text of the Foreign Trust Tax Compliance Act of 1995

This bill was introduced on September 19, 1995, in a previous session of Congress, but was not enacted. The text of the bill below is as of Sep 19, 1995 (Introduced).

Source: GPO

HR 2356 IH

104th CONGRESS

1st Session

H. R. 2356

To amend the Internal Revenue Code of 1986 to prevent the avoidance of tax through the use of foreign trusts.

IN THE HOUSE OF REPRESENTATIVES

September 19, 1995

Mr. GIBBONS (for himself, Mr. GEPHARDT, Mr. STARK, Mr. JACOBS, Mr. FORD, Mr. MATSUI, Mrs. KENNELLY, Mr. COYNE, Mr. LEVIN, Mr. MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of Georgia, Mr. PAYNE of Virginia, Mr. NEAL of Massachusetts, and Mr. WARD) introduced the following bill; which was referred to the Committee on Ways and Means


A BILL

To amend the Internal Revenue Code of 1986 to prevent the avoidance of tax through the use of foreign trusts.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ‘Foreign Trust Tax Compliance Act of 1995’.

SEC. 2. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

    (a) IN GENERAL- Section 6048 of the Internal Revenue Code of 1986 (relating to returns as to certain foreign trusts) is amended to read as follows:

‘SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

    ‘(a) NOTICE OF CERTAIN EVENTS-

      ‘(1) GENERAL RULE- On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).

      ‘(2) CONTENTS OF NOTICE- The notice required by paragraph (1) shall contain such information as the Secretary may prescribe, including--

        ‘(A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and

        ‘(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.

      ‘(3) REPORTABLE EVENT- For purposes of this subsection--

        ‘(A) IN GENERAL- The term ‘reportable event’ means--

          ‘(i) the creation of any foreign trust by a United States person,

          ‘(ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and

          ‘(iii) 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 the rules of subpart E of part I of subchapter J of chapter 1, or

            ‘(II) any portion of a foreign trust was included in the gross estate of the decedent.

        ‘(B) EXCEPTIONS-

          ‘(i) FAIR MARKET VALUE SALES- Subparagraph (A)(ii) shall not apply to any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value and the rules of section 679(a)(3) shall apply.

          ‘(ii) PENSION AND CHARITABLE TRUSTS- Subparagraph (A) shall not apply with respect to a trust which is--

            ‘(I) described in section 404(a)(4) or 404A, or

            ‘(II) determined by the Secretary to be described in section 501(c)(3).

      ‘(4) RESPONSIBLE PARTY- For purposes of this subsection, the term ‘responsible party’ means--

        ‘(A) the grantor in the case of the creation of an inter vivos trust,

        ‘(B) the transferor in the case of a reportable event described in paragraph (3)(A)(ii) other than a transfer by reason of death, and

        ‘(C) the executor of the decedent’s estate in any other case.

    ‘(b) UNITED STATES GRANTOR OF FOREIGN TRUST-

      ‘(1) IN GENERAL- If, at any time during any taxable year of a United States person, such person is treated as the owner of any portion of a foreign

trust under the rules of subpart E of part I of subchapter J of chapter 1, such person shall be responsible to ensure that--

        ‘(A) such trust makes a return for such year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe, and

        ‘(B) such trust furnishes such information as the Secretary may prescribe to each United States person (i) who is treated as the owner of any portion of such trust or (ii) who receives (directly or indirectly) any distribution from the trust.

      ‘(2) TRUSTS NOT HAVING UNITED STATES AGENT-

        ‘(A) IN GENERAL- If the rules of this subsection apply to any foreign trust, the determination of amounts required to be taken into account with respect to such trust by a United States person under the rules of subpart E of part I of subchapter J of chapter 1 shall be determined by the Secretary in the Secretary’s sole discretion from the Secretary’s own knowledge or from such information as the Secretary may obtain through testimony or otherwise.

        ‘(B) UNITED STATES AGENT REQUIRED- The rules of this subsection shall apply to any foreign trust to which paragraph (1) applies unless such trust agrees (in such manner, subject to such conditions, and at such time as the Secretary shall prescribe) to authorize a United States person to act as such trust’s limited agent solely for purposes of applying sections 7602, 7603, and 7604 with respect to--

          ‘(i) any request by the Secretary to examine records or produce testimony related to the proper treatment of amounts required to be taken into account under the rules referred to in subparagraph (A), or

          ‘(ii) any summons by the Secretary for such records or testimony.

        The appearance of persons or production of records by reason of a United States person being such an agent shall not subject such persons or records to legal process for any purpose other than determining the correct treatment under this title of the amounts required to be taken into account under the rules referred to in subparagraph (A). A foreign trust which appoints an agent described in this subparagraph shall not be considered to have an office or a permanent establishment in the United States, or to be engaged in a trade or business in the United States, solely because of the activities of such agent pursuant to this subsection.

        ‘(C) OTHER RULES TO APPLY- Rules similar to the rules of paragraphs (2) and (4) of section 6038A(e) shall apply for purposes of this paragraph.

    ‘(c) REPORTING BY UNITED STATES BENEFICIARIES OF FOREIGN TRUSTS-

      ‘(1) IN GENERAL- If any United States person receives (directly or indirectly) during any taxable year of such person any distribution from a foreign trust, such person shall make a return with respect to such trust for such year which includes--

        ‘(A) the name of such trust,

        ‘(B) the aggregate amount of the distributions so received from such trust during such taxable year, and

        ‘(C) such other information as the Secretary may prescribe.

      ‘(2) INCLUSION IN INCOME IF RECORDS NOT PROVIDED- If adequate records are not provided to the Secretary to determine the proper treatment of any distribution from a foreign trust, such distribution shall be treated as an accumulation distribution includible in the gross income of the distributee under chapter 1. To the extent provided in regulations, the preceding sentence shall not apply if the foreign trust elects to be subject to rules similar to the rules of subsection (b)(2)(B).

    ‘(d) SPECIAL RULES-

      ‘(1) DETERMINATION OF WHETHER UNITED STATES PERSON RECEIVES DISTRIBUTION- For purposes of this section, in determining whether a United States person 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.

      ‘(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVITIES- To the extent provided in regulations, a trust which is a United States person shall be treated as a foreign trust for purposes of this section and section 6677 if such trust has substantial activities, or holds substantial property, outside the United States.

      ‘(3) TIME AND MANNER OF FILING INFORMATION- Any notice or return required under this section shall be made at such time and in such manner as the Secretary shall prescribe.

      ‘(4) MODIFICATION OF RETURN REQUIREMENTS- The Secretary is authorized to suspend or modify any requirement of this section if the Secretary determines that the United States has no significant tax interest in obtaining the required information.’

    (b) INCREASED PENALTIES- Section 6677 of such Code (relating to failure to file information returns with respect to certain foreign trusts) is amended to read as follows:

‘SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

    ‘(a) CIVIL PENALTY- In addition to any criminal penalty provided by law, if any notice or return required to be filed by section 6048--

      ‘(1) is not filed on or before the time provided in such section, or

      ‘(2) does not include all the information required pursuant to such section or includes incorrect information,

    the person required to file such notice or return shall pay a penalty equal to 35 percent of the gross reportable amount. If any failure described in the preceding sentence continues for more than 90 days after the day on which the Secretary mails notice of such failure to the person required to pay such penalty, such person shall pay a penalty (in addition to the amount determined under the preceding sentence) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period.

    ‘(b) SPECIAL RULES FOR RETURNS UNDER SECTION 6048(b)- In the case of a return required under section 6048(b)--

      ‘(1) the United States person referred to in such section shall be liable for the penalty imposed by subsection (a), and

      ‘(2) subsection (a) shall be applied by substituting ‘5 percent’ for ‘35 percent’.

    ‘(c) GROSS REPORTABLE AMOUNT- For purposes of subsection (a), the term ‘gross reportable amount’ means--

      ‘(1) the gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to section 6048(a),

      ‘(2) the gross value of the portion of the trust’s assets at the close of the year treated as owned by the United States person in the case of a failure relating to section 6048(b)(1), and

      ‘(3) the gross amount of the distributions in the case of a failure relating to section 6048(c).

    ‘(d) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

    ‘(e) DEFICIENCY PROCEDURES NOT TO APPLY- Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a).’

    (c) CONFORMING AMENDMENTS-

      (1) Paragraph (2) of section 6724(d) of such Code is amended by striking ‘or’ at the end of subparagraph (S), by striking the period at the end of subparagraph (T) and inserting ‘, or’, and by inserting after subparagraph (T) the following new subparagraph:

        ‘(U) section 6048(b)(1)(B) (relating to foreign trust reporting requirements).’

      (2) The table of sections for subpart B of part III of subchapter A of chapter 61 is of such Code amended by striking the item relating to section 6048 and inserting the following new item:

‘Sec. 6048. Information with respect to certain foreign trusts.’

      (3) The table of sections for part I of subchapter B of chapter 68 of such Code is amended by striking the item relating to section 6677 and inserting the following new item:

‘Sec. 6677. Failure to file information with respect to certain foreign trusts.’

    (d) EFFECTIVE DATES-

      (1) REPORTABLE EVENTS- To the extent related to subsection (a) of section 6048 of the Internal Revenue Code of 1986, as amended by this section, the amendments made by this section shall apply to reportable events (as defined in such section 6048) occurring after the date of the enactment of this Act.

      (2) GRANTOR TRUST REPORTING- To the extent related to subsection (b) of such section 6048, the amendments made by this section shall apply to taxable years of United States persons beginning after the date of the enactment of this Act.

      (3) REPORTING BY UNITED STATES BENEFICIARIES- To the extent related to subsection (c) of such section 6048, the amendments made by this section shall apply to distributions received after the date of the enactment of this Act.

SEC. 3. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES.

    (a) TREATMENT OF TRUST OBLIGATIONS, ETC-

      (1) Paragraph (2) of section 679(a) of the Internal Revenue Code of 1986 is amended by striking subparagraph (B) and inserting the following:

        ‘(B) TRANSFERS AT FAIR MARKET VALUE- To any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value.’

      (2) Subsection (a) of section 679 of such Code (relating to foreign trusts having one or more United States beneficiaries) is amended by adding at the end the following new paragraph:

      ‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO ACCOUNT UNDER FAIR MARKET VALUE EXCEPTION-

        ‘(A) IN GENERAL- In determining whether paragraph (2)(B) applies to any transfer by a person described in clause (ii) or (iii) of subparagraph (C), there shall not be taken into account--

          ‘(i) any obligation of a person described in subparagraph (C), and

          ‘(ii) to the extent provided in regulations, any obligation which is guaranteed by a person described in subparagraph (C).

        ‘(B) TREATMENT OF PRINCIPAL PAYMENTS ON OBLIGATION- Principal payments by the trust on any obligation referred to in subparagraph (A) shall be taken into account on and after the date of the payment in determining the portion of the trust attributable to the property transferred.

        ‘(C) PERSONS DESCRIBED- The persons described in this subparagraph are--

          ‘(i) the trust,

          ‘(ii) any grantor or beneficiary of the trust, and

          ‘(iii) any person who is related (within the meaning of section 643(i)(3)) to any grantor or beneficiary of the trust.’

    (b) EXEMPTION OF TRANSFERS TO CHARITABLE TRUSTS- Subsection (a) of section 679 of such Code is amended by striking ‘section 404(a)(4) or 404A’ and inserting ‘section 6048(a)(3)(B)(ii)’.

    (c) OTHER MODIFICATIONS- Subsection (a) of section 679 of such Code is amended by adding at the end the following new paragraphs:

      ‘(4) SPECIAL RULES APPLICABLE TO FOREIGN GRANTOR WHO LATER BECOMES A UNITED STATES PERSON-

        ‘(A) IN GENERAL- If a nonresident alien individual has a residency starting date within 5 years after directly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual transferred to such trust on the residency starting date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer.

        ‘(B) TREATMENT OF UNDISTRIBUTED INCOME- For purposes of this section, undistributed net income for periods before such individual’s residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into account.

        ‘(C) RESIDENCY STARTING DATE- For purposes of this paragraph, an individual’s residency starting date is the residency starting date determined under section 7701(b)(2)(A).

      ‘(5) OUTBOUND TRUST MIGRATIONS- If--

        ‘(A) an individual who is a citizen or resident of the United States transferred property to a trust which was not a foreign trust, and

        ‘(B) such trust becomes a foreign trust while such individual is alive,

      then this section and section 6048 shall be applied as if such individual transferred to such trust on the date such trust becomes a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to such trust. A rule similar to the rule of paragraph (4)(B) shall apply for purposes of this paragraph.’

    (d) MODIFICATIONS RELATING TO WHETHER TRUST HAS UNITED STATES BENEFICIARIES- Subsection (c) of section 679 of such Code is amended by adding at the end the following new paragraphs:

      ‘(3) CERTAIN UNITED STATES BENEFICIARIES DISREGARDED- A beneficiary shall not be treated as a United States person in applying this section with respect to any transfer of property to foreign trust if such beneficiary first became a United States person more than 5 years after the date of such transfer.

      ‘(4) TREATMENT OF FORMER UNITED STATES PERSONS- To the extent provided by the Secretary, for purposes of this subsection, the term ‘United States person’ includes any person who was a United States person at any time during the existence of the trust.’

    (e) TECHNICAL AMENDMENT- Subparagraph (A) of section 679(c)(2) is amended to read as follows:

        ‘(A) in the case of a foreign corporation, such corporation is a controlled foreign corporation (as defined in section 957(a)),’.

    (f) REGULATIONS- Section 679 is amended by adding at the end the following new subsection:

    ‘(d) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.’

    (g) EFFECTIVE DATE- The amendments made by this section shall apply to transfers of property after February 6, 1995.

SEC. 4. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR TRUST RULES.

    (a) GENERAL RULE-

      (1) Subsection (f) of section 672 of the Internal Revenue Code of 1986 (relating to special rule where grantor is foreign person) is amended to read as follows:

    ‘(f) SUBPART NOT TO RESULT IN FOREIGN OWNERSHIP-

      ‘(1) IN GENERAL- Notwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation.

      ‘(2) EXCEPTIONS-

        ‘(A) CERTAIN REVOCABLE AND IR-REVOCABLE TRUSTS-

          ‘(i) IN GENERAL- Except as provided in clause (ii), paragraph (1) shall not apply to any trust if--

            ‘(I) the power to revest absolutely in the grantor title to the trust property is exercisable solely by the grantor without the approval or consent of any other person or with the consent of a related or subordinate party who is subservient to the grantor, or

            ‘(II) the only amounts distributable from such trust (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor.

          ‘(ii) EXCEPTION- Clause (i) shall not apply to any trust which has a beneficiary who is a United States person to the extent such beneficiary has made transfers of property by gift (directly or indirectly) to a foreign person who is the grantor of such trust. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift is excluded from taxable gifts under section 2503(b).

        ‘(B) COMPENSATORY TRUSTS- Except as provided in regulations, paragraph (1) shall not apply to any portion of a trust distributions from which are taxable as compensation for services rendered.

      ‘(3) SPECIAL RULES- Except as otherwise provided in regulations prescribed by the Secretary--

        ‘(A) a controlled foreign corporation (as defined in section 957) shall be treated as a domestic corporation for purposes of paragraph (1), and

        ‘(B) paragraph (1) shall not apply for purposes of applying part III of subchapter G (relating to foreign personal holding companies) and part VI of subchapter P (relating to treatment of certain passive foreign investment companies).

      ‘(4) RECHARACTERIZATION OF PURPORTED GIFTS- In the case of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such circumstances as the Secretary determines to be appropriate to prevent the avoidance of the purposes of this subsection.

      ‘(5) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations providing that paragraph (1) shall not apply in appropriate cases.’

      (2) The last sentence of subsection (c) of section 672 of such Code is amended by inserting ‘subsection (f) and’ before ‘sections 674’.

    (b) CREDIT FOR CERTAIN TAXES- Paragraph (2) of section 665(d) of such Code is amended by adding at the end the following new sentence: ‘Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the term ‘taxes imposed on the trust’ includes the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust gross income.’

    (c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH NOMINEES-

      (1) Section 643 of such Code is amended by adding at the end the following new subsection:

    ‘(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH NOMINEES- For purposes of this part, any amount paid to a United States person which is derived directly or indirectly from a foreign trust of which the payor is not the grantor shall be deemed in the year of payment to have been directly paid by the foreign trust to such United States person.’

      (2) Section 665 of such Code is amended by striking subsection (c).

    (d) EFFECTIVE DATE-

      (1) IN GENERAL- Except as provided by paragraph (2), the amendments made by this section shall take effect on the date of the enactment of this Act.

      (2) EXCEPTION FOR CERTAIN TRUSTS- The amendments made by this section shall not apply to any trust--

        (A) which is treated as owned by the grantor or another person under section 676 or 677 (other than subsection (a)(3) thereof) of the Internal Revenue Code of 1986, and

        (B) which is in existence on September 19, 1995.

      The preceding sentence shall not apply to the portion of any such trust attributable to any transfer to such trust after September 19, 1995.

    (e) TRANSITIONAL RULE- If--

      (1) by reason of the amendments made by this section, any person other than a United States person ceases to be treated as the owner of a portion of a domestic trust, and

      (2) before January 1, 1997, such trust becomes a foreign trust, or the assets of such trust are transferred to a foreign trust,

    no tax shall be imposed by section 1491 of the Internal Revenue Code of 1986 by reason of such trust becoming a foreign trust or the assets of such trust being transferred to a foreign trust.

SEC. 5. INFORMATION REPORTING REGARDING FOREIGN GIFTS.

    (a) IN GENERAL- Subpart A of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 is amended by inserting after section 6039E the following new section:

‘SEC. 6039F. NOTICE OF GIFTS RECEIVED FROM FOREIGN PERSONS.

    ‘(a) IN GENERAL- If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.

    ‘(b) FOREIGN GIFT- For purposes of this section, the term ‘foreign gift’ means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)).

    ‘(c) PENALTY FOR FAILURE TO FILE INFORMATION-

      ‘(1) IN GENERAL- If a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)--

        ‘(A) the tax consequences of the receipt of such gift shall be determined by the Secretary in the Secretary’s sole discretion from the Secretary’s own knowledge or from such information as the Secretary may obtain through testimony or otherwise, and

        ‘(B) such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).

      ‘(2) REASONABLE CAUSE EXCEPTION- Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

    ‘(d) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.’

    (b) CLERICAL AMENDMENT- The table of sections for such subpart is amended by inserting after the item relating to section 6039E the following new item:

‘Sec. 6039F. Notice of large gifts received from foreign persons.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to amounts received after the date of the enactment of this Act in taxable years ending after such date.

SEC. 6. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS WHICH ARE NOT GRANTOR TRUSTS.

    (a) MODIFICATION OF INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS- Subsection (a) of section 668 of the Internal Revenue Code of 1986 (relating to interest charge on accumulation distributions from foreign trusts) is amended to read as follows:

    ‘(a) GENERAL RULE- For purposes of the tax determined under section 667(a)--

      ‘(1) INTEREST DETERMINED USING UNDERPAYMENT RATES- The interest charge determined under this section with respect to any distribution is the amount of interest which would be determined on the partial tax computed under section 667(b) for the period described in paragraph (2) using the rates and the method under section 6621 applicable to underpayments of tax.

      ‘(2) PERIOD- For purposes of paragraph (1), the period described in this paragraph is the period which begins on the date which is the applicable number of years before the date of the distribution and which ends on the date of the distribution.

      ‘(3) APPLICABLE NUMBER OF YEARS- For purposes of paragraph (2)--

        ‘(A) IN GENERAL- The applicable number of years with respect to a distribution is the number determined by dividing--

          ‘(i) the sum of the products described in subparagraph (B) with respect to each undistributed income year, by

          ‘(ii) the aggregate undistributed net income.

        The quotient determined under the preceding sentence shall be rounded under procedures prescribed by the Secretary.

        ‘(B) PRODUCT DESCRIBED- For purposes of subparagraph (A), the product described in this subparagraph with respect to any undistributed income year is the product of--

          ‘(i) the undistributed net income for such year, and

          ‘(ii) the sum of the number of taxable years between such year and the taxable year of the distribution (counting in each case the undistributed income year but not counting the taxable year of the distribution).

      ‘(4) UNDISTRIBUTED INCOME YEAR- For purposes of this subsection, the term ‘undistributed income year’ means any prior taxable year of the trust for which there is undistributed net income, other than a taxable year during all of which the beneficiary receiving the distribution was not a citizen or resident of the United States.

      ‘(5) DETERMINATION OF UNDISTRIBUTED NET INCOME- Notwithstanding section 666, for purposes of this subsection, an accumulation distribution from the trust shall be treated as reducing proportionately the undistributed net income for prior taxable years.

      ‘(6) PERIODS BEFORE 1996- Interest for the portion of the period described in paragraph (2) which occurs before January 1, 1996, shall be determined--

        ‘(A) by using an interest rate of 6 percent, and

        ‘(B) without compounding until January 1, 1996.’

    (b) ABUSIVE TRANSACTIONS- Section 643(a) of such Code is amended by inserting after paragraph (6) the following new paragraph:

      ‘(7) ABUSIVE TRANSACTIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations to prevent avoidance of such purposes.’

    (c) TREATMENT OF USE OF TRUST PROPERTY-

      (1) IN GENERAL- Section 643 of such Code (relating to definitions applicable to subparts A, B, C, and D) is amended by adding at the end the following new subsection:

    ‘(i) USE OF FOREIGN TRUST PROPERTY- For purposes of subparts B, C, and D--

      ‘(1) GENERAL RULE- If a foreign trust makes a loan of cash or marketable securities directly or indirectly to--

        ‘(A) any grantor or beneficiary of such trust who is a United States person, or

        ‘(B) any United States person not described in subparagraph (A) who is related to such grantor or beneficiary,

      the amount of such loan shall be treated as a distribution by such trust to such grantor or beneficiary (as the case may be).

      ‘(2) USE OF OTHER PROPERTY- Except as provided in regulations prescribed by the Secretary, any direct or indirect use of trust property (other than cash or marketable securities) by a person referred to in subparagraph (A) or (B) of paragraph (1) shall be treated as a distribution to the grantor or beneficiary (as the case may be) equal to the fair market value of the use of such property. The Secretary may prescribe regulations treating a loan guarantee by the trust as a use of trust property equal to the value of the guarantee.

      ‘(3) DEFINITIONS AND SPECIAL RULES- For purposes of this subsection--

        ‘(A) CASH- The term ‘cash’ includes foreign currencies and cash equivalents.

        ‘(B) RELATED PERSON-

          ‘(i) IN GENERAL- A person is related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b). In applying section 267 for purposes of the preceding sentence, section 267(c)(4) shall be applied as if the family of an individual includes the spouses of the members of the family.

          ‘(ii) ALLOCATION OF USE- If any person described in paragraph (1)(B) is related to more than one person, the grantor or beneficiary to whom the treatment under this subsection applies shall be determined under regulations prescribed by the Secretary.

        ‘(C) EXCLUSION OF TAX-EXEMPTS- The term ‘United States person’ does not include any entity exempt from tax under this chapter.

        ‘(D) TRUST NOT TREATED AS SIMPLE TRUST- Any trust which is treated under this subsection as making a distribution shall be treated as not described in section 651.

      ‘(4) SUBSEQUENT TRANSACTIONS REGARDING LOAN PRINCIPAL- If any loan is taken into account under paragraph (1), any subsequent transaction between the trust and the original borrower regarding the principal of the loan (by way of complete or partial repayment, satisfaction, cancellation, discharge, or otherwise) shall be disregarded for purposes of this title.’

      (2) TECHNICAL AMENDMENT- Paragraph (8) of section 7872(f) is amended by inserting ‘, 643(i),’ before ‘or 1274’ each place it appears.

    (d) EFFECTIVE DATES-

      (1) INTEREST CHARGE- The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act.

      (2) ABUSIVE TRANSACTIONS- The amendment made by subsection (b) shall take effect on the date of the enactment of this Act.

      (3) USE OF TRUST PROPERTY- The amendment made by subsection (c) shall apply to--

        (A) loans of cash or marketable securities after September 19, 1995, and

        (B) uses of other trust property after December 31, 1995.

SEC. 7. RESIDENCE OF ESTATES AND TRUSTS, ETC.

    (a) TREATMENT AS UNITED STATES PERSON-

      (1) IN GENERAL- Paragraph (30) of section 7701(a) of the Internal Revenue Code of 1986 is amended by striking subparagraph (D) and by inserting after subparagraph (C) the following:

        ‘(D) any estate or trust if--

          ‘(i) a court within the United States is able to exercise primary supervision over the administration of the estate or trust, and

          ‘(ii) in the case of a trust, one or more United States fiduciaries have the authority to control all substantial decisions of the trust.’

      (2) CONFORMING AMENDMENT- Paragraph (31) of section 7701(a) of such Code is amended to read as follows:

      ‘(31) FOREIGN ESTATE OR TRUST- The term ‘foreign estate’ or ‘foreign trust’ means any estate or trust other than an estate or trust described in section 7701(a)(30)(D).’

      (3) EFFECTIVE DATE- The amendments made by this subsection shall apply--

        (A) to taxable years beginning after December 31, 1996, or

        (B) at the election of the trustee of a trust, to taxable years ending after the date of the enactment of this Act.

      Such an election, once made, shall be irrevocable.

    (b) DOMESTIC TRUSTS WHICH BECOME FOREIGN TRUSTS-

      (1) IN GENERAL- Section 1491 of such Code (relating to imposition of tax on transfers to avoid income tax) is amended by adding at the end the following new flush sentence:

    ‘If a trust which is not a foreign trust becomes a foreign trust, such trust shall be treated for purposes of this section as having transferred, immediately before becoming a foreign trust, all of its assets to a foreign trust.’

      (2) PENALTY- Section 1494 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

    ‘(c) PENALTY- In the case of any failure to file a return required by the Secretary with respect to any transfer described in section 1491, the person required to file such return shall be liable for the penalties provided in section 6677 in the same manner as if such failure were a failure to file a return under section 6048(a).’

      (3) EFFECTIVE DATE- The amendments made by this subsection shall take effect on the date of the enactment of this Act.