INCOME TAXREG–251703–96, page 5.Proposed regulations under section 7701 of the Codeprovide guidance relating to the definition of a trust as aUnited States person (domestic trust) or foreign trust. Apublic hearing will be held on September 16, 1997.

REG–252487–96, page 9.Proposed regulations under section 672 of the Coderelate to the application of the grantor trust rules tocertain trusts established by foreign persons. A publichearing will be held on August 27, 1997.

EMPLOYEE PLANSNotice 97–35, page 32.Weighted average interest rate update. Guidelines areset forth for determining for June 1997, the weightedaverage interest rate and the resulting permissible rangeof interest rates used to calculate current liability forpurposes of the full funding limitation of section412(c)(7) of the Code as amended by the OmnibusBudget Reconciliation Act of 1987 and by the UruguayRound Agreements Act (GATT).

EXEMPT ORGANIZATIONS

Announcement 97–62, page 34.A list is given of organizations now classified as privatefoundations.

ADMINISTRATIVE

Rev. Proc. 97–30, page 20.Election of general asset accounts. An automaticconsent procedure is provided for electing general assetaccounts for depreciable property placed in service inprior years. Rev. Proc. 97–27 modified.

Del. Order 232 (Rev. 3), page 21.The authority to issue Taxpayer Assistance Orders (TAOs)under IRC section 7811 is delegated to certain officials.Del. Order 232 (Rev. 2) superseded.

Notice 97–34, page 22.This notice provides guidance regarding the new foreigntrust and foreign gift reporting provisions contained inthe Small Business Job Protection Act of 1996.

Finding Lists begin on page 38.Announcement of Disbarments and Suspensions begins on page 35.

Bulletin No. 1997–25June 23, 1997

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not be reliedupon as authoritative interpretations.

Mission of the Service

The purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point of view.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great cour tesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

2

Introduction

The Internal Revenue Bulletin is the authoritative instru-ment of the Commissioner of Internal Revenue forannouncing official rulings and procedures of the Inter-nal Revenue Service and for publishing Treasury Deci-sions, Executive Orders, Tax Conventions, legislation,court decisions, and other items of general interest. It ispublished weekly and may be obtained from the Superin-tendent of Documents on a subscription basis. Bulletincontents of a permanent nature are consolidated semi-annually into Cumulative Bulletins, which are sold on asingle-copy basis.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All published rulingsapply retroactively unless otherwise indicated. Proce-dures relating solely to matters of internal managementare not published; however, statements of internalpractices and procedures that affect the rights andduties of taxpayers are published.

Revenue rulings represent the conclusions of the Ser-vice on the application of the law to the pivotal factsstated in the revenue ruling. In those based on positionstaken in rulings to taxpayers or technical advice toService field offices, identifying details and informationof a confidential nature are deleted to prevent unwar-ranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be consid-ered, and Service personnel and others concerned arecautioned against reaching the same conclusions inother cases unless the facts and circumstances aresubstantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Administra-tive Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary (Enforce-ment).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletinof the succeeding quarterly and semi-annual period,respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986Section 168.—Accelerated CostRecovery System

May a taxpayer make a general asset accountelection in the current taxable year for depreciableproperty placed in service in a prior taxable year?See Rev. Proc. 97–30, page 20.

26 CFR 1.168(i)–1: General asset accounts.

May a taxpayer make a general asset accountelection in the current taxable year for depreciableproperty placed in service in a prior taxable year?See Rev. Proc. 97–30, page 20.

Section 446.—General Rule forMethods of Accounting

If a taxpayer makes a general asset accountelection in the current taxable year for depreciableproperty placed in service in a prior taxable year,is this election a change in method of accounting?See Rev. Proc. 97–30, page 20.

26 CFR 1.446–1: General rule for methods ofaccounting.

If a taxpayer makes a general asset accountelection in the current taxable year for depreciable

property placed in service in a prior taxable year,is this election a change in method of accounting?See Rev. Proc. 97–30, page 20.

Section 481.—AdjustmentsRequired by Changes in Method ofAccounting

If a taxpayer makes a general asset accountelection in the current taxable year for depreciableproperty placed in service in a prior taxable year,does this change in method of accounting requirean adjustment under §§ 481(a)? See Rev. Proc.97–30, page 20.

June 23, 1997 4 1997–25 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousNotice of Proposed Rulemakingand Notice of Public Hearing

Residence of Trusts andEstates—7701

REG–251703–96

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations providing guidancerelating to the definition of a trust as aUnited States person (domestic trust) orforeign trust. The proposed regulationsreflect changes to the law made by theSmall Business Job Protection Act of1996 and affect the determination of theresidency of trusts for federal tax pur-poses. This document also provides no-tice of a public hearing on these pro-posed regulations.

DATES: Written comments must be re-ceived by August 4, 1997. Requests tospeak (with outlines of oral commentsto be discussed) at the public hearingscheduled for September 16, 1997, at 10a.m. must be submitted by August 26,1997.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–251703–96),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–251703–96), Courier’s Desk, In-ternal Revenue Service, 1111 Constitu-tion Avenue, NW, Washington, DC. Al-ternatively, taxpayers may submitcomments electronically via the Internetby selecting the ‘‘Tax Regs’’ option onthe IRS Home Page, or by submittingcomments directly to the IRS Internetsite at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The publichearing will be held in the InternalRevenue Service Auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the regulations,James A. Quinn or Eliana Dolgoff,(202) 622–3060; concerning submissionsand the hearing, Evangelista Lee, (202)622–7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 1907 of the Small BusinessJob Protection Act of 1996 (the Act),Public Law 104–188, 110 Stat. 1755(August 20, 1996) amended sections7701(a)(30) and (31) to provide a newrule for determining whether a trust isdomestic or foreign (the new rule doesnot apply to estates), effective for taxyears beginning after December 31,1996, or at the election of the trustee ofa trust to tax years ending after August20, 1996. Section 7701(a)(30)(E) pro-vides that the termUnited States personmeans any trust if (i) a court within theUnited States is able to exercise primarysupervision over the administration ofthe trust (court test), and (ii) one ormore United States fiduciaries have theauthority to control all substantial deci-sions of the trust (control test). Section7701(a)(31)(B) provides that the termforeign trust means any trust other thana trust described in section7701(a)(30)(E).

Prior to the Act, section 7701(a)(31)provided thatforeign estateand foreigntrust mean an estate or trust, as the casemay be, the income of which, fromsources without the United States, whichis not effectively connected with theconduct of a trade or business within theUnited States, is not includible in grossincome under subtitle A. Accordingly,whether a trust was domestic or foreigndepended on whether the trust was morecomparable to a resident or nonresidentalien individual. Thus, it was necessaryto consider and weigh various factorssuch as the location of the assets, thecountry under whose laws the trust wascreated, the residence of the fiduciary,the nationality of the decedent or settlor,the nationality of the beneficiaries, andthe location of the administration of thetrust. See Rev. Rul. 60–181 (1960–1C.B. 257), citing B.W. Jones Trust v.Commissioner, 46 B.T.A. 531 (1942),aff’d, 132 F.2d 914 (4th Cir. 1943).

The Act made a number of proceduraland substantive changes to the tax treat-ment of foreign trusts that were de-signed to improve tax compliance andadministration. In making these overallchanges, Congress believed that it wouldbe appropriate to have an objective testfor determining whether a trust is for-eign or domestic. Consequently, it en-acted the two-part test set forth above.

Explanation of Provisions

The proposed regulations provide thata foreign trust is taxed in the samemanner as a nonresident alien. Thus,once a trust is determined to be aforeign trust, the residency of the fidu-ciary of the trust is not relevant indetermining the residence of the trust.Additionally, section 7701(b) does notapply to determine whether a trust is aresident of the United States, and aforeign trust is not present in the UnitedStates for purposes of section 871(a)(2).

The proposed regulations require thatthe terms of the trust instrument andapplicable law be applied to determinewhether the court test and the controltest are met. The residency of a trustmay change if the result of the court testor control test changes.

The Safe Harbor

The IRS and Treasury Departmentwere concerned that the lack of author-ity construing trust law in many stateswould make it difficult for taxpayers todetermine whether a trust is domestic orforeign under the court and control tests.Specifically, it may be difficult to deter-mine whether the court of a particularstate would assert primary supervisionover the administration of a trust if thattrust had never appeared before a court.Therefore, the proposed regulations pro-vide a safe harbor based upon theprinciple that when the administration ofa trust is conducted entirely within aparticular locality, the local courts willexercise primary supervision over thetrust. Restatement (2d) of Conflicts ofLaws § 267. The safe harbor providesthat a trust is a domestic trust if,pursuant to the terms of a trust instru-ment, the trust has only United Statesfiduciaries, such fiduciaries are adminis-tering the trust exclusively in the UnitedStates, and the trust is not subject to anautomatic migration provision. The IRSand Treasury Department request com-ments on whether this special rule issufficient to address the lack of a well-developed body of local law.

The Court Test

The proposed regulations define therelevant terms for purposes of the courttest. The term court includes any fed-eral, state, or local court.

The term the United Statesincludesonly the States and the District ofColumbia. Accordingly, a court within a

1997–25 I.R.B. 5 June 23, 1997

territory or possession of the UnitedStates or within a foreign country is nota court within the United States and atrust subject to the primary supervisionof such a court fails to meet the courttest. The IRS and Treasury Departmentrequest comments on the conclusion thatthe termthe United Statesis used in itsgeographical sense and therefore ex-cludes territories and possessions.

The term is able to exercisemeansthat if petitioned, a court has or wouldhave the authority under applicable lawto render orders or judgments resolvingissues concerning administration of thetrust.

The term primary supervisionmeansthat a court has or would have theauthority to determine substantially allissues regarding the administration ofthe trust. Simply having jurisdictionover the trustee, a beneficiary, or trustproperty is not primary supervision.

The term administration of the trustmeans the carrying out of the dutiesimposed on a fiduciary by the terms ofthe trust instrument and applicable law.

In order to provide certainty to tax-payers, the proposed regulations providesome bright-line rules for satisfying thecourt test. A trust meets the court test ifan authorized fiduciary registers thetrust in a court within the United Statesunder a state statute that has provisionssubstantially similar to Article VII,TrustAdministration, of the Uniform ProbateCode.

In the case of a testamentary trustestablished under a will probated withinthe United States, if all fiduciaries of thetrust have been qualified as trustees ofthe trust by a court within the UnitedStates, the trust meets the court test.

In the case of an inter vivos trust, ifthe fiduciaries or beneficiaries take stepswith a court within the United States(such as the filing of a written requestwith the court) that cause the adminis-tration of the trust to be subject to theprimary supervision of the court, thetrust meets the court test.

The proposed regulations clarify thatif both a United States court and aforeign court are able to exercise pri-mary supervision over the administrationof the trust, the trust will be consideredto meet the court test.

The proposed regulations containrules addressing automatic migrationclauses, also known as ‘‘flee clauses.’’The proposed regulations provide thatthe court test is not met if a UnitedStates court’s attempt to assert jurisdic-tion or otherwise supervise the adminis-

tration of the trust directly or indirectlywould cause the trust to migrate fromthe United States.

The Control Test

The control test requires that one ormore United States fiduciaries have theauthority to control all substantial deci-sions of the trust. Under the proposedregulations, the term fiduciary refers toany person described in section7701(a)(6) and § 301.7701–6(b). Forpurposes of the control test, any otherperson that has the power to controlsubstantial decisions of the trust, forexample a trust protector, will also betreated as a fiduciary. The proposedregulations treat such persons as fiducia-ries because they are exercising powerstraditionally held by fiduciaries or be-cause they can effectively exercise con-trol over the fiduciaries.

Substantial decisions are those deci-sions that persons are authorized orrequired to make under the terms of thetrust instrument and applicable law andthat are not ministerial. Included in theproposed regulations is a nonexclusivelist of substantial decisions. Substantialdecisions do not include decisions exer-cisable by a grantor that is not afiduciary of the trust, or decisions exer-cisable by a beneficiary that affect onlythe beneficiary’s interest in the trust.

In accordance with the legislative his-tory, the proposed regulations providethat United States fiduciaries have theauthority to control all substantial deci-sions of the trust when they have thepower by vote or otherwise to make allof the substantial decisions of the trustand no foreign fiduciary has the powerto veto the substantial decisions of theUnited States fiduciaries.

The proposed regulations containrules addressing automatic migrationclauses, also known as ‘‘flee clauses.’’The proposed regulations provide thatthe control test is not met if an attemptby any governmental agency or creditorto collect information from or assert aclaim against the trust would cause oneor more substantial decisions of the trustto no longer be controlled by UnitedStates fiduciaries.

The proposed regulations are pro-posed to apply to trusts for taxable yearsbeginning after December 31, 1996, andto a trust whose trustee has elected toapply sections 7701(a)(30) and (31) tothe trust for taxable years ending afterAugust 20, 1996, under section1907(a)(3)(B) of the Act. Notice 96–65

(1996–52 I.R.B. 28) grants trusts thatmeet the conditions specified in thatnotice additional time to comply withthe new domestic trust criteria containedin the Act and allows such trusts tocontinue to file as domestic trusts duringthe period specified in that notice. No-tice 96–65 also addresses the time andmanner for making the election providedby the Act to apply the new domestictrust criteria retroactively for taxableyears of the trust ending after August20, 1996. Notice 96–65 remains in ef-fect and should be consulted for thesepurposes.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined inExecutive Order 12866. Therefore, aregulatory assessment is not required. Italso has been determined that section553(b) of the Administrative ProcedureAct (5 U.S.C. chapter 5) does not applyto these regulations, and because theregulation does not impose a collectionof information on small entities, theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemak-ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, consider-ation will be given to any written com-ments (preferably a signed original andeight (8) copies) that are submittedtimely to the IRS. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduledfor September 16, 1997, at 10 a.m. inthe Internal Revenue Service Audito-rium, Internal Revenue Building, 1111Constitution Avenue, NW, WashingtonDC. Because of access restrictions, visi-tors will not be admitted beyond theInternal Revenue Building lobby morethan 15 minutes before the hearingstarts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons that wish to present oralcomments at the hearing must submitwritten comments by August 4, 1997,and submit an outline of the topics to bediscussed and the time to be devoted to

June 23, 1997 6 1997–25 I.R.B.

each topic (preferably a signed originaland eight (8) copies) by August 26,1997.

A period of 10 minutes will be allot-ted to each person for making com-ments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.

Drafting Information

The principal authors of these regula-tions are James A. Quinn and ElianaDolgoff of the Office of Assistant ChiefCounsel (Passthroughs and Special In-dustries). However, other personnel fromthe IRS and Treasury Department par-ticipated in their development.

* * * * *

Proposed Amendments to the Regula-tions

Accordingly, 26 CFR part 301 isproposed to be amended as follows:PART

301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *

§ 301.7701–5 [Amended]

Par. 2. The last sentence of section301.7701–5 is removed.

Par. 3. Section 301.7701–7 is addedto read as follows:

§ 301.7701–7 Trusts—domestic and for-eign.

(a) In general. (1) A trust is a UnitedStates person if—

(i) A court within the United States isable to exercise primary supervisionover the administration of the trust(court test); and

(ii) One or more United States fidu-ciaries have the authority to control allsubstantial decisions of the trust (controltest).

(2) A trust is a United States personfor purposes of the Internal RevenueCode at any time that the trust meetsboth the court test and the control test.For purposes of the regulations in thischapter, the termdomestic trustmeans atrust that is a United States person. The

term foreign trustmeans any trust otherthan a domestic trust.

(3) Except as otherwise provided inpart I, subchapter J, chapter 1 of theCode, the taxable income of a foreigntrust is computed in the same manner asthe taxable income of a nonresidentalien. Thus, section 7701(b) does notapply to determine whether a foreigntrust is a resident alien. In addition, aforeign trust is not considered to bepresent in the United States for purposesof section 871(a)(2).

(b) Applicable law. The terms of thetrust instrument and applicable law mustbe applied to determine whether thecourt test and the control test are met.

(c) In general—(1) Safe harbor. Atrust is a domestic trust if the trust hasonly United States fiduciaries, as de-fined in paragraph (e) of this section,the trust is administered exclusively inthe United States pursuant to the termsof a trust instrument, and the trust is notsubject to an automatic migration provi-sion described in paragraph (d)(2)(v) or(e)(3) of this section.

(2) Example. The following exampleillustrates the rule of paragraph (c)(1) ofthis section:

Example. Aexecutes a trust instrument for theequal benefit ofA’s two children, B and C. Thetrust instrument provides thatDC, a State Ycorporation, is the only trustee of the trust.Pursuant to the terms of the trust instrument, thetrust is administered in StateY, a state within theUnited States. The trust is not subject to anautomatic migration provision described in para-graph (d)(2)(v) or (e)(3) of this section. No personother thanDC has any power over the trust. Thetrust satisfies the safe harbor of paragraph (c)(1)and is a domestic trust.

(d) The court test—(1) Definitions.The following definitions apply for pur-poses of the court test:

(i) Court. The term court includesany federal, state, or local court.

(ii) The United States.The term theUnited Statesis used in this section in ageographical sense. Thus, for purposesof the court test, the United Statesincludes only the States and the Districtof Columbia. See section 7701(a)(9).Accordingly, a court within a territory orpossession of the United States orwithin a foreign country is not a courtwithin the United States.

(iii) Is able to exercise. The term isable to exercisemeans that a court hasor would have the authority under appli-cable law to render orders or judgmentsresolving issues concerning administra-tion of the trust.

(iv) Primary supervision. The termprimary supervisionmeans that a courthas or would have the authority todetermine substantially all issues regard-ing the administration of the entire trust.A court may have primary supervisioneven if another court has jurisdictionover a trustee, a beneficiary, or trustproperty.

(v) Administration. The termadminis-tration of the trust means the carryingout of the duties imposed on a fiduciaryby the terms of the trust instrument andapplicable law, including maintainingthe books and records of the trust, filingtax returns, defending the trust fromsuits by creditors, and determining theamount and timing of distributions.

(2) Situations that meet the courttest—(i) Uniform Probate Code.A trustmeets the court test if a trust is regis-tered by an authorized fiduciary in acourt within the United States under astate statute that has provisions substan-tially similar to Article VII, Trust Ad-ministration, of the Uniform ProbateCode, 8 Uniform Laws Annotated 1(West Supp. 1997), available from theNational Conference of Commissionerson Uniform State Laws, 676 North St.Clair Street, Suite 1700, Chicago, Illi-nois 60611.

(ii) Testamentary trust.In the case ofa trust created pursuant to the terms of awill probated within the United States(other than an ancillary probate), if allfiduciaries of the trust have been quali-fied as trustees of the trust by a courtwithin the United States, the trust meetsthe court test.

(iii) Inter vivos trust.In the case of atrust other than a testamentary trust, ifthe fiduciaries and/or beneficiaries takesteps with a court within the UnitedStates that cause the administration ofthe trust to be subject to the primarysupervision of the court, the trust meetsthe court test.

(iv) A United States and a foreigncourt are able to exercise primary su-pervision over the administration of thetrust. If both a United States court and aforeign court are able to exercise pri-mary supervision over the administrationof the trust, the trust meets the courttest.

(v) Automatic migration provisions.Notwithstanding any other provision inthis section, a court within the UnitedStates is not considered to have primarysupervision over the administration ofthe trust if the trust instrument providesthat a United States court’s attempt toassert jurisdiction or otherwise supervise

1997–25 I.R.B. 7 June 23, 1997

the administration of the trust directly orindirectly would cause the trust to mi-grate from the United States.

(3) Examples. The following ex-amples illustrate the rules of this para-graph (d):

Example 1. A, a United States citizen, executesa trust instrument for the equal benefit ofA’s twoUnited States children. The trust instrument pro-vides thatDC, a domestic corporation, is to act astrustee of the trust and that the trust is to beadministered in CountryX, a foreign country. Thetrust instrument provides that the law of StateY, astate within the United States, is to govern thetrust. Under the law of CountryX, a court withinCountry X is able to exercise primary supervisionover the administration of the trust but, as requiredby the trust instrument, applies the law of StateYto the trust. No court within the United States isable to exercise primary supervision over theadministration of the trust. The trust fails to satisfythe court test and therefore is a foreign trust.

Example 2. Trust T owns a single asset, aninterest in land located in StateY, a state withinthe United States. Under the law of StateY, a trustowning solely real property within the state issubject to the primary supervision over the admin-istration of the trust by a court within StateY. Thetrust satisfies the court test.

Example 3. A, a United States citizen, executesa trust instrument for his own benefit and thebenefit of B, his United States spouse. The trustinstrument provides that the trust is to be adminis-tered in StateY, a state within the United States,by DC, a StateY corporation. The trust instrumentfurther provides that in the event that a creditorsues the trustee in a United States court, the trustwill migrate from StateY to CountryZ, a foreignjurisdiction, so that no United States court willhave jurisdiction over the trust. A court within theUnited States is not able to exercise primarysupervision over the administration of the trustbecause the United States court’s jurisdiction overthe administration of the trust is automaticallyterminated in the event the court attempts to assertjurisdiction. Therefore, the trust fails to satisfy thecourt test from the time of its creation and is aforeign trust.

(e) Control test—(1) Definitions—(i)United States fiduciary.The term fidu-ciary includes any person described insection 7701(a)(6) and § 301.7701–6(b).In addition, for purposes of this section,any other person who has the power tocontrol one or more substantial deci-sions of the trust (and therefore has apower ordinarily held by a fiduciary)will be treated as a fiduciary. A personmay be treated as a fiduciary even if thetrust instrument provides for the personto be relieved of personal liability forviolation of duties. A United Statesfiduciary is a fiduciary that is a UnitedStates person within the meaning ofsection 7701(a)(30). For example, a fi-duciary which is a United States corpo-ration owned by a nonresident alien is aUnited States fiduciary.

(ii) Substantial decisions.(A) Theterm substantial decisionsmeans thosedecisions (other than those described in

paragraph (e)(1)(ii)(B) of this section)that persons are authorized or requiredto make under the terms of the trustinstrument and applicable law and thatare not ministerial. Substantial decisionsinclude, but are not limited to—

(1) Whether and when to distributeincome or corpus;

(2) The amount of any distributions;(3) The selection of a beneficiary;(4) The power to make investment

decisions;(5) Whether a receipt is allocable to

income or principal;(6) Whether to terminate the trust;(7) Whether to compromise, arbitrate,

or abandon claims of the trust;(8) Whether to sue on behalf of the

trust or to defend suits against the trust;and

(9) Whether to remove, add, or re-place a trustee.

(B) Substantial decisions do not in-clude decisions exercisable by a grantor,unless the grantor is acting as a fidu-ciary under section 7701(a)(6) and§ 301.7701–6(b). In addition, substan-tial decisions do not include decisionsexercisable by a beneficiary, unless thebeneficiary is acting as a fiduciary undersection 7701(a)(6) and § 301.7701–6(b),that affect solely the portion of the trustin which the beneficiary has an interest.Decisions that are ministerial includedecisions regarding details such as thebookkeeping, the collection of rents, andthe execution of investment decisionsmade by the fiduciaries.

(iii) Control. Control means havingthe power, by vote or otherwise, tomake all of the substantial decisions ofthe trust, with no other person havingthe power to veto the substantial deci-sions. However, the ability of a grantor(other than a grantor acting as a fidu-ciary under section 7701(a)(6) and§ 301.7701–6(b)) to veto another per-son’s substantial decision does not causesuch person to fail to control that sub-stantial decision. In addition, the abilityof a beneficiary (other than a benefi-ciary acting as a fiduciary under section7701(a)(6) and § 301.7701–6(b)) to vetoanother person’s substantial decision thataffects solely the portion of the trust inwhich the beneficiary has an interestdoes not cause such person to fail tocontrol that substantial decision.

(2) Replacement of a fiduciary.In theevent of an inadvertent change in thefiduciaries that would cause a change inthe residency of a trust, the trust isallowed six months from the date of thechange in the fiduciaries to adjust either

the fiduciaries or the residence of thefiduciaries so as to avoid a change inthe residence of the trust. Inadvertentchanges in the fiduciaries include thedeath of a fiduciary or the abrupt resig-nation of a fiduciary. If the adjustmentis made within six months, the trust istreated as retaining its pre-change resi-dence during the six-month period. Ifthe adjustment is not made within sixmonths, the trust residence changes asof the date of the inadvertent change.

(3) Automatic migration provisions.Notwithstanding any other provision inthis section, United States fiduciaries arenot considered to control all substantialdecisions of the trust if an attempt byany governmental agency or creditor tocollect information from or assert aclaim against the trust would cause oneor more substantial decisions of the trustto no longer be controlled by UnitedStates fiduciaries.

(4) Examples. The following ex-amples illustrate the rules of this para-graph (e):

Example 1. Ais a nonresident alien individual.A is the grantor and beneficiary of an individualretirement account (IRA) and has the exclusivepower to make decisions regarding withdrawalsfrom the IRA and to direct its investments.A isnot a fiduciary as defined in paragraph (e)(1)(i) ofthis section. The IRA has a single United Statestrustee and no foreign trustees. The United Statestrustee has the power to control all decisions ofthe trust other than withdrawal and investmentdecisions. In this case, decisions regarding with-drawals and the trust’s investments are not sub-stantial decisions because these decisions aresolely exercisable by the grantor. Therefore, thecontrol test is satisfied because the United Statesfiduciary controls all substantial decisions.

Example 2. Ais a nonresident alien individual.A is the grantor of a trust and has the power torevoke the trust, in whole or in part and revestassets inA. A is the owner of the trust undersection 676. A is not a fiduciary as defined inparagraph (e)(1)(i) of this section. The trust hastwo trustees,B, a United States person andC, anonresident alien.C’s only power is the power tomake distributions from the trust andC canexercise this power without authorization fromB.In this case, decisions exercisable byA to havetrust assets distributed toA are not substantialdecisions because these decisions are exercisableby the grantor. However, distribution decisionsexercisable byC are substantial decisions. There-fore, the trust is a foreign trust becauseB does notcontrol all substantial decisions of the trust.

Example 3.Trust has three fiduciaries,A, B, andC. A and B are United States citizens andC is anonresident alien. The trust instrument directs thatC is to make all of the trust’s investment deci-sions, but thatA and B may vetoC’s investmentdecisions. A and B cannot act to make theinvestment decisions on their own. The control testis not satisfied because the United States fiducia-ries, A and B, do not have the power to make allof the substantial decisions of the trust.

Example 4.Trust has two fiduciaries,A and B,both of whom are United States citizens. The trustinstrument provides thatC, a foreign corporation,

June 23, 1997 8 1997–25 I.R.B.

will serve as an advisor and recommend invest-ments toA and B. A and B may accept or rejectC’s recommendations and can make investmentsthat C has not recommended.A and B control allother decisions of the trust.A and B delegate toCthe authority to execute the investment decisionsapproved byA and B. The control test is satisfiedbecause the United States fiduciaries control allsubstantial decisions of the trust.

Example 5.Trust has three fiduciaries,A, B, andC. A and B are United States citizens andC is anonresident alien. The trust instrument providesthat no substantial decisions of the trust can bemade unless there is unanimity among the fiducia-ries. The control test is not satisfied because theUnited States fiduciaries do not control all thesubstantial decisions of the trust. No substantialdecisions can be made withoutC’s agreement.

Example 6.(i) A trust that satisfies the court testhas three fiduciaries,A, B, and C. A and B areUnited States citizens andC is a nonresident alien.Decisions are made by majority vote of thefiduciaries. The trust instrument provides thatupon the death or resignation of any of thefiduciaries,D, a nonresident alien, is the successorfiduciary. A dies andD becomes a fiduciary of thetrust. Two months afterA dies, E, a United Statesperson, replacesD as a fiduciary of the trust.During the period afterA’s death and beforeEbegins to serve, the trust satisfies the control testand remains a domestic trust.

(ii) Assume the same facts as in paragraph (i) ofthis Example 6 except that at the end of thesix-month period afterA’s death,D has not beenreplaced and remains a fiduciary of the trust. Thetrust became a foreign trust on the dateA died.

Example 7.Trust has three beneficiaries,A, Band C, all of whom are nonresident aliens. Eachbeneficiary has the right to receive all of theincome from his or her share of the trust for life.Each beneficiary also has a limited power ofappointment over his or her respective share of thetrust. The trust has only one fiduciary,D, a UnitedStates citizen. The trust meets the control testbecause the United States fiduciary controls allsubstantial decisions of the trust notwithstandingthe beneficiaries’ powers of appointment over theirrespective interests.

(f) Effective date.This section is ap-plicable to trusts for taxable years be-ginning after December 31, 1996, and totrusts whose trustee has elected to applysections 7701(a)(30) and (31) to thetrust for taxable years ending after Au-gust 20, 1996, under section1907(a)(3)(B) of the Small Business JobProtection Act of 1996, Public Law104–188, 110 Stat. 1755 (26 U.S.C.7701 note).

Michael P. Dolan,Acting Commissioner of Internal

Revenue.

(Filed by the Office of the Federal Register onJune 4, 1997, 8:45 a.m., and published in the issueof the Federal Register for June 5, 1997, 62 F.R.30796)

Notice of Proposed Rulemakingand Notice of Public Hearing

Inbound Grantor Trusts WithForeign Grantors

REG–252487–96

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations implementing sec-tion 672(f) of the Internal RevenueCode, as amended by the Small Busi-ness Job Protection Act of 1996, whichrelates to the application of the grantortrust rules to certain trusts establishedby foreign persons. The proposed regu-lations affect primarily United Statespersons who are beneficiaries of trustsestablished by foreign persons. Thisdocument also provides notice of apublic hearing on these proposed regula-tions.

DATES: Written comments must be re-ceived by August 4, 1997. Requests tospeak (with outlines of oral comments)to be discussed at the public hearingscheduled for August 27, 1997, at 10a.m. must be submitted by August 6,1997.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–252487–96),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–252487–96), Courier’s Desk, In-ternal Revenue Service, 1111 Constitu-tion Avenue, NW, Washington, DC. Al-ternatively, taxpayers may submitcomments electronically via the Internetby selecting the ‘‘Tax Regs’’ option onthe IRS Home Page, or by submittingcomments directly to the IRS Internetsite at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The publichearing will be held in room 3313,Internal Revenue Building, 1111 Consti-tution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning § 1.671–2(e),James Quinn (202) 622–3060; concern-ing the remainder of these regulations,M. Grace Fleeman (202) 622–3850;concerning submissions and the hearing,Michael Slaughter (202) 622–7190 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION

Background

Section 1904 of the Small BusinessJob Protection Act of 1996 (the Act),Public Law 104–188, 110 Stat. 1755(August 20, 1996), amended section672(f) and certain other sections of theInternal Revenue Code (Code). Theamendments affect the application ofsections 671 through 679 of the Code(the grantor trust rules) to certain trustscreated by foreign persons.

1. Prior law

Under prior law, a grantor of a trustgenerally was treated as the owner ofany portion of the trust over which heretained any of the powers or interestsdescribed in sections 673 through 677without regard to whether he was adomestic or foreign person. A specialrule contained in prior section 672(f)generally provided that, if a U.S. benefi-ciary of a trust created by a foreignperson transferred property to the for-eign person by gift, the U.S. beneficiarywas treated as the grantor of the trust tothe extent of the transfer.

Under the prior rules, if a foreignperson created a trust with one or moreU.S. beneficiaries that was treated as agrantor trust with the foreign person asthe grantor, a distribution of incomefrom the trust to a U.S. beneficiary wastreated as a gift and was not subject toU.S. income tax in the hands of thebeneficiary. See Rev. Rul. 69–70(1969–1 C.B. 182). If the income of thetrust was not taxable to the foreigngrantor under section 871 and also nottaxable to either the grantor or the trustby either the grantor’s country of resi-dence or another foreign country, theincome of the trust was, thus, not sub-ject to tax by any jurisdiction.

A special rule contained in section665(c) provided generally that interme-diaries or nominees interposed betweencertain foreign trusts and their U.S.beneficiaries could be disregarded. How-ever, that rule applied only to trustscreated by U.S. persons.

2. Overview of changes

The changes made by section 1904 ofthe Act are designed to ensure that U.S.persons who benefit from offshore trustscreated by foreign persons (inboundtrusts) pay an appropriate amount ofU.S. tax. Generally, the grantor trustrules now cause a person to be treatedas the owner of a trust only to the

1997–25 I.R.B. 9 June 23, 1997

extent such application results, directlyor indirectly, in an amount being cur-rently taken into account in computingthe income of a U.S. citizen or residentor a domestic corporation. Exceptionsare provided for certain revocable trusts,for trusts from which the only amountsdistributable during the lifetime of thegrantor are to the grantor or the grant-or’s spouse, and for certain compensa-tory trusts. There also are grandfatherrules for certain trusts that were inexistence on September 19, 1995.

As a result of the changes, manyinbound trusts that were grantor trustsunder prior law are now nongrantortrusts. Distributions of trust income tothe U.S. beneficiaries of such trusts arenow taxable to U.S. beneficiaries andmay be subject to an interest charge onaccumulation distributions.

Section 1904 of the Act also includessome special rules. Section 643(h),which replaces former section 665(c),treats any amount paid to a U.S. personthat is derived directly or indirectlyfrom a foreign trust of which the payoris not the grantor as if the amount ispaid by the foreign trust directly to theU.S. person. Section 672(f)(4) allowsthe IRS to recharacterize a purportedgift or bequest from a partnership orforeign corporation when necessary toprevent the avoidance of the purpose ofsection 672(f). Section 672(f)(5), whichis an expansion of prior section 672(f),generally provides that if a U.S. benefi-ciary of a trust created by a foreignperson transfers property to the foreignperson, the U.S. beneficiary is treated asthe grantor of the trust to the extent ofthe transfer.

Explanation of Provisions

1. § 1.643(h)–1: Distributions by cer-tain foreign trusts through intermediar-ies

The proposed regulations describe thecircumstances under which an amountof property that is derived, directly orindirectly, by a U.S. person from aforeign trust through an intermediarywill be deemed to have been paiddirectly by the foreign trust to the U.S.person. This rule does not apply if theintermediary is the grantor of the por-tion of the trust from which the amountis distributed. The amount will bedeemed to have been paid directly bythe foreign trust if any one of thefollowing conditions is satisfied: (1) theintermediary is related (as defined in theregulations) to either the U.S. person or

the foreign trust and the intermediarytransfers to the U.S. person either prop-erty that the intermediary received fromthe trust or proceeds from the propertythat the intermediary received from thetrust; (2) the intermediary would nothave transferred the property to the U.S.person (or would not have transferredthe property on substantially the sameterms) but for the fact the intermediaryreceived property from the foreign trust;or (3) the intermediary received theproperty from the foreign trust pursuantto a plan one of the principal purposesof which was the avoidance of U.S. tax.

The proposed regulations describe theeffect of disregarding the intermediary.If the intermediary is an agent of eitherthe foreign trust or the U.S. personunder generally applicable agency prin-ciples (under the standards set forth inCommissioner v. Bollinger, 485 U.S.340 (1988)), the amount is treated aspaid by the foreign trust to the U.S.person in the year it would be so treatedunder the general principles. Thus, if theintermediary is an agent of the foreigntrust, the amount is treated as paid tothe U.S. person in the year it is paid bythe intermediary to the U.S. person. If,however, the intermediary is an agent ofthe U.S. person, the amount is treated aspaid to the U.S. person in the year it ispaid by the foreign trust to the interme-diary.

If the intermediary is not an agent ofeither the foreign trust or the U.S.person under generally applicableagency principles, the intermediary gen-erally will be treated as an agent of theforeign trust, and the amount will betreated as paid by the foreign trust tothe U.S. person in the year the amountis paid by the intermediary to the U.S.person. However, the district directormay determine, based on all the relevantfacts and circumstances, that the inter-mediary should be treated as the agentof the U.S. person.

The regulations provide a de minimisrule for distributions that do not exceedin the aggregate $10,000.

2. § 1.671–2(e): Definition of grantor

The proposed regulations provide adefinition of grantor that applies forpurposes of the grantor trust rules gener-ally. A grantor is any individual, corpo-ration, or other person to the extent suchperson (i) creates a trust or (ii) directlyor indirectly makes a gratuitous transferto a trust. For purposes of the proposedregulations, a gratuitous transfer is any

transfer other than a transfer for fairmarket value, or a corporate or partner-ship distribution. Treasury and the IRSrequest comments regarding the appro-priate scope of gratuitous transfers.

A grantor includes a person whoacquires an interest in a trust in anongratuitous transfer from a personwho is a grantor of the trust. A grantoralso includes an investor who acquiresan interest in a fixed investment trustfrom a person who had acquired hisinterest through a direct investment inthe trust. Treasury and the IRS requestcomments on the appropriate scope ofthese rules as they affect fixed invest-ment trusts.

If a person creates or funds anyportion of a trust primarily as an accom-modation for another person, the otherperson will be treated as a grantor withrespect to such portion of the trust. See,e.g.,Stern v. Commissioner, 77 T.C. 614(1981), rev’d on other grounds, 747 F.2d555 (9th Cir. 1984).

These regulations are not intended tochange the result of existing law withrespect to trusts used for business pur-poses. See § 301.7701–4(e) (environ-mental remediation trusts); Rev. Rul.87–127, 1987–2 C.B. 156 (pre-need fu-neral trusts); Rev. Proc. 92–64, 1992–2C.B. 422 (rabbi trusts). Treasury and theIRS request comments on the applica-tion of these new rules to trusts used forbusiness purposes.

A grantor of a trust may or may notbe treated as an owner of the trust undersections 671 through 677 and 679. Aperson other than a grantor of a trustmay be treated as an owner of the trustunder section 678.

3. § 1.672(f)–1: Foreign persons nottreated as owners

The proposed regulations prescribe atwo-step analysis for implementing thegeneral rule of section 672(f). First, thegrantor trust rules other than section672(f) (the basic grantor trust rules) areapplied to determine the worldwideamount and the U.S. amount. Then, thetrust is treated as partially or whollyowned by a foreign person based on anannual year-end comparison of theworldwide amount and the U.S. amount.

The worldwide amount is defined asthe net amount of income, gains, deduc-tions, and losses that would be takeninto account for the current year underthe basic grantor trust rules in comput-ing the worldwide taxable income ofany person, whether or not such person

June 23, 1997 10 1997–25 I.R.B.

is a U.S. taxpayer (as defined in theregulation). The worldwide amount isdetermined in accordance with U.S.principles of income taxation, and in-cludes amounts that would be attribut-able to foreign persons, without regardto whether such amounts are subject toU.S. income taxation.

The U.S. amount is defined as the netamount of income, gains, deductions,and losses that would be taken intoaccount for the current year under thebasic grantor trust rules (directly orthrough one or more entities) in comput-ing the taxable income of a U.S. tax-payer. The U.S. amount includesamounts such as interest on state orlocal bonds that are not includible ingross income.

A U.S. taxpayer is defined as anyperson who is a U.S. citizen, a residentalien individual, a domestic corporation,a U.S. person who is treated as theowner of a trust under section 679, or adomestic trust to the extent such trustactually pays U.S. tax with respect tothe income, gains, deductions, andlosses.

If the worldwide amount and the U.S.amount are the same, the basic grantortrust rules continue to apply without thelimitation of section 672(f). If theworldwide amount is greater than theU.S. amount, section 672(f) prevents thebasic grantor trust rules from treating aperson as the owner of that portion ofthe trust attributable to the excess of theworldwide amount over the U.S.amount.

4. § 1.672(f)–2: Trusts created by cer-tain foreign corporations

Section 672(f)(3) provides in partthat, except as otherwise provided inregulations, a controlled foreign corpora-tion (CFC) shall be treated as a domes-tic corporation for purposes of section672(f)(1). Under the proposed regula-tions, a CFC that creates and funds atrust will be treated as a domesticcorporation to the extent that, if thebasic grantor trust rules were applied,income earned by the trust for thetaxable year would be subpart F incometo the CFC that would be currentlytaken into account in computing thegross income of a U.S. citizen or resi-dent or a domestic corporation. How-ever, the CFC will not be treated as adomestic corporation to the extent theincome of the trust would not be subpartF income or to the extent it would besubpart F income but would not be

taken into account in computing thegross income of a U.S. citizen or resi-dent or a domestic corporation (e.g., theCFC had no overall earnings and prof-its).

The proposed regulations includesimilar rules for trusts created by pas-sive foreign investment companies(PFICs) or foreign personal holdingcompanies.

Section 672(f)(3) also provides thatthe general rule of section 672(f)(1)shall not apply for purposes of section1296. The proposed regulations imple-ment this rule by providing that, forpurposes of determining whether a for-eign corporation is a PFIC, the grantortrust rules shall be applied as if section672(f) had not come into effect. Conse-quently, a foreign corporation cannotavoid PFIC status by transferring pas-sive assets to a trust that would betreated as a nongrantor trust if section672(f) were applied.

5. § 1.672(f)–3: Exceptions to generalrule

A. Certain revocable trusts

The proposed regulations provide thatthe general rule of § 1.672(f)–1 doesnot apply to any portion of a trust if thepower to revest in the grantor title tosuch portion is exercisable solely by thegrantor without the approval or consentof any other person. If the grantor canexercise the power only with the ap-proval of a related or subordinate partywho is subservient to the grantor, suchpower will be treated as exercisablesolely by the grantor.

The exception will not apply unlessthe power to revest is exercisable for aperiod or periods aggregating 183 daysor more during the taxable year of thetrust. This rule is intended to provide abright line rule for the benefit of bothtaxpayers and IRS examiners that ad-dresses potentially abusive situations inwhich a power to revest is so limitedthat it is not likely to be exercised. The183 days need not be consecutive; thus,a power to revest that is exercisableeach year from January 1 through May31 and again from September 1 throughDecember 31 would be eligible for theexception.

Consistent with the statute, the pro-posed regulations provide a grandfatherrule for a trust that was treated asowned by the grantor under section 676on September 19, 1995. As long as sucha trust would continue to be so treatedunder the basic grantor trust rules, the

trust will be exempt from the generalrule of section 672(f), except with re-spect to any portion of the trust attribut-able to transfers to the trust after Sep-tember 19, 1995. Under the proposedregulations, separate accounting is re-quired for amounts transferred to thetrust after September 19, 1995, togetherwith all income and gains thereof, aswell as losses and distributions there-from.

B. Certain other trusts

The proposed regulations provide thatthe general rule does not apply to anytrust (or portion of a trust) if the onlyamounts distributable (whether incomeor corpus) from such trust (or portion ofa trust) during the lifetime of the grantorare amounts distributable to the grantoror the grantor’s spouse. For this pur-pose, payments of reasonablenongratuitous amounts, such as reason-able administrative expenses, are notconsidered to be amounts distributablefrom the trust.

The proposed regulations clarify thatamounts distributable in discharge of alegal obligation of the grantor or thegrantor’s spouse will generally betreated as amounts distributable to thegrantor or the grantor’s spouse. Thus, itis expected that a reinsurance trust thatwould have been a grantor trust underprior law generally will continue to be agrantor trust. (No inference is intendedas to whether a reinsurance trust consti-tutes a trust under regulation§ 301.7701–4.) However, a legal obliga-tion will not include an obligation to aperson who is related (as defined in theregulations) to the grantor or the grant-or’s spouse, unless the obligation wasentered into for adequate and full con-sideration in money or money’s worth.Trusts from which distributions are tax-able as compensation for services ren-dered generally will be covered by theexception for compensatory trusts, de-scribed below.

Amounts distributable to support afamily member will be treated asamounts distributable to the grantor orthe grantor’s spouse only if certainrequirements are satisfied. Although dif-ferent jurisdictions have different re-quirements for support obligations, ad-ministrative simplicity is served byproviding one uniform rule on thispoint. Under the proposed regulations,the family member must be an indi-vidual who would be treated as a depen-dent of the grantor or the grantor’s

1997–25 I.R.B. 11 June 23, 1997

spouse under sections 152(a)(1) through(8), without regard to the requirementthat half of the individual’s support bereceived from the grantor or the grant-or’s spouse. In addition, the familymember must be either permanently andtotally disabled (within the meaning ofsection 22(e)(3)) or, in the case of a son,daughter, stepson, or stepdaughter, lessthan 24 years old.

Consistent with the statute, the pro-posed regulations provide a grandfatherrule for a trust that was treated asowned by the grantor under section 677(other than subsection (a)(3) thereof) onSeptember 19, 1995. As long as such atrust would continue to be so treatedunder the basic grantor trust rules, thetrust will be exempt from the generalrule, except with respect to any portionof the trust attributable to transfers tothe trust after September 19, 1995. Un-der the proposed regulations, separateaccounting is required for amountstransferred to the trust after September19, 1995, together with all income andgains thereof, as well as losses anddistributions therefrom.

C. Compensatory trusts

The proposed regulations implementsection 672(f)(2)(B), which providesthat, except as provided in regulations,the general rule shall not apply to anyportion of a trust from which distribu-tions are taxable as compensation forservices rendered. Tracking the languageof the statute, the proposed regulationslist categories of trusts that constitutecompensatory trusts, without regard towhether they could be treated as grantortrusts under the basic grantor trust rules.This list is intended to be an exclusivelist. However, the proposed regulationsalso provide that additional categories ofcompensatory trusts may be designatedlater in guidance published in the Inter-nal Revenue Bulletin.

The following categories of trusts areclassified as compensatory trusts: (i)qualified trusts described in section401(a), (ii) trusts described in section457(g), (iii) nonexempt employees’trusts described in section 402(b), (iv)individual retirement account (IRA)trusts that are either simplified employeepensions described in section 408(k) orsimple retirement accounts described insection 408(p), (v) IRA trusts to whichthe only contributions are rollover con-tributions listed in section 408(a)(1), (vi)certain so–called rabbi trusts (see Rev.Proc. 92–64 (1992–2 C.B. 422)), and

(vii) trusts that are welfare benefit fundsdescribed in section 419(e) (without re-gard to whether they provide taxablebenefits).

The IRS and Treasury contemplatethat the nonexempt employees’ trustslisted in category (iii) above will betreated as grantor trusts only to theextent provided in proposed regulations§ 1.671–1(g) and § 1.671–1(h), whichwere published in theFederal Register(61 FR 50778) on September 27, 1996.

IRAs that are excluded from the listof compensatory trusts because they arefunded by individuals, rather than em-ployers, are expected to be covered byone or both of the exceptions for revo-cable trusts or for trusts from which theonly amounts distributable during thelifetime of the grantor are to the grantoror the grantor’s spouse.

6. § 1.672(f)–4: Recharacterization ofpurported gifts

The proposed regulations implementthe purported gift rule of section672(f)(4), which was enacted as abackstop to section 672(f). See Staff ofthe Joint Committee on Taxation, 104thCong., 2nd Sess., General Explanationof the Tax Legislation Enacted in the104th Congress, at 271 (1996). Thepurported gift rule prevents taxpayersfrom avoiding the general rule of sec-tion 672(f) by using a partnership or aforeign corporation as a substitute for atrust.

As a general rule, if a U.S. doneereceives a purported gift or bequestdirectly or indirectly from a partnership,the purported gift or bequest must beincluded in the U.S. donee’s income asordinary income. If a U.S. donee re-ceives a purported gift or bequest di-rectly or indirectly from a foreign cor-poration, the purported gift or bequestgenerally must be included in the U.S.donee’s gross income as a distributionfrom the foreign corporation. In thelatter case, the U.S. donee will not betreated as having basis in the foreigncorporation, and the U.S. donee will betreated as having a holding period in theforeign corporation equal to the averageholding period (using a weighted aver-age) of the actual interest holders.

However, the gift or bequest will notbe recharacterized if the donee canestablish that a U.S. citizen or residentalien who directly or indirectly holds aninterest in the partnership or foreigncorporation treated the purported gift asa distribution from the partnership or

foreign corporation and a subsequentgift to the donee. There also is anexception for charitable contributions todonees described in section 170(c).

The proposed regulations providerules for gratuitous transfers to U.S.donees from trusts created by partner-ships or foreign corporations. As a re-sult, a partnership or foreign corporationcannot avoid the purported gift rule bycreating a nongrantor trust that makesan immediate nontaxable distribution oftrust corpus to a U.S. donee. Under theproposed regulations, if the partnershipor foreign corporation is not treatedunder the grantor trust rules as theowner of the portion of the trust fromwhich property is distributed to a U.S.donee in a gratuitous transfer, the distri-bution will be characterized as a distri-bution from the partnership or foreigncorporation if such characterization re-sults in a higher U.S. tax liability.

Notwithstanding any other provision,the proposed regulations provide that thedistrict director may recharacterize atransfer that is subject to the rules ofsection 672(f)(4) to prevent the avoid-ance of U.S. tax or clearly to reflectincome. For example, the district direc-tor may determine, based upon the factsand circumstances, that a distributionfrom a partnership or foreign corpora-tion is more properly treated as a distri-bution from a trust.

The proposed regulations provide a deminimis rule for purported gifts or be-quests that do not exceed in the aggre-gate $10,000.

7. § 1.672(f)–5: Special rules

A. Transfers by certain beneficiaries toforeign settlor

The proposed regulations provide thatif, but for section 672(f)(5), a foreignperson would be treated as the owner ofany portion of a trust, any U.S. benefi-ciary of the trust will be treated as theowner of a portion of the trust to theextent the U.S. beneficiary directly orindirectly made transfers of property tosuch foreign person in excess of trans-fers to the U.S. beneficiary from theforeign person. (Such a transfer mayalso constitute an indirect transfer froma U.S. person to a foreign trust forpurposes of section 679.) The U.S. ben-eficiary need not have been a U.S.person at the time of the transfer.

The proposed regulations do notspecify a time period within which atransfer must have been made to triggerthis rule. However, they do provide that

June 23, 1997 12 1997–25 I.R.B.

the rule will not apply to the extent theU.S. beneficiary can demonstrate thatthe transfer was wholly unrelated to anytransaction involving the trust. In addi-tion, consistent with the statute, theproposed regulations provide that atransfer of property does not includeeither a nongratuitous transfer or a giftthat would be excluded from taxablegifts under section 2503(b).

B. Different taxable years

The proposed regulations provide thatif a person has a different taxable yearfrom the taxable year of the trust, anamount is currently taken into accountin computing the income of such personfor purposes of the general rule if theamount is taken into account for thetaxable year of such person that includesthe last day of the taxable year of thetrust.

C. Entity characterization

The proposed regulations provide thatentities generally will be characterizedunder U.S. income tax principles. Seeregulations §§ 301.7701–1 through301.7701–4. However, an entity havinga single owner could avoid the pur-ported gift rule if it could elect to bedisregarded as a separate entity, becausethe purported gift or bequest would thenbe received from the owner of theentity, rather than from the entity itself.Therefore, the proposed regulations pro-vide that, for purposes of section672(f)(4), a wholly owned business en-tity must be treated as a corporation,separate from its single owner.

8. § 301.7701–2(c)(2)(iii): Special rulefor business entities that make purportedgifts

As explained above, an entity havinga single owner could avoid the pur-ported gift rule if it elected to bedisregarded as a separate entity underthe existing entity classification regula-tions. Therefore, the proposed regula-tions add a new sentence to the existingregulations to provide that, for purposesof section 672(f)(4), a wholly ownedbusiness entity must be treated as acorporation, separate from its owner.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been

determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to theseregulations, and, because the regulationsdo not impose a collection of informa-tion on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply. Pursuant to section 7805(f) ofthe Code, these regulations will be sub-mitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on their impact onsmall business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, consider-ation will be given to any written com-ments (preferably a signed original andeight (8) copies) that are submittedtimely to the IRS. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduledfor August 27, 1997, at 10 a.m., in room3313, Internal Revenue Building, 1111Constitution Avenue, NW, WashingtonDC. Because of access restrictions, visi-tors will not be admitted beyond theInternal Revenue Building lobby morethan 15 minutes before the hearingstarts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons that wish to present oralcomments at the hearing must submitwritten comments by August 4, 1997,and submit an outline of the topics to bediscussed and the time to be devoted toeach topic (preferably a signed originaland eight (8) copies) by August 6, 1997.

A period of 10 minutes will be allot-ted to each person for making com-ments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.

Drafting Information

The principal author of these regula-tions is M. Grace Fleeman of the Officeof Associate Chief Counsel (Interna-tional). However, other personnel fromthe IRS and Treasury Department par-ticipated in their development.

* * * * *

Proposed Amendments to the Regula-tions

Accordingly, 26 CFR parts 1 and 301are proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.643(h)–1 also issued under

26 U.S.C. 643(a)(7).Section 1.671–2(e) also issued under

26 U.S.C. 643(a)(7) and 672(f)(6).Section 1.672(f)–1 also issued under

26 U.S.C. 643(a)(7) and 672(f)(6).Section 1.672(f)–2 also issued under

26 U.S.C. 643(a)(7), 672(f)(3) and (6).Section 1.672(f)–3 also issued under

26 U.S.C. 643(a)(7), 672(f)(2) and (6).Section 1.672(f)–4 also issued under

26 U.S.C. 643(a)(7), 672(f)(4) and (6).Section 1.672(f)–5 also issued under

26 U.S.C. 643(a)(7) and 672(f)(6). * * *Par. 2. Section 1.643(h)–1 is added to

read as follows: § 1.643(h)–1 Distribu-tions by certain foreign trusts throughintermediaries.

(a) In general. For purposes of sec-tions 641 through 683, any amount ofproperty that is derived, directly orindirectly, by a United States personfrom a foreign trust through anotherperson (an intermediary) shall bedeemed to have been paid directly bythe foreign trust to the United Statesperson if any one of the followingconditions is satisfied—

(1) The intermediary is related(within the meaning of paragraph (e) ofthis section) to either the United Statesperson or the foreign trust and theintermediary transfers to the UnitedStates person either property that theintermediary received from the foreigntrust or proceeds from the property thatthe intermediary received from the for-eign trust;

(2) The intermediary would not havetransferred the property to the UnitedStates person (or would not have trans-ferred the property to the United Statesperson on substantially the same terms)but for the fact that the intermediaryreceived property from the foreign trust;or

(3) The intermediary received theproperty from the foreign trust pursuantto a plan one of the principal purposesof which was the avoidance of U.S. tax.

(b) Exception for grantor as interme-diary. Paragraph (a) of this section shallnot apply if the intermediary is thegrantor of the portion of the trust fromwhich the amount is derived. For thedefinition of grantor, see § 1.671–2(e).

(c) Effect of disregarding intermedi-ary. If an amount is treated as paid

1997–25 I.R.B. 13 June 23, 1997

directly by the foreign trust to a UnitedStates person pursuant to this section,one of the following rules shall apply:

(1) Intermediary is agent under gen-eral principles. If the intermediary is anagent of the foreign trust or the UnitedStates person under generally applicableagency principles, the payment shall betreated as paid by the foreign trust tothe United States person in the year itwould be so treated under such prin-ciples. Thus, if the intermediary is anagent of the foreign trust, the paymentshall be treated as paid to the UnitedStates person in the year the amount ispaid by the intermediary to the UnitedStates person. If, however, the interme-diary is an agent of the United Statesperson, the payment shall be treated aspaid to the United States person in theyear the amount is paid by the foreigntrust to the intermediary.

(2) Intermediary is not agent undergeneral principles—(i) Agent of foreigntrust. Except as provided in paragraph(c)(2)(ii) of this section, if the interme-diary is not an agent of the foreign trustor the United States person under gener-ally applicable agency principles—

(A) The intermediary shall be treatedas an agent of the foreign trust; and

(B) The payment shall be treated aspaid by the foreign trust to the UnitedStates person in the year the amount ispaid by the intermediary to the UnitedStates person.

(ii) Agent of United States person.The district director may determine,based on all the relevant facts andcircumstances, that the intermediaryshould be treated as the agent of theUnited States person. If the intermediaryis treated as the agent of the UnitedStates person pursuant to this paragraph(c)(2)(ii), the payment shall be treated aspaid to the United States person in theyear the intermediary receives the pay-ment from the foreign trust.

(d) De minimis exception. This sec-tion shall not apply if, during the tax-able year of the United States person,the aggregate amount that is transferredto such person from all foreign truststhrough one or more intermediaries doesnot exceed $10,000.

(e) Related parties. For purposes ofthis section, an intermediary shall betreated as related to a United Statesperson or foreign trust if the intermedi-ary and the United States person orforeign trust are related within themeaning of section 643(i)(2)(B), withthe following modifications:

(1) For purposes of applying section267 (other than section 267(f)) andsection 707(b)(1), ‘‘at least 10 percent’’shall be substituted for ‘‘more than 50percent’’ each place it appears;

(2) The principles of section267(b)(10), substituting ‘‘at least 10 per-cent’’ for ‘‘more than 50 percent,’’ shallapply to determine whether two corpora-tions are related; and

(3) The principles applicable to trustsshall apply to determine whether anestate is related to another person.

(f) Examples. The following ex-amples illustrate the rules of this sec-tion. In each example, FT is an irrevo-cable foreign trust that is not treated asowned by any other person. The ex-amples follow:

Example 1. Related intermediary. I, a nonresi-dent alien who is not the grantor of FT, receives adistribution of stock from FT in the year 2001. Inthe year 2002, I sells the stock to an unrelatedparty for its fair market value of 100X and givesthe 100X to his daughter, B, who is a U.S.resident. I is not an agent of either FT or B undergenerally applicable agency principles. Underparagraphs (a)(1) and (c)(2)(i) of this section, FTis deemed to have distributed 100X directly to Bin the year 2002.

Example 2. ‘‘But for’’ condition. I, a foreignbank that is unrelated to any of the parties in thesetransactions, received a deposit of 500X from FTin the year 2001. In the year 2002, I transfers400X to B, a United States person, in a transferthat it would not have made but for the fact that Ihad received 500X from FT. I is not an agent ofeither FT or B under generally applicable agencyprinciples. Under paragraphs (a)(2) and (c)(2)(i) ofthis section, FT is deemed to have distributed400X directly to B in the year 2002.

Example 3. Tax avoidance purpose. FT wascreated in 1980 by A, a nonresident alien. In theyear 2001, FT’s trustee, T, determines that 1000Xof accumulated income should be distributed toA’s U.S. granddaughter, B. Pursuant to a plan witha principal purpose of avoiding the interest chargethat would be imposed by section 668, T causesFT to distribute 1000X to I, an unrelated foreignperson. I subsequently transfers 1000X to B in theyear 2001. Under paragraph (a)(3) of this section,B is deemed to have received an accumulationdistribution from FT in the year 2001.

Example 4. Amount not derived from foreigntrust. W and her husband, H, are both nonresidentaliens. W’s son, S, is a U.S. resident. W receivesannual income of 5000X from her own invest-ments. Several years ago, H created and fundedFT using his separate property. At the beginning ofthe year 2001, W receives a distribution of 100Xfrom FT. There is no plan with a principal purposeof avoiding U.S. tax. At the end of the year 2001,W gives 100X of her investment income to S.None of the conditions in paragraph (a) of thissection is satisfied. The transfer to S is treated as anontaxable gift from W and not as an amountderived directly or indirectly from FT.

(g) Effective date. The rules of thissection are applicable for transfers madeby foreign trusts on or after August 20,1996.

Par. 3. In § 1.671–2, paragraph (e) isrevised to read as follows:

§ 1.671–2 Applicable principles.* * * * *

(e)(1) For purposes of subchapter J ofthe Internal Revenue Code, a grantorincludes any person to the extent suchperson either creates a trust, or directlyor indirectly makes a gratuitous transfer(within the meaning of paragraph(e)(4)(i) of this section) of property to atrust.

(2) A grantor includes a person whoacquires an interest in a trust from agrantor of the trust if either—

(i) The transfer is nongratuitous(within the meaning of paragraph(e)(4)(ii) of this section); or

(ii) The transfer is of an interest in afixed investment trust.

(3) If one person creates or funds atrust (or portion of a trust) primarily asan accommodation for another person,the other person shall be treated as agrantor of the trust (or portion of thetrust).

(4)(i) A gratuitous transfer is anytransfer other than a transfer for fairmarket value, or a corporate or partner-ship distribution. A transfer of propertyto a trust may be considered a gratuitoustransfer without regard to whether thetransfer is a gift for gift tax purposes(see chapter 12 of subtitle B of theInternal Revenue Code).

(A) For purposes of this paragraph(e), a transfer for fair market valueincludes only transfers in considerationfor property received from the trust,services rendered by the trust, or theright to use property of the trust. Atransfer is for fair market value only tothe extent that the value of the propertyreceived, services rendered, or the rightto use property is equal to at least thefair market value of the property trans-ferred. For example, rents, royalties, andcompensation paid to a trust are trans-fers for fair market value only if thepayments reflect an arm’s length pricefor the use of the property of, orservices rendered by, the trust. For pur-poses of this determination, if a personcontributes property to a trust (or toanother entity that subsequently transfersthe property (or proceeds therefrom) toa trust) in exchange for any type ofinterest in the trust (or other entity),such interest in the trust (or other entity)shall be disregarded in determiningwhether fair market value has beenreceived. In addition, a person shall notbe treated as making a transfer for fair

June 23, 1997 14 1997–25 I.R.B.

market value merely because thetransferor recognizes gain on the trans-action. For example, if a taxpayer electsto treat a transfer of appreciated prop-erty to a foreign trust as a deemed saleunder section 1057, such a transfer willnot be treated as a transfer for fairmarket value because the transferor didnot receive actual fair market valueconsideration pursuant to the deemedsale.

(B) For purposes of this paragraph(e), a transfer to a trust is a corporatedistribution, and therefore not a gratu-itous transfer, only if it is a distributiondescribed in section 301, 302, 305, 355or 356. Similarly, for purposes of thisparagraph (e), a transfer to a trust is apartnership distribution, and thereforenot a gratuitous transfer, only if it isdescribed in section 731. A distributionfrom one trust to another trust that is abeneficiary of the first trust is a gratu-itous transfer.

(C) Notwithstanding any other provi-sion of this paragraph (e), the districtdirector may determine, based upon thefacts and circumstances, that a direct orindirect transfer to a trust is moreproperly characterized as a gratuitoustransfer if the transfer was structuredwith a principal purpose of avoidingU.S. tax. See, e.g., sections 643(a)(7)and 679(d).

(ii) For purposes of this paragraph(e), any transfer other than a gratuitoustransfer is a nongratuitous transfer.

(5) The following examples illustratethe rules of this paragraph (e):

Example 1. A creates and funds a trust, T, forthe benefit of her children. Under paragraph (e)(1)of the section, A is a grantor of T.

Example 2. A makes an investment in a fixedinvestment trust, T, that is classified as a trustunder § 301.7701-4(c)(1) of this chapter. B subse-quently acquires A’s entire interest in T for fairmarket value. Under paragraph (e)(2) of thissection, B is a grantor of T with respect to suchinterest.

Example 3. A, an attorney, creates a trust, T, forthe benefit of his client, B, and B’s children. Thetrust instrument names A as the grantor. A funds Twith a nominal contribution out of his own funds.A views the contribution as an investment in thegeneration of fees for future legal services. Underparagraph (e)(3) of this section, B is a grantor ofT.

Example 4. A, a U.S. citizen, creates and fundsa trust, T, for the benefit of B. B holds anunrestricted power to withdraw any amount con-tributed to the trust for a period of 60 days afterthe contribution is made. B is treated as an ownerof T under section 678 as a result of thewithdrawal power. However, B is not a grantor ofT under paragraph (e)(1) of this section as a resultof the withdrawal power, because B neither cre-ated T nor made a gratuitous transfer to T.

Example 5. A contributes cash to a trust, T,through a broker, in exchange for units in T. The

value of the units in T is disregarded in determin-ing whether A has received fair market valueunder paragraph (e)(4)(i)(A) of this section. There-fore, A has made a gratuitous transfer to T, and,under paragraph (e)(1) of this section, A is agrantor of T.

Example 6. A borrows cash from T, an unre-lated trust. Arm’s-length interest payments by A toT will not be treated as gratuitous transfers underparagraph (e)(4)(i)(A) of this section. Therefore,under paragraph (e)(1) of this section, A is not agrantor of T with respect to the interest payments.

Example 7. A creates and funds a domestictrust, DT. After A’s death, DT distributes cash to aforeign trust, FT, that is a beneficiary of DT.Under paragraph (e)(4)(i)(B) of this section, thetrust distribution by DT is a gratuitous transfer.Therefore, under paragraph (e)(1) of this section,DT is a grantor of FT with respect to suchtransfer.

Example 8. A creates and funds a trust, T. Towns stock of C, a publicly traded company, thatpays a dividend to its shareholders, including T.The dividend paid by C is a nongratuitous transferunder paragraph (e)(4)(i)(B) of this section. There-fore, C is not a grantor under paragraph (e)(1) ofthis section with respect to the dividend.

Example 9. A, a nonresident alien, creates atrust, T, for the benefit of her spouse, B, who is aU.S. citizen. T is not treated as owned by anyother person. A sells property worth $1,000,000 toT in exchange for $100,000 in cash. Underparagraph (e)(4)(i)(A) of this section, the $900,000excess is a gratuitous transfer by A. Therefore, Ais a grantor of T under paragraph (e)(1) of thissection with respect to such transfer.

(6) The rules of this paragraph (e) areapplicable as of August 20, 1996.

Par. 4. Sections 1.672(f)–1,1.672(f)–2, 1.672(f)–3, 1.672(f)–4, and1.672(f)–5 are added to read as follows:

§ 1.672(f)–1 Foreign persons nottreated as owners.

(a) General rule. Section 672(f)(1)provides that sections 671 through 679(the grantor trust rules) shall cause aperson to be treated as the owner of anyportion of a trust only to the extent suchapplication results in an amount (if any)being currently taken into account (di-rectly or through one or more entities)in computing the income of a citizen orresident of the United States or a do-mestic corporation. Section 672(f)(1)may apply only to a trust that would betreated as owned, in whole or in part, bya foreign person under the grantor trustrules without regard to section 672(f).For rules describing the application ofthis section, see paragraph (b) of thissection. For definitions regarding therules of this section, see paragraph (c)of this section. For examples illustratingthe application of this section, see para-graph (d) of this section. For the effec-tive date of the rules of this section, seeparagraph (e) of this section.

(b) Application of general rule—(1)Initial determination. To determine

whether a trust is treated as owned by aforeign person, the taxpayer should firstapply the grantor trust rules withoutregard to section 672(f) (the basicgrantor trust rules) to determine theworldwide amount (as defined in para-graph (c)(1) of this section) and the U.S.amount (as defined in paragraph (c)(2)of this section).

(2) Result. The trust is treated asowned by a foreign person based on anannual comparison at the end of thetrust’s taxable year of the worldwideamount and the U.S. amount. If there isa worldwide amount and such amount isgreater than the U.S. amount, undersection 672(f) the foreign person shallnot be treated as the owner of theportion of the trust attributable to theexcess of the worldwide amount overthe U.S. amount. Otherwise, the basicgrantor trust rules shall apply withoutthe limitation of section 672(f). Forexamples, see paragraph (d) of thissection.

(c) Definitions—(1) Worldwideamount. The worldwide amount is thenet amount of income, gains, deduc-tions, and losses that would be takeninto account for the current year underthe basic grantor trust rules in comput-ing the worldwide taxable income ofany person, whether or not such personis a U.S. taxpayer (as defined in para-graph (c)(3) of this section). The world-wide amount is computed in accordancewith U.S. principles of income taxationand includes amounts that would beattributable to foreign persons, withoutregard to whether such amounts aresubject to U.S. income tax.

(2) U.S. amount. The U.S. amount isthe net amount of income, gains, deduc-tions, and losses that would be takeninto account for the current year underthe basic grantor trust rules (directly orthrough one or more entities) in comput-ing the taxable income of a U.S. tax-payer (as defined in paragraph (c)(3)ofthis section). The U.S. amount includesamounts that would be attributable tothe U.S. taxpayer even if the amountwould not be includible in gross income(e.g., tax-exempt interest described insection 103(a)).

(3) U.S. taxpayer. A U.S. taxpayer isany person who is a U.S. citizen, aresident alien individual, a domestic cor-poration, a U.S. person who is treated asthe owner of a trust under section 679,or a domestic trust to the extent suchtrust actually pays U.S. tax with respectto its income, gains, deductions, andlosses.

1997–25 I.R.B. 15 June 23, 1997

(d) Examples. The following ex-amples illustrate the rules of this sec-tion:

Example 1. U.S. amount equals worldwideamount. A, a citizen of the United States, createsand funds an irrevocable foreign trust, FT, for thebenefit of his U.S. son, B. Under the basic grantortrust rules (see section 679), A would be treated asthe owner of FT. For the taxable year endingDecember 31, 1999, FT has ordinary income of100X, long-term capital gain of 200X, deductionsof 20X, and short-term capital losses of 15X.Under paragraph (c)(1) of this section, the world-wide amount is 265X (100X + 200X – 20X -15X). Under paragraph (c)(2) of this section, theU.S. amount also is 265X. Consequently, underparagraph (b)(2) of this section, because theworldwide amount is equal to the U.S. amount,the basic grantor trust rules apply without thelimitation of section 672(f) to treat A as the ownerof FT.

Example 2. No U.S. amount. A, a nonresidentalien, funds an irrevocable domestic trust, DT, forthe benefit of his U.S. son, B. A has a reversion-ary interest within the meaning of section 673. Ifthe basic grantor trust rules were applied, A wouldbe treated as the owner of DT, and any distribu-tions to B would be considered nontaxable giftsfrom A to B. Under paragraph (c)(2) of thissection, there is no U.S. amount, because noamount is taken into account for the current yearunder the basic grantor trust rules in computingthe taxable income of a U.S. taxpayer. Underparagraph (c)(1) of this section, the worldwideamount is equal to DT’s net income. Underparagraph (b)(2) of this section, A is not treated asthe owner of any portion of DT. Consequently, DTis a separate taxable entity, and distributions fromDT to B must be taken into account in computingB’s income.

Example 3. U.S. amount less than worldwideamount. FP is a foreign partnership for U.S.income tax purposes. FP has two partners: C, anonresident alien, and D, a U.S. citizen. Thepartnership agreement provides that all income,gains, losses, deductions, and credits are allocated50 percent to each partner. FP contributed cash toan irrevocable foreign trust, FT, primarily for thebenefit of E, D’s U.S. brother. FP can control thebeneficial enjoyment of the trust assets within themeaning of section 674. If the basic grantor trustrules were applied, FT would be treated as theowner of FP. Because D’s 50 percent distributiveshare of FP’s income would be currently takeninto account in computing the income of a U.S.citizen, the U.S. amount computed under para-graph (c)(2) of this section is equal to one half ofthe worldwide amount computed under paragraph(c)(1) of this section. Therefore, under paragraph(b)(2) of this section, FP is not treated as theowner of the portion of FT attributable to C’sinterest in FP. Such portion of FT will be treatedas a separate taxable entity, and distributions byFT to E with respect to that portion of the trustwill be considered distributions to E under section662 and may be subject to the section 668 interestcharge on accumulation distributions. (In addition,distributions from FP to E may be subject torecharacterization as purported gifts under§ 1.672(f)–4.)

Example 4. No worldwide amount. USC is aU.S. corporation with a wholly owned foreignsubsidiary, FC. USC funds an irrevocable foreigntrust, FT, that cannot benefit any U.S. person.USC retains no power or interest that would causeit to be treated as the owner of FT under the basicgrantor trust rules. However, FC is given a power

of appointment such that FC would be treated asthe owner of FT under section 678. FT acquires anote issued by FC. FT has no items of income,deduction, losses, or credit other than income fromthe note. Under U.S. income tax principles, if thebasic grantor trust rules were applied, FC wouldbe treated as the owner of FT. Thus, FC would betreated as both the debtor and the creditor withrespect to the note, and the note would bedisregarded. Under paragraph (c)(1) of this sec-tion, there is no worldwide amount. Under para-graph (c)(2) of this section, there is no U.S.amount. Consequently, under paragraph (b)(2) ofthis section, the basic grantor trust rules applywithout the limitation of section 672(f) to treat FCas the owner of FT.

Example 5. Deemed contribution on effectivedate. Assume the same facts as inExample 2. DTwas created in 1990. On August 20, 1996, DTheld accumulated income. Prior to August 20,1996, A was treated as the owner of DT. A isdeemed to have contributed the assets that wereheld in DT on August 20, 1996 to a new trust onthat date.

(e) Effective date. The rules of thissection are applicable as of August 20,1996.

§ 1.672(f)–2 Trusts created by certainforeign corporations.

(a) Controlled foreign corporations. Acontrolled foreign corporation (as de-fined in section 957) that creates andfunds a trust shall be treated as adomestic corporation for purposes of§§ 1.672(f)–1 through 1.672(f)–5 to theextent that, if the grantor trust ruleswithout regard to section 672(f) (thebasic grantor trust rules) were applied,income earned by the trust for thetaxable year would be currently takeninto account pursuant to section 951 incomputing the gross income of a citizenor resident of the United States or adomestic corporation.

(b) Passive foreign investment com-panies—(1) In general. A passive for-eign investment company (as defined insection 1296) that creates and funds atrust shall be treated as a domesticcorporation for purposes of§§ 1.672(f)–1 through 1.672(f)–5 to theextent that, if the basic grantor trustrules were applied, income earned bythe trust for the taxable year would becurrently taken into account pursuant tosection 1293 in computing the grossincome of a citizen or resident of theUnited States or a domestic corporation.

(2) Application of section 1296. Forpurposes of determining whether a for-eign corporation is a passive foreigninvestment company as defined in sec-tion 1296, the grantor trust rules shall beapplied as if section 672(f) had notcome into effect.

(c) Foreign personal holding compa-nies. A foreign personal holding com-

pany (as defined in section 552) thatcreates and funds a trust shall be treatedas a domestic corporation for purposesof §§ 1.672(f)–1 through 1.672(f)–5 tothe extent that, if the basic grantor trustrules were applied, income earned bythe trust for the taxable year would becurrently taken into account pursuant tosection 551 in computing the grossincome of a citizen or resident of theUnited States or a domestic corporation.

(d) Examples. The following ex-amples illustrate the rules of this sec-tion. In each example, FT is an irrevo-cable foreign trust, and CFC is acontrolled foreign corporation. The ex-amples follow:

Example 1. Controlled foreign corporationwithout ultimate U.S. ownership. Two nonresidentaliens, A and B, create a domestic partnership, DP.DP’s only asset is all the stock of CFC. CFCcreates and funds FT to benefit A’s U.S. daughter,C. CFC retains an administrative power over thetrust as described in section 675. Thus, if the basicgrantor trust rules were applied, CFC would betreated as the owner of FT, and distributions fromFT to C would not be taxed as distributions undersection 662. However, under paragraph (a) of thissection, CFC is not treated as a domestic corpora-tion for purposes of § 1.672(f)–1. Although CFCis a controlled foreign corporation (because CFCis owned by DP, a domestic person), no incomeearned by CFC will be included in the income ofa U.S. taxpayer. Consequently, there is no U.S.amount under § 1.672(f)–1(c)(2). Under§ 1.672(f)–1(b)(2), the basic grantor trust rules donot apply to treat CFC as the owner of FT.Transfers from FT to C are considered to bedistributions to C under section 662 and may besubject to the section 668 interest charge onaccumulation distributions. (In addition, distribu-tions to C from DP, CFC, or FT may be subject torecharacterization as purported gifts under§ 1.672(f)–4.)

Example 2. Trust income is all subpart Fincome. CFC is wholly owned by USC, a domes-tic corporation. CFC creates and funds FT for thebenefit of USC. CFC can control the beneficialenjoyment of the trust assets within the meaningof section 674. All of FT’s income is of the typethat is subpart F income (as defined in section952). FT does not distribute any income. Withoutregard to income earned by FT, CFC has asignificant amount of earnings and profits. If thebasic grantor trust rules were applied, CFC wouldbe treated as the owner of FT, and all items ofincome of FT would be currently taken intoaccount in computing the income of USC, adomestic corporation. Consequently, under para-graph (a) of this section, CFC is treated as adomestic corporation for purposes of § 1.672(f)–1.Under § 1.672(f)–1(b)(2), the basic grantor trustrules apply without the limitation of section 672(f)to treat CFC as the owner of FT. Distributionsfrom FT to USC are treated as distributions fromCFC to USC.

Example 3. Portion of trust income is subpart Fincome. Assume the same facts as inExample 2,except that FT also owns all of the stock of S, acorporation that is incorporated in the same coun-try as CFC and that uses a substantial part of itsassets in a trade or business in such country. Thus,dividends from S are not subpart F income. In thetaxable year ending December 31, 1999, FT’s only

June 23, 1997 16 1997–25 I.R.B.

income is subpart F income of 200X and divi-dends from S of 50X. FT has no deductions orlosses for 199X. Under paragraph (a) of thissection, CFC is treated as a domestic corporationfor purposes of computing the U.S. amount under§ 1.672(f)–1(c)(2) only to the extent FT’s incomeis of the type that is subpart F income. Conse-quently, the U.S. amount is 200X. Under§ 1.672(f)–1(c)(1), the worldwide amount is250X. Under § 1.672(f)–1(b)(2), CFC is nottreated as the owner of the portion of FT attribut-able to the excess of the worldwide amount overthe U.S. amount. Such portion of FT will betreated as a separate taxable entity. Distributions toUSP with respect to such portion of FT will beincluded in USP’s income under section 662 andmay be subject to the section 668 interest chargeon accumulation distributions.

Example 4. Reduction in portion of trust treatedas nongrantor trust. Assume the same facts as inExample 3. For each of the years 2001 through2010, FT receives dividend income of 2X from S,none of which is distributed. In the year 2011, at atime when FT’s basis in the stock of S is 80X, Ssells its business and invests the proceeds in assetsthat generate subpart F income. CFC will now betreated as the owner of the portion of FT that hadpreviously been treated as a separate taxableentity. FT will be deemed to have distributed 80X(the stock of S) to CFC. CFC will be required toinclude 20X of undistributed net income (2X ayear for 10 years) in its income.

(d) Effective date. The rules of thissection are applicable as of August 20,1996.

§ 1.672(f)–3 Exceptions to general rule.

(a) Certain revocable trusts—(1) Ingeneral. The general rule of § 1.672(f)–1(a) shall not apply to any portion of atrust if the power to revest absolutely inthe grantor title to such portion isexercisable solely by the grantor withoutthe approval or consent of any otherperson. If the grantor can exercise suchpower only with the approval of arelated or subordinate party who issubservient to the grantor, such powerwill be treated as exercisable solely bythe grantor. The grantor will be treatedas having a power to revest only if thegrantor has such power for a period orperiods aggregating 183 days or moreduring the taxable year of the trust. Seesection 643(a)(7). For the definition ofgrantor, see § 1.671–2(e). For the defi-nition of related or subordinate party,see § 1.672(c)–1. For purposes of thisparagraph (a), a related or subordinateparty is subservient to the grantor unlessthe presumption in the last sentence of§ 1.672(c)–1 is rebutted by a preponder-ance of the evidence.

(2) Grandfather rule—(i) In general.The general rule of § 1.672(f)–1 shallnot apply to a trust that was treated asowned by the grantor under section 676on September 19, 1995, as long as thetrust would continue to be so treated

under the basic grantor trust rules. How-ever, such a trust will be subject to thegeneral rule of § 1.672(f)–1 with re-spect to any portion of the trust attribut-able to transfers to the trust after Sep-tember 19, 1995.

(ii) Separate accounting for transfersafter September 19, 1995. In the case ofa revocable trust that contains bothamounts held in the trust on September19, 1995, and amounts that were trans-ferred to the trust after September 19,1995, paragraph (a)(2)(i) of this sectionshall apply only if the amounts thatwere held in the trust on September 19,1995, together with all income, gains,and losses derived therefrom (less allpost-September 19, 1995, distributionstherefrom) are separately accounted forfrom the amounts that were transferredto the trust after September 19, 1995,together with all income, gains, andlosses derived therefrom (less all distri-butions therefrom). If there is no sepa-rate accounting, the general rule of§ 1.672(f)–1 shall apply to the trust. Ifthere is separate accounting, the generalrule of § 1.672(f)–1 shall not apply tothe portion of the trust that is attribut-able to amounts that were held in thetrust on September 19, 1995.

(3) Examples. The following ex-amples illustrate the rules of this para-graph (a):

Example 1. Owner is grantor. After September19, 1995, FP1, a foreign person, creates and fundsa revocable trust, T, for the benefit of FP1’schildren, who are U.S. residents. The trustee is aforeign bank, FB, that is owned and controlled byFP1 and FP2, who is FP1’s brother. The power torevoke T and revest absolutely in FP1 title to thetrust property is exercisable by FP1, but only withthe approval or consent of FB. There are no factsthat would suggest that FB is not subservient toFP1. Therefore, under paragraph (a)(1) of thissection, T is not subject to the general rule of§ 1.672(f)–1. FP1 is treated as the owner of T.

Example 2. Owner not grantor. Assume thesame facts as inExample 1, except that FP1 dies.After FP1’s death, FP2 has the power to withdrawthe assets of T, but only with the approval of FB.There are no facts that would suggest that FB isnot subservient to FP2. However, under paragraph(a)(1) of this section, T is now subject to thegeneral rule of § 1.672(f)–1, because FP2 is not agrantor of T. FP2 is not treated as the owner of T.

Example 3. Trustee not related or subordinateparty. Assume the same facts as inExample 1,except that neither FP1 nor any member of hisfamily has any substantial ownership interest orother connection with FB. FP1 can remove andreplace FB at any time for any reason. AlthoughFP1 can replace FB if FB refuses to approve orconsent to FP1’s decision to revest the trustproperty in himself, FB is not a related orsubordinate party. Therefore, under paragraph(a)(1) of this section, T is subject to the generalrule of § 1.672(f)–1. FP1 will not be treated asthe owner of T.

Example 4. Unrelated trustee will consent torevocation. FP, a foreign person, creates and fundsan irrevocable trust, T. The trustee is a foreignbank, FB, that is not a related or subordinate partywithin the meaning of § 1.672(c)–1. FB has thediscretion to distribute trust income or corpus toany person, including FP. Even if FB would infact distribute all the trust property to FP ifrequested to do so by FP, under paragraph (a)(1)of this section, T is subject to the general rule of§ 1.672(f)–1, because FP does not have the powerto revoke T. FP will not be treated as the owner ofT.

Example 5. Husband treated as holding powerheld by wife. H and his wife, W, both nonresidentaliens, create and fund a trust, T, using communityproperty. The power to revoke T and revestabsolutely in H and W title to the trust property isexercisable either by W acting alone or by H withthe consent of W. W has advised H that she willnot consent to any decision by H to revoke T.Although W is a related or subordinate party to Hwithin the meaning of § 1.672(c)–1, the presump-tion that W is subservient to H is rebutted by apreponderance of the evidence. However, pursuantto section 672(e), H is treated as holding thepower to revest that is held by W. Therefore,under paragraph (a)(1) of this section, T is notsubject to the general rule of § 1.672(f)–1. H andW are treated as the owners of T.

Example 6. U.S. grantor of trust revocable byforeign person. A, a nonresident alien, creates arevocable foreign trust, FT, and funds FT with$5,000 cash. The only possible beneficiary of FTis a foreign person. B, a U.S. citizen, contributes$1,000,000 of appreciated property to FT. Bretains no powers that would cause B to be treatedas an owner of any portion of FT under thegrantor trust rules. Although A has the power torevest absolutely in itself title to the appreciatedproperty, A is not a grantor of FT with respect tothe appreciated property. See § 1.671–2(e). There-fore, under paragraph (a)(1) of this section, theportion of FT that is attributable to the appreciatedproperty is subject to the general rule of§ 1.672(f)–1. A is not treated as the owner of suchportion.

(b) Certain other trusts—(1) In gen-eral. The general rule of § 1.672(f)–1(a)shall not apply to any trust (or portionof a trust) during the lifetime of thegrantor if the only amounts distributable(whether income or corpus) from suchtrust (or portion of a trust) during thelifetime of the grantor are amountsdistributable to the grantor or the spouseof the grantor. This paragraph (b) shallnot apply to that portion of a trust fromwhich, at any time after October 20,1996, any amounts are distributable toany person other than the grantor or thespouse of the grantor. For purposes ofthis paragraph (b), payments ofnongratuitous amounts (within themeaning of § 1.671–2(e)(4)(ii)) will notbe considered amounts distributable. Forthe definition of grantor, see § 1.671–2(e).

(2) Amounts distributable in dis-charge of legal obligation—(i) In gen-eral. Subject to the provisions of para-graph (b)(2)(ii) of this section, amounts

1997–25 I.R.B. 17 June 23, 1997

that are distributable from a portion of atrust in discharge of a legal obligationof the grantor or the spouse of thegrantor shall be treated as amountsdistributable to the grantor or the spouseof the grantor for purposes of paragraph(b)(1) of this section. For this purpose,an obligation is considered a legal obli-gation if it is enforceable under the locallaw of the jurisdiction in which thegrantor (or the spouse of the grantor)resides.

(ii) Legal obligation to related per-son. For purposes of paragraph (b)(2)(i)of this section, the termlegal obligationdoes not include an obligation to arelated person except to the extent theobligation was contracted bona fide andfor adequate and full consideration inmoney or money’s worth (see§ 20.2043–1 of this chapter). For thispurpose, a related person is a persondescribed in § 1.643(h)–1(e).

(3) Amounts distributable in dis-charge of support obligation. Amountsthat are distributable from a portion of atrust in discharge of the grantor’s or thegrantor’s spouse’s obligation to supporta family member shall be treated asamounts distributable to the grantor orthe spouse of the grantor only if thefamily member is an individual whowould be treated as a dependent of thegrantor or the grantor’s spouse undersections 152(a)(1) through (8), withoutregard to the requirement that half ofthe individual’s support be receivedfrom the grantor or the grantor’s spouse,and the family member is either—

(i) Permanently and totally disabled(within the meaning of section 22(e)(3));or

(ii) In the case of a son, daughter,stepson, or stepdaughter, less than 24years old.

(4) Grandfather rule—(i) In general.The general rule of § 1.672(f)–1 shallnot apply to a trust that was treated asowned by the grantor under section 677(other than section 677(a)(3)) on Sep-tember 19, 1995, as long as the trustwould continue to be so treated underthe basic grantor trust rules. However,such a trust will be subject to thegeneral rule of § 1.672(f)–1 with re-spect to any portion of the trust attribut-able to transfers to the trust after Sep-tember 19, 1995.

(ii) Separate accounting for transfersafter September 19, 1995. In the case ofa trust that contains both amounts heldin the trust on September 19, 1995, andamounts that were transferred to thetrust after September 19, 1995, para-

graph (b)(4)(i) of this section shall applyonly if the amounts that were held inthe trust on September 19, 1995, to-gether with all income, gains, and lossesderived therefrom (less all post-September 19, 1995, distributions there-from) are separately accounted for fromthe amounts that were transferred to thetrust after September 19, 1995, togetherwith all income, gains, and losses de-rived therefrom (less all distributionstherefrom). If there is no separate ac-counting, the general rule of§ 1.672(f)–1 shall apply to the trust. Ifthere is separate accounting, the generalrule of § 1.672(f)–1 shall not apply tothe portion of the trust that is attribut-able to amounts that were held in thetrust on September 19, 1995.

(5) Examples. The following ex-amples illustrate the rules of this para-graph (b):

Example 1. Amounts distributable only tograntor or grantor’s spouse. H and his wife, W,are both nonresident aliens. H and W have a child,C, who is a U.S. resident. H creates and funds anirrevocable trust, FT, using only his separateproperty. The only amounts distributable (whetherincome or corpus) from FT as long as either H orW are alive are amounts distributable to H or W.Upon the death of both H and W, C may receivedistributions from FT. Under paragraph (b)(1) ofthis section, FT is not subject to the general ruleof § 1.672(f)–1 during H’s lifetime. H is treatedas the owner of FT.

Example 2. Amounts temporarily distributableto person other than grantor or grantor’s spouse.Assume the same facts as inExample 1, exceptthat C is a 30-year old law student at the time FTis created, FT is created after October 20, 1996,and the trust instrument provides that as long as Cis in law school amounts may be distributed fromFT to pay C’s expenses. Thereafter, the onlyamounts distributable from FT as long as either Hor W are alive will be amounts distributable to Hor W. C’s expenses are not treated as legalobligations of H or W under paragraph (b)(2)(ii)of this section or as support obligations underparagraph (b)(3) of this section. Therefore, underparagraph (b)(1) of this section, FT is subject tothe general rule of § 1.672(f)–1(a). H is nottreated as the owner of FT. After C graduates fromlaw school, the general rule of § 1.672(f)–1 stillwill be applicable, and H still will not be treatedas the owner of FT.

Example 3. Grantor predeceases spouse.As-sume the same facts as inExample 1. H prede-ceases W. Under paragraph (b)(1) of this section,FT will become subject to the general rule of§ 1.672(f)–1 upon H’s death, because W is not agrantor. Accordingly, FT will be treated as aseparate taxable entity upon H’s death.

Example 4. Effect of divorce. H creates andfunds a trust, FT, from which the only amountsdistributable are amounts distributable to himselfand A. At the time FT is created, A is H’s wife.However, the trust document refers to A only byher name. H and A divorce. Under paragraph(b)(1) of this section, FT will be subject to thegeneral rule of § 1.672(f)–1 after the divorce,because amounts will still be distributable to A,

and A will no longer be the spouse of the grantor.After the divorce, FT will be treated as a separatetaxable entity.

Example 5. Fixed investment trust. FC, a for-eign corporation, invests in a domestic fixedinvestment trust, DT, that is classified as a trustunder § 301.7701–4(c)(1) of this chapter. Theonly amounts that are distributable from theportion of DT that is owned by FC are amountsdistributable to FC. Under paragraph (b)(1) of thissection, such portion of DT is exempt from thegeneral rule of § 1.672(f)–1. FC is treated as theowner of its portion of DT.

Example 6. Reinsurance trust. A domestic in-surance company, DI, reinsures a portion of itsbusiness with a foreign insurance company, FI. FIcreates and funds an irrevocable domestic trust,DT, in the United States as security for itsobligations under the reinsurance agreement. Thetrust funds are held by a U.S. bank and may beused only to pay claims arising out of thereinsurance policies. On the termination of DT,any assets remaining will revert to FI. The onlyamounts that are distributable from DT are distrib-utable in discharge of FI’s legal obligation. There-fore, under paragraph (b)(1) of this section, DT isexempt from the general rule of § 1.672(f)–1. FIis treated as the owner of DT.

Example 7. Asset securitization trust. A foreigncorporation, FC, borrows money from a bank, B,to finance the purchase of an airplane. FC createsa foreign trust, FT, to hold the airplane as securityfor the loan from B. The only amounts that aredistributable from FT are amounts distributable toB in the event that FC defaults on its loan from B.Thus, the only amounts distributable from FT arein discharge of FC’s legal obligation to B. WhenFC repays the loan, the trust assets will revert toFC. Under paragraph (b)(1) of this section, FT isexempt from the general rule of § 1.672(f)–1. FCis treated as the owner of FT.

(c) Compensatory trusts—(1) In gen-eral. Except as provided in paragraph(c)(4) of this section, § 1.672(f)–1 doesnot apply to any portion of a trustdistributions from which are taxable ascompensation for services rendered. Atrust described in this paragraph (c)(1) isreferred to in this section as a compen-satory trust.

(2) Trusts classified as compensatorytrusts. The following types of trusts arethe only types of trusts that shall beclassified as compensatory trusts withinthe meaning of paragraph (c)(1) of thissection—

(i) A qualified trust described in sec-tion 401(a) (but see § 1.641(a)–0(a));

(ii) A trust described in section457(g);

(iii) A nonexempt employees’ trustdescribed in section 402(b) (see§ 1.671–1(g) and (h));

(iv) A trust that is an individual re-tirement account described in section408(k) or 408(p);

(v) A trust that is an individual retire-ment account the only contributions towhich are rollover contributions listed insection 408(a)(1);

June 23, 1997 18 1997–25 I.R.B.

(vi) A trust that would be anonexempt employees’ trust described insection 402(b) but for the fact that thetrust’s assets are not set aside from theclaims of creditors of the actual ordeemed transferor within the meaning of§ 1.83–3(e); and

(vii) A trust that is a welfare benefitfund described in section 419(e).

(3) Other individual retirement ac-counts. For rules that apply to individualretirement accounts (within the meaningof section 408(a)) that are not compen-satory trusts within the meaning ofparagraph (c)(1) of this section, seeparagraphs (a) and (b) of this section.

(4) Exceptions. The Commissionermay, in revenue rulings, notices, orother guidance published in the InternalRevenue Bulletin (see § 601.601(d)(2)-(ii)(b)), designate categories of compen-satory trusts to which the general rule ofparagraph (c)(1) of this section does notapply.

(d) Effective date.Except as providedin paragraph (b)(1) of this section, therules of this section are applicable as ofAugust 20, 1996.

§ 1.672(f)–4 Recharacterization of pur-ported gifts.

(a) In general—(1) Purported giftsfrom partnerships. Except as provided inparagraphs (b) and (f) of this section,and without regard to the existence ofany trust, if a United States person (U.S.donee) directly or indirectly receives apurported gift or bequest (as defined inparagraph (d) of this section) from apartnership, the purported gift or bequestmust be included in the U.S. donee’sgross income as ordinary income.

(2) Purported gifts from foreign cor-porations. Except as provided in para-graphs (b) and (f) of this section, andwithout regard to the existence of anytrust, if a U.S. donee directly or indi-rectly receives a purported gift or be-quest (as defined in paragraph (d) ofthis section) from a foreign corporation,the purported gift or bequest must beincluded in the U.S. donee’s gross in-come as if it were a distribution fromthe foreign corporation. For purposes ofsection 1012, the U.S. donee will not betreated as having basis in the foreigncorporation. However, for purposes ofsection 1223, the U.S. donee will betreated as having a holding period in theforeign corporation on the date of thedeemed distribution equal to theweighted average of the holding periodsof the actual interest holders.

(b) Exceptions—(1) U.S. partner orshareholder treats transfer as distribu-tion and gift. Paragraph (a) of thissection shall not apply if the U.S. doneecan establish that a U.S. citizen orresident alien who directly or indirectlyholds an interest in the partnership orforeign corporation treated the purportedgift as a distribution to the U.S. partneror shareholder and a subsequent gift tothe U.S. donee.

(2) Charitable contributions. Para-graph (a) of this section shall not applyto U.S. donees that are described insection 170(c).

(c) Certain distributions from trustscreated by partnerships or foreign cor-porations. If a partnership or foreigncorporation is treated as the owner,under sections 671 through 679, of aportion of a trust from which property isdistributed to a U.S. donee in a gratu-itous transfer, the U.S. donee must treatthe amount as a distribution from thepartnership or foreign corporation. If apartnership or foreign corporation is nottreated as the owner, under sections 671through 679, of the portion of a trustfrom which property is distributed to aU.S. donee in a gratuitous transfer, theU.S. donee shall be taxable in themanner provided in paragraph (a) of thissection only if the U.S. tax computedunder that section exceeds the U.S. taxthat would be due if the U.S. doneetreats the amount as a distribution fromthe trust.

(d) Definition of purported gift orbequest. For purposes of this section, apurported gift or bequest is any transferby a partnership or foreign corporation(other than a transfer for fair marketvalue) to a person who is not a partnerin the partnership or shareholder of theforeign corporation.

(e) Effect on U.S. partner or share-holder. This section applies only tocomputations of the U.S. donee’s grossincome. This section does not affect theU.S. tax treatment of a U.S. partner inthe partnership or a U.S. shareholder ofthe foreign corporation.

(f) Recharacterization by district di-rector. Notwithstanding any other provi-sion in this section, if a U.S. doneereceives a transfer that is subject to therules of this section, the district directormay recharacterize such transfer to pre-vent the avoidance of U.S. tax or clearlyto reflect income. For example, thedistrict director may determine, basedupon the facts and circumstances, that adistribution from a partnership or for-

eign corporation is more properly char-acterized as a distribution from a trust.

(g) De minimis exception. This sec-tion shall not apply if, during the tax-able year of a U.S. donee, the aggregateamount of purported gifts or bequeststhat is transferred to such U.S. doneedirectly or indirectly from a partnershipor foreign corporation does not exceed$10,000. The aggregate amount mustinclude gifts or bequests from personsthat the U.S. donee knows or has reasonto know are related to the partnership orforeign corporation (within the meaningof section 643(i)).

(h) Examples. The following ex-amples illustrate the rules of this sec-tion:

Example 1.FC is a foreign corporation that iswholly owned by A, a nonresident alien. FCdistributes property directly to A’s U.S. daughter,B, purportedly as a gift. Under paragraph (a)(2) ofthis section, B must treat the distribution as adividend from FC. (However, if B can establishthat the distribution exceeded FC’s earnings andprofits, B must treat such excess as an amountreceived in excess of basis under section301(c)(3).) If FC is a passive foreign investmentcompany, B must treat the amount as a distribu-tion under section 1291. B will be treated ashaving the same holding period as A.

Example 2.FC is a foreign corporation that iswholly owned by A, a nonresident alien. FCcreates and funds a revocable foreign trust, FT,from which a gratuitous transfer is made immedi-ately to A’s U.S. daughter, B. Thus, the transfer isout of trust corpus. FC is not treated as the ownerof FT under sections 671 through 679. Underparagraph (c) of this section, B must treat thetransfer as a dividend from FC, rather than adistribution from FT, if such treatment results in ahigher U.S. tax liability.

(i) Effective date. The rules of thissection are applicable for any transferby a partnership or foreign corporationon or after August 20, 1996.

§ 1.672(f)–5 Special rules.

(a) Transfers by certain beneficiariesto foreign settlor—(1) In general. If, butfor section 672(f)(5), a foreign personwould be treated as the owner of anyportion of a trust, any U.S. beneficiaryof such trust shall be treated as theowner of a portion of the trust to theextent the U.S. beneficiary directly orindirectly made transfers of property tosuch foreign person (without regard towhether the U.S. beneficiary was a U.S.beneficiary at the time of any transfer)in excess of transfers to the U.S. benefi-ciary from the foreign person. The ruleof this paragraph will not apply to theextent the U.S. beneficiary can demon-strate to the satisfaction of the districtdirector that the transfer by the U.S.beneficiary to the foreign person waswholly unrelated to any transaction in-

1997–25 I.R.B. 19 June 23, 1997

volving the trust. For purposes of thisparagraph, a transfer of property doesnot include a nongratuitous transfer. See§ 671–2(e)(4)(ii). In addition, a giftshall not be taken into account to theextent such gift would not be character-ized as a taxable gift under section2503(b). For a definition ofU.S. benefi-ciary, see section 679.

(2) Examples. The following ex-amples illustrate the rules of this sec-tion:

Example 1.A, a nonresident alien, contributesproperty to FC, a foreign corporation that iswholly owned by A. FC creates a foreign trust,FT, for the benefit of A and his children. FT isrevocable by FC without the approval or consentof any other person. FC funds FT with theproperty received from A. A and his family moveto the United States. Under paragraph (a)(1) ofthis section, A is treated as the owner of FT.

Example 2.B, a U.S. citizen, makes a gratu-itous transfer of $1 million to his uncle, C, anonresident alien. C creates a foreign trust, FT, forthe benefit of B and his children. FT is revocableby C without the approval or consent of any otherperson. C funds FT with the property receivedfrom B. Under paragraph (a)(1) of this section, Bis treated as the owner of FT. (B also would betreated as the owner of FT as a result of section679.)

(b) Different taxable years. If a per-son has a different taxable year (asdefined in section 7701(a)(23)) from thetaxable year of the trust, an amount iscurrently taken into account in comput-ing the income of such person forpurposes of § 1.672(f)–1 if the amountis taken into account for the taxableyear of such person that includes thelast day of the taxable year of the trust.

(c) Entity characterization. Entitiesgenerally shall be characterized underU.S. income tax principles. See§§ 301.7701–1 through 301.7701–4 ofthis chapter. However, for purposes of§ 1.672(f)–4, a transferor that is awholly owned business entity shall betreated as a corporation, separate fromits single owner. See § 301.7701–2(c)(2)(iii) of this chapter.

(d) Effective date. The rules of thissection are generally applicable as ofAugust 20, 1996. However, the rules inparagraph (c) of this section shall not beapplicable until [date of publication as afinal regulation in theFederal Regis-ter].

PART 301—PROCEDURE ANDADMINISTRATION

Par. 5. The authority citation for part301 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.7701–2(c)(2)(iii) also is-sued under 26 U.S.C. 643(a)(7),672(f)(4) and (6).

Par. 6. Section 301.7701–2 isamended by adding paragraph (c)(2)(iii)to read as follows:

§ 301.7701–2 Business entities; defini-tions.

* * * * *(c) * * *(2) * * *(iii) Special rule for foreign business

entities that make purported gifts. Forthe purposes of applying the rules ofsection 672(f)(4), a wholly owned busi-ness entity shall be treated as a corpora-tion, separate from its single owner.

* * * * *

Michael P. Dolan,Acting Commissioner of Internal

Revenue.

(Filed by the Office of the Federal Register onJune 4, 1997, 8:45 a.m., and published in the issueof the Federal Register for June 5, 1997, 62 F.R.30785)

26 CFR 601.204: Changes in accounting periodsand in methods of accounting.(Also Part I, §§ 168, 446, 481; 1.168(i)–1, 1.446–1.)

Rev. Proc. 97–30

SECTION 1. PURPOSE

This revenue procedure allows a tax-payer to make a general asset accountelection under § 168(i)(4) of the Inter-nal Revenue Code for certain propertythat was placed in service in taxableyears ending before October 11, 1994.The election set forth in this revenueprocedure is available only for a taxableyear ending in 1996 or 1997 (the yearof change).

SECTION 2. BACKGROUND

.01 Section 168(i)(4) provides that,under regulations, a taxpayer may main-tain one or more general asset accountsfor any property to which § 168 applies.The rules for general asset accounts areprovided in § 1.168(i)–1 of the IncomeTax Regulations, which allows a tax-payer to make an election to groupassets into one or more general assetaccounts. The assets in any particularaccount are depreciated as a single asset.Each general asset account generallyincludes only assets that are placed inservice by the taxpayer in the sametaxable year and that have the same

depreciation method, recovery period,convention, and asset class.

Section 1.168(i)–1 applies to propertysubject to § 168 that is placed in ser-vice in taxable years ending on or afterOctober 11, 1994. For property subjectto § 168 that was placed in service afterDecember 31, 1986, in taxable yearsending before October 11, 1994,§ 1.168(i)–1(l) provides that the InternalRevenue Service will allow any reason-able method that is consistently appliedto the taxpayer’s general asset accounts.

.02 Except as otherwise expresslyprovided, a taxpayer must obtain theconsent of the Commissioner of InternalRevenue to change a method of ac-counting for federal income tax pur-poses. Section 446(e) and § 1.446–1(e)(2)(i). To obtain this consent, thetaxpayer must file a Form 3115, Appli-cation for Change in AccountingMethod, during the taxable year inwhich the taxpayer desires to make theproposed change. Section 1.446–1T(e)(3)(i).

.03 The Commissioner is authorizedto prescribe administrative proceduressetting forth the limitations, terms, andconditions necessary to obtain consentfor effecting a change in method ofaccounting and to prevent amounts frombeing duplicated or omitted, includingthe taxable year or years in which the§ 481(a) adjustment is to be taken intoaccount. Section 1.446–1(e)(3)(ii).

SECTION 3. GENERAL ASSETACCOUNT ELECTION

.01 Subject to section 3.02 of thisrevenue procedure, a taxpayer may electto apply the general asset account rulesin § 1.168(i)–1 for any item of prop-erty: (1) depreciated by the taxpayerunder § 168; (2) placed in service bythe taxpayer after December 31, 1986,in any taxable year ending before Octo-ber 11, 1994; (3) for which the taxpayerhas not previously made a general assetaccount election; and (4) held by thetaxpayer as of the beginning of the yearof change.

.02 This election may be made only ifthe taxpayer has records that establish:(1) the taxable year in which the prop-erty was placed in service by the tax-payer; (2) the applicable depreciationmethod, recovery period, and conventionunder § 168 for the property; (3) theunadjusted depreciable basis (as definedin § 1.168(i)–1(b)(1)) of the property asof the beginning of the year of change;and (4) the depreciation allowed or

June 23, 1997 20 1997–25 I.R.B.

allowable, whichever is greater, for theproperty as of the end of the taxableyear immediately preceding the year ofchange.

SECTION 4. EFFECT OF ELECTION

.01 In general. If a taxpayer makes ageneral asset account election under thisrevenue procedure, the taxpayer con-sents to, and agrees to apply, all of theprovisions of § 1.168(i)–1 to the prop-erty subject to the election, beginningwith the year of change. Thus, pursuantto § 1.168(i)–1(k)(1), the election gen-erally is irrevocable and will be bindingon the taxpayer for computing taxableincome for the year of change and forall subsequent taxable years. The elec-tion has no effect on the depreciationmethod, recovery period, and conventionof the property.

.02 Establishment of general assetaccounts. Any property subject to ageneral asset account election under thisrevenue procedure must be grouped intoone or more general asset accounts inaccordance with the rules in § 1.168(i)–1(c) and separate from any accountformed in any taxable year prior to theyear of change. In addition, each generalasset account must include a beginningbalance for both the unadjusted depre-ciable basis and the depreciation reserveof the general asset account. The begin-ning balance for the unadjusted depre-ciable basis of the general asset accountis equal to the sum of the unadjusteddepreciable bases as of the beginning ofthe year of change for all propertyincluded in the general asset account.The beginning balance of the deprecia-tion reserve of the general asset accountis equal to the sum of the depreciationallowed or allowable, whichever isgreater, as of the end of the taxable yearimmediately preceding the year ofchange for all property included in thegeneral asset account.

SECTION 5. CHANGE IN METHODOF ACCOUNTING

.01 Consent.A general asset accountelection for any item of property that ismade pursuant to this revenue procedureis a change in method of accounting.Under § 1.446–1(e)(2)(i), the consent ofthe Commissioner is hereby granted tomake this method change by any tax-

payer for any item of property for whicha general asset account election is madepursuant to this revenue procedure. Thisconsent is granted for the taxpayer’syear of change. The consent is condi-tioned, however, on the taxpayer’s com-plying with this revenue procedure. Ifthe taxpayer does not comply with thisrevenue procedure, the taxpayer will bedeemed to have initiated a change inmethod of accounting without obtainingthe consent of the Commissioner re-quired under § 446(e).

.02 No § 481(a) adjustment.Becausethe adjusted basis of the property is notchanged by the general asset accountelection, the method change is made ona cut-off basis and, thus, no adjustmentunder § 481(a) is required or permitted.

.03 Manner of making methodchange.

(1) Complete and file a currentForm 3115. The general asset accountelection under this revenue procedure ismade on the taxpayer’s timely filedoriginal federal income tax return (in-cluding extensions) for the year ofchange or on an amended return for theyear of change filed no later than De-cember 20, 1997. The election is madeby attaching a completed, current Form3115 to the taxpayer’s original oramended return for the year of change.The requirement to file a Form 3115during the taxable year in which thetaxpayer desires to make the proposedchange is waived in accordance with§ 1.446–1(e)(3)(ii).

(2) No user fee.No user fee isrequired for a Form 3115 filed underthis revenue procedure. Any user feethat is submitted with any Form 3115requesting permission to make a generalasset account election under this revenueprocedure will be returned to the tax-payer.

.04 No protection from examinationchanges.A general asset account elec-tion under this revenue procedure doesnot change the taxpayer’s presentmethod of computing depreciation al-lowances for the property subject to theelection and, consequently, examinationprotection is not provided. Therefore,for any taxable year before the year ofchange, a taxpayer that receives consentto make a general asset account electionunder this revenue procedure does notthereby obtain protection from examina-tion changes for the property included inthe general asset account.

SECTION 6. EFFECTIVE DATE

An election may be made pursuant tothis revenue procedure for a taxpayer’staxable year ending in 1996 or 1997.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 97–27, 1997–21 I.R.B. 10,is modified.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Kathleen Reed of the Of-fice of Assistant Chief Counsel(Passthroughs and Special Industries).For further information regarding thisrevenue procedure, contact Mark Pitzerat (202) 622–3110 (not a toll-free call).

Issuance of Taxpayer AssistanceOrders (TAOs)

Delegation Order 232 (Rev. 3)

Effective: April 16, 1997.Authority: To issue Taxpayer Assis-

tance Orders (TAOs), other than TAOsinvolving a principal residence, underIRC § 7811, as amended by § 102 ofPublic Law 104–168 (Taxpayer Bill ofRights 2).

Delegated to:Assistant Commissioner(International); Regional Commission-ers; District Directors and Assistant Di-rectors; Service Center Directors andAssistant Directors; Regional, ServiceCenter, District, and International Tax-payer Advocates.

Redelegation:This authority may beredelegated to an Associate TaxpayerAdvocate.

Authority: To issue Taxpayer Assis-tance Orders (TAOs), under IRC§ 7811, to release a principal residenceof a taxpayer levied upon or to ceaseany action regarding a principal resi-dence.

Delegated to:Regional Commission-ers, Assistant Commissioner (Interna-tional), and the Regional and Interna-tional Taxpayer Advocates.

Redelegation:This authority may notbe redelegated.

The authority to modify or rescind aTAO is limited by IRC § 7811(c), asamended by § 102(b) of Public Law104–168, to only the Commissioner,Deputy Commissioner, and TaxpayerAdvocate.

1997–25 I.R.B. 21 June 23, 1997

Source of Authority:Treasury Order150–10.

This order supersedes Del. Order 232(Rev. 2).

Dated April 16, 1997.Lee R. Monks

Taxpayer Advocate.

Information Reporting onTransactions With Foreign Trustsand on Large Foreign Gifts

Notice 97–34

This notice provides guidance regard-ing the new foreign trust and foreigngift reporting provisions contained in theSmall Business Job Protection Act of1996 (the ‘‘Act’’). The Act expandsinformation reporting requirements un-der section 6048 of the Internal RevenueCode (the ‘‘Code’’) for U.S. personswho make transfers to foreign trusts andfor U.S. owners of foreign trusts. Inaddition, the Act adds new reportingrequirements for U.S. beneficiaries offoreign trusts, extensively revises thecivil penalties for failure to file informa-tion with respect to foreign trusts, andadds civil penalties for failure to reportcertain transfers to foreign entities. Seesections 6048(c), 6677, and 1494(c).The Act also adds section 6039F to theCode, creating reporting requirementsfor U.S. persons who receive large giftsfrom foreign persons.

Notice 96–60, 1996–49 I.R.B. 7, pro-vided that taxpayers would not be re-quired to file information statementsunder section 6048(a) or be subject toassociated penalties under section 6677until further guidance was issued. Sec-tion VIII of this notice sets forth thisfurther guidance.

This notice has eight sections. SectionI explains the expected revisions toForms 3520 and 3520–A. Section IIprovides certain definitions of termsused in this notice. Section III providesguidance on reporting of transfers toforeign trusts. Section IV explains thereporting responsibilities of U.S. ownersof foreign trusts, including the informa-tion returns to be filed by these foreign

trusts and the procedures for foreigntrusts to appoint U.S. agents. Section Vprovides guidance regarding the newreporting requirements for U.S. benefi-ciaries of foreign trusts. Section VIexplains the new reporting rules for U.S.persons who receive large gifts fromforeign persons. Section VII providesguidance on the new penalties for fail-ure to comply with these reporting re-quirements. Finally, Section VIII pro-vides special transition rules.

Treasury and the Service expect toissue regulations incorporating the guid-ance set forth in this notice. Until suchregulations are issued, taxpayers mustcomply with the guidance set forth inthis notice.

Section I. Revisions to Forms 3520and 3520–A

Prior to the Act, a U.S. person whotransferred property to a foreign trustwas required to report the transfer onForm 3520, ‘‘Creation of or Transfers toCertain Foreign Trusts,’’ within 90 daysof the transfer. In addition, U.S. ownersof foreign trusts were required to fileannually Form 3520–A, ‘‘Annual Returnof Foreign Trust with U.S. Beneficia-ries.’’ No reporting was required of U.S.beneficiaries of foreign trusts or of U.S.persons who received gifts from foreignpersons.

In order to facilitate taxpayer compli-ance and reduce duplicative reportingrequirements, the Service is developinga revised Form 3520 (‘‘Annual Returnto Report Transactions With ForeignTrusts and Receipt of Certain ForeignGifts’’) that generally will allow U.S.persons to use a single form to complywith all of the new reporting require-ments of the Act pertaining to transac-tions with foreign trusts and the receiptof foreign gifts. In addition, Form3520–A will be revised so that foreigntrusts will be able to use that form tomeet the new information reporting re-quirements of section 6048(b). U.S.owners of foreign trusts will no longerbe required to file Form 3520–A.

Section II. Definitions

For purposes of this notice, the terms‘‘grantor,’’ ‘‘beneficiary,’’ and ‘‘obliga-tion’’ are defined as follows.

A ‘‘grantor’’ includes any person whocreates a trust as well as any personwho directly or indirectly makes a gra-tuitous transfer of money or other prop-erty to a trust. A grantor includes aperson who acquires an interest in a

trust in a nongratuitous transfer from aperson who is a grantor of the trust. Agrantor also includes an investor whoacquires an interest in a fixed invest-ment trust from a grantor of the trust. Ifone person creates or funds any portionof a trust primarily as an accommoda-tion for another person, the other personwill be treated as the grantor withrespect to such portion of the trust.Gratuitous transfers are described belowin Section III.

A ‘‘beneficiary’’ includes any personthat could possibly benefit (directly orindirectly) from the trust at any time(including any person who could benefitif the trust were amended), whether ornot the person is named in the trustinstrument as a beneficiary and whetheror not the person can receive a distribu-tion from the trust in the current year.Sections 679(c), 643(a)(7).See alsoH.R. Rep. No. 658, 94th Cong., 1stSess. 210 (1975), 1976–3 (vol. 2) C.B.902. However, for purposes of sections643(i), 679(a)(3)(C) and 1494, a personwill not be considered a beneficiary if,based on all relevant facts and circum-stances, it could not be reasonably an-ticipated that the person could possiblybenefit from the trust. For example, forthis purpose a publicly-traded corpora-tion would generally not be treated as abeneficiary of a family’s trust even ifthe trustee is given complete discretionto distribute trust income to anyone.However, friends and business associ-ates of the family would be consideredbeneficiaries of such a trust because itcould be reasonably anticipated that thetrust could possibly benefit such per-sons.

An ‘‘obligation’’ includes any bond,note, debenture, certificate, bill receiv-able, account receivable, note receivable,open account, or other evidence of in-debtedness, and, to the extent not previ-ously described, any annuity contract.

Section III. Transfers to ForeignTrusts

This section of the notice providesguidance for the reporting of transfers toforeign trusts. As more fully describedbelow, gratuitous transfers are reportableunder section 6048(a). For this purpose,a gratuitous transfer is any transfer otherthan: (a) a transfer for fair market value,or (b) a corporate or partnership distri-bution. In addition, as more fully de-scribed below, nongratuitous transfers(all transfers other than gratuitous trans-fers) to a foreign trust are reportable

1 There are currently two provisions of the InternalRevenue Code designated as section 6039F. Thesecond provision was added by the Health Insur-ance Portability and Accountability Act of 1996(HIPAA). Treasury intends to seek a technicalcorrection to HIPAA to redesignate section 6039Fas added by HIPAA as section 6039G. All subse-quent references to section 6039F in this Noticerelate to section 6039F as contained in the SmallBusiness Job Protection Act of 1996.

June 23, 1997 22 1997–25 I.R.B.

under section 1494 if: (a) the U.S.transferor does not immediately recog-nize all of the gain on the transfer (orrecognizes gain solely by reason of anelection under section 1057), or (b) theU.S. transferor is related to the trust. Ifa transfer is gratuitous in part andnongratuitous in part, the gratuitous por-tion of the transfer must be reportedunder section 6048 and thenongratuitous portion of the transfermust be reported under section 1494.

A. Background

Section 6048(a) generally providesthat any U.S. person who directly orindirectly transfers money or other prop-erty to a foreign trust (including atransfer by reason of death) must reportsuch transfer at the time and in themanner prescribed by the Secretary. Sec-tion 6048(a)(2). Transfers to foreigntrusts described in sections 402(b),404(a)(4), or 404A, or trusts determinedby the Secretary to be described insection 501(c)(3) are not reportable un-der these requirements. Section6048(a)(3)(B)(ii). Transfers involvingfair market value sales are also notreportable. Section 6048(a)(3)(B)(i). TheSecretary may exempt other types oftransfers from being reported if theUnited States does not have a significantinterest in obtaining the required infor-mation. Section 6048(d)(4). A personwho fails to comply with the reportingrequirements of section 6048(a) withrespect to a transfer occurring afterAugust 20, 1996, will be subject to a 35percent penalty on the gross value of theproperty transferred. Section 6677(a).

One of the purposes of the reportingrequirements in section 6048(a) is toensure that U.S. transferors comply withsection 679. Section 679 generally treatsa U.S. person as the owner of a foreigntrust if the U.S. person transfers prop-erty to the foreign trust and the trustcould benefit a U.S. person. However, aU.S. person will not be treated as theowner of the trust under section 679 if,in exchange for the property transferredto the trust, the U.S. person receivesproperty whose value is at least equal tothe fair market value of the propertytransferred. Section 679(a)(2)(B).

Certain transfers of property by U.S.persons to foreign trusts may be de-

scribed in section 1491 as well assection 6048(a). Section 1491 generallyprovides that a U.S. person who trans-fers property to a foreign trust is subjectto a 35 percent excise tax on anyunrecognized gain in the transferredproperty. Section 1494 generally pro-vides that transfers described in section1491 to certain foreign entities (includ-ing foreign trusts) must be reported.Notice 97–18, 1997–10 I.R.B. 35, pro-vided that in the case of transfers toforeign trusts, reporting obligations un-der section 1494 may be satisfied if theU.S. transferor complies with its report-ing obligations under section 6048(a)and the U.S. transferor does not oweexcise tax under section 1491.

B. Section 6048(a) Information Re-porting

Except as otherwise provided in Sec-tion III.E., a U.S. person must reportunder section 6048(a) any gratuitoustransfer to a foreign trust. Althoughnongratuitous transfers generally are notreportable under section 6048(a), anytransfer in exchange for an obligationthat is treated as a qualified obligation(as defined in section III.C.2) must alsobe reported under section 6048(a). In theevent of a reportable transfer occurringby reason of death, the executor, asdefined in section 2203, is responsiblefor reporting the transfer.

A gratuitous transfer is any transferother than (i) a transfer for fair marketvalue, or (ii) a corporate or partnershipdistribution. A transfer of property to atrust may be considered a gratuitoustransfer without regard to whether thetransfer is a gift for gift tax purposes(see Chapter 12 of Subtitle B of theCode). A gratuitous transfer to a foreigntrust must be reported on Form 3520.

For purposes of this notice, a transferfor fair market value includes onlytransfers in consideration for propertyreceived from the trust, services ren-dered by the trust, or the right to useproperty of the trust. A transfer is forfair market value only to the extent thatthe value of the property received, ser-vices rendered, or the right to use theproperty is equal to the fair marketvalue of the property transferred. Forexample, rents, royalties, and compensa-tion paid to a trust are transfers for fairmarket value only if the payments re-flect an arm’s length price for the use ofthe property of, or services rendered by,the trust.

For purposes of this determination, ifa U.S. person contributes property to a

trust in exchange for any type of interestin the trust, such interest in the trust willbe disregarded in determining whetherfair market value has been received. Inaddition, a U.S. person will not betreated as making a transfer for fairmarket value merely because thetransferor recognizes gain on the trans-action. For example, if a taxpayer electsto treat a transfer of appreciated prop-erty to a foreign trust as a deemed saleunder section 1057, such a transfer willnot be treated as a transfer for fairmarket value because the transferor didnot receive actual fair market valueconsideration pursuant to the deemedsale. For special rules regarding obliga-tions issued by related foreign trusts, seeSection III.C. below.

For purposes of this notice, a transferto a foreign trust is a corporate distribu-tion, and therefore not a gratuitoustransfer, only if it is a distributiondescribed in sections 301, 302, 305,355, or 356. Similarly, for purposes ofthis notice, a transfer to a foreign trustis a partnership distribution, and there-fore not a gratuitous transfer, only if itis described in section 731. A distribu-tion from one trust to another trust thatis a beneficiary of the first trust is agratuitous transfer. Moreover, a domestictrust that becomes a foreign trust isdeemed to have made a gratuitous trans-fer of all its assets immediately beforebecoming a foreign trust.See section1491.

Notwithstanding any other guidanceprovided by this notice, a gratuitoustransfer also includes any direct or indi-rect transfer that is structured with aprincipal purpose of avoiding the appli-cation of sections 679 or 6048.Seesections 643(a)(7), 679(d), and 6048(a).

C. Trust Obligations

1. BackgroundCongress was concerned that certain

taxpayers may have attempted to avoidthe application of sections 679 and6048(a) by transferring property to aforeign trust in exchange for obligationsissued by the trust. H.R. Rep. No. 542,104th Cong., 2d Sess., pt. 2 at 25(1996). Thus, the Act provides that if aU.S. person transfers money or otherproperty to a related foreign trust, anyobligation issued by the trust (or anyobligation of a person related to thetrust) will not be taken into account indetermining if the U.S. person receivedfair market value, except to the extentprovided by regulations. Sections679(a)(3)(A)(i), 6048(a)(3)(B)(i). For

2 As explained in Notice 97–18, Treasury and theService are studying whether distributions bydomestic corporations and partnerships should bereportable under section 1494. This notice doesnot affect the reporting of such corporate orpartnership distributions.

1997–25 I.R.B. 23 June 23, 1997

purposes of determining whether an ob-ligation is disregarded, a person is re-lated to a trust if, without regard to thetransfer, the person is a grantor of thetrust, a beneficiary of the trust, or aperson who is related (within the mean-ing of section 643(i)(2)(B)) to anygrantor or beneficiary of the trust. Sec-tion 679(a)(3)(C).

Congress nevertheless intended thatTreasury and the Service would exerciseregulatory authority to allow certaintrust obligations to be taken into accountin determining whether such a transferorhas received fair market value. In exer-cising this regulatory authority, Congressexpected that Treasury and the Servicewould give consideration to whetherthere is a reasonable expectation that anobligation of the trust would be repaid.H.R. Conf. Rep. No. 737, 104th Cong.,2d Sess. 335 (1996).

2. Qualified ObligationsWhere a U.S. person transfers money

or other property to a related foreigntrust in exchange for an obligation fromthat trust (or an obligation of a personrelated to such trust), regulations willprovide that the obligation will be takeninto account for purposes of section 679in determining whether the U.S.transferor received fair market valuefrom the foreign trust only if the obliga-tion is a ‘‘qualified obligation.’’

An obligation is a qualified obligationonly if:

(i) The obligation is reduced to writ-ing by an express written agreement;

(ii) The term of the obligation doesnot exceed five years (for purposes ofdetermining the term of an obligation,the obligation’s maturity date is the lastpossible date that the obligation can beoutstanding under the terms of the obli-gation);

(iii) All payments on the obligationare denominated in U.S. dollars;

(iv) The yield to maturity of theobligation is not less than 100 percentof the applicable Federal rate and notgreater than 130 percent of the appli-cable Federal rate (the applicable Fed-eral rate for an obligation is the appli-cable Federal rate in effect under section1274(d) for the day on which the obli-gation is issued, as published in theInternal Revenue Bulletin);

(v) The U.S. transferor extends theperiod for assessment of any income ortransfer tax attributable to the transferand any consequential income taxchanges for each year that the obligationis outstanding, to a date not earlier thanthree years after the maturity date of the

obligation (this extension is not neces-sary if the maturity date of the obliga-tion does not extend beyond the end ofthe U.S. person’s taxable year and ispaid within such period); when properlyexecuted and filed, such an agreementwill be deemed to be consented to bythe Service Center Director or the Assis-tant Commissioner (International) forpurposes of § 301.6501(c)–1(d); and

(vi) The U.S. transferor reports thestatus of the obligation, including princi-pal and interest payments, on Form3520 for each year that the obligation isoutstanding.

If, while the original obligation isoutstanding, the U.S. transferor or aperson related to the trust directly orindirectly obtains another obligation is-sued by the trust, or if the U.S.transferor directly or indirectly obtainsanother obligation issued by a personrelated to the trust, the original obliga-tion will be deemed to have the maturitydate of any such subsequent obligationin determining whether the term of theoriginal obligation exceeds the specified5-year term. In addition, a series ofobligations issued and repaid by thetrust (or a person related to the trust)will be treated as a single obligation ifthe transactions giving rise to the obli-gations are structured with a principalpurpose to avoid the application of thisprovision.

If an obligation treated as a qualifiedobligation subsequently fails to be aqualified obligation (e.g., a renegotiationof the terms of the obligation causes theterm of the obligation to exceed fiveyears), the U.S. transferor will be treatedas making a gratuitous transfer to thetrust in an amount equal to the originalobligation’s adjusted issue price (withinthe meaning of § 1.1275–1(b)) plus anyaccrued but unpaid qualified stated in-terest (within the meaning of § 1.1273–1(c)) as of the date of the subsequentevent that causes the obligation to nolonger be a qualified obligation. If thematurity date is extended beyond fiveyears by reason of the issuance of asubsequent obligation by the trust (orperson related to the trust), the amountof the gratuitous transfer will not exceedthe issue price of the subsequent obliga-tion. The subsequent obligation will beseparately tested to determine if it is aqualified obligation.

Generally, as discussed above, a gra-tuitous transfer resulting from a failedqualified obligation will be deemed tooccur on the date of the subsequentevent that causes the obligation to no

longer be a qualified obligation. How-ever, based on all facts and circum-stances, the district director may deem agratuitous transfer to have occurred onany date on or after the issue date of theoriginal obligation. For example, if atthe time the original obligation wasissued the transferor knew or had reasonto know that the obligation would notbe repaid, the district director coulddeem the transfer to have occurred onthe issue date of the original obligation.A demand loan does not have a speci-fied term and, therefore, cannot be a‘‘qualified obligation.’’ In addition, anannuity contract cannot be a ‘‘qualifiedobligation.’’

The rules for qualified obligationsapply to an obligation of a relatedforeign trust (or of a person related tothe trust) issued after February 6, 1995,whether or not in accordance with apreexisting arrangement or understand-ing. For purposes of these rules, if anobligation issued on or before February6, 1995, is modified after that date, andthe modification is a significant modifi-cation within the meaning of § 1.1001–3, the obligation is treated as if it wereissued on the date of the modification.However, the penalty contained in re-vised section 6677 will only apply tothe failure to report transfers in ex-change for obligations issued after Au-gust 20, 1996.

D. Section 1494 Information Re-porting

Notwithstanding that nongratuitoustransfers of property generally are notreportable under section 6048(a), fairmarket value transfers must neverthelessbe reported on Form 3520 pursuant tosection 1494 if:

(i) The U.S. transferor (other than aperson described in Part II.A.1.i.through iii. of Notice 97–18, 1997–10I.R.B. 35) makes a nongratuitous trans-fer of appreciated property to a foreigntrust and does not immediately recog-nize all of the gain on the propertytransferred (or recognizes gain only byreason of an election described in sec-tion 1057); or

(ii) The U.S. transferor is related tothe trust. A transferor is consideredrelated to the trust if the transferor is thegrantor of the trust, a beneficiary of thetrust, or a person related to a grantor orbeneficiary (applying the principles ofsection 643(i)(2)(B), as modified bySection II.A.2. of Notice 97–18,1997–10 I.R.B. 35).

June 23, 1997 24 1997–25 I.R.B.

If such a nongratuitous transfer to aforeign trust is reportable under section1494, the transfer must be reported onForm 3520 in a manner comparable tothe manner for reporting transactionswith other foreign entities on Form 926(‘‘Return by a U.S. Transferor of Prop-erty to a Foreign Corporation, ForeignEstate or Trust, or Foreign Partner-ship’’). SeeNotice 97–18, Section III.C.Thus, if a U.S. person transfers appreci-ated property to a foreign trust and doesnot immediately recognize the entireamount of gain on the transfer (orrecognizes gain only by reason of anelection described in section 1057), thetransferor must separately identify theproperty transferred. However, if thetransferor recognizes the gain (if any)on the property transferred, but thetransferor is related to the foreign trust,the transferor may aggregate theamounts transferred to the trust duringthe year, using the categories set forth inSection III.C. of Notice 97–18.

The transferor will not be required tofile a separate Form 926 in addition toForm 3520 unless the transferor owesexcise tax under section 1491 with re-spect to a transfer. Elections under sec-tion 1057 to avoid the section 1491excise tax can be made on Form 3520.

E. Deferred Compensation andCharitable Trusts

Without regard to whether a transferto a foreign trust is gratuitous ornongratuitous, transfers to foreign trustsdescribed in sections 402(b), 404(a)(4),404A, or 501(c)(3) are exempt fromreporting under section 6048(a). Section6048(a)(3)(B)(ii). For purposes of thisprovision, a trust will be considereddescribed in section 501(c)(3) only if ithas a determination letter from the Ser-vice that has not been revoked recogniz-ing its status as exempt from incometaxation under section 501(a).

Section 6048(d)(4) authorizes the Sec-retary to suspend requirements of sec-tion 6048 as appropriate. Based on thisauthority, no reporting will be requiredunder section 6048(a) on transfers toCanadian Registered Retirement SavingsPlans (RRSPs) if the trust would qualifyfor treaty benefits at the time of thetransfer under the Convention Betweenthe United States of America andCanada with Respect to Taxes on In-come and on Capital. Any U.S. personrelying on a tax treaty with Canada toavoid information reporting must, how-ever, disclose this position under section6114.

Furthermore, the Secretary has deter-mined that, if a foreign trust is describedin sections 402(b), 404(a)(4), 404A or501(c)(3), or is an RRSP, and a transferto such trust would be exempt fromreporting under section 6048(a) pursuantto this notice, no reporting is requiredwith respect to any transfer to that trustunder section 1494. Thus, no penaltywill apply under sections 6677 or1494(c) with respect to the failure toreport any transfer to such a trust.

Comments are solicited concerningwhether other categories of transfers toforeign trusts should be exempt fromreporting under sections 6048(a) and1494.

F. Examples

The following examples illustrate therules in this Section II. In these ex-amples, A is a U.S. citizen, DC is adomestic corporation, DT is a domestictrust that is not treated as owned by anyother person, and FT is a foreign trust.

Example 1. Contribution to FT.A contributescash to FT, through a broker, in exchange forunits in FT. The value of the units in FT isdisregarded in determining whether A has re-ceived fair market value. Therefore, the contri-bution by A is a gratuitous transfer and A mustreport the contribution to FT under section6048(a).Example 2. Interest payment to FT.A borrowscash from FT, an unrelated foreign trust. Arm’s-length interest payments by A will not betreated as gratuitous transfers. Thus, A is notrequired to report the payments under section6048(a). In addition, A is not required to reportthe payments under section 1494, since A is notrelated to the trust.Example 3. Trust distribution to FT.A createdand funded DT. After A’s death, DT distributescash to FT, which is a beneficiary of DT. Thetrust distribution by DT is a gratuitous transfer.DT must report the distribution under section6048(a).Example 4. Dividend payment to FT.A createsand funds FT. FT owns stock of DC, a publiclytraded company, which pays a dividend to FT.The dividend paid by DC is not a gratuitoustransfer. Thus, DC is not required to report thedividend to FT under section 6048(a).Example 5. Right to withdraw.F, a foreignindividual, creates FT and contributes $10,000to FT. In addition, A transfers $10,000,000 toFT. A retains no power over FT. F has the rightto withdraw all of FT’s property. A must reportthe transfer of $10,000,000 to FT under section6048(a).Example 6. Anti-abuse rule.FT is created by aforeign person to benefit B, A’s child, who is aU.S. citizen. FT is not treated as owned by anyother person. On December 1, 1998, A creates alimited partnership and contributes propertyworth $1,000,000 to the limited partnership. OnMarch 1, 1999, with a principal purpose toavoid the application of section 679, A sells a25 percent interest in the limited partnership tothe trust in exchange for $185,000 (A takes theposition that $185,000 reflects the fair marketvalue of the 25 percent interest because of a

discount for the minority interest.) Even if thefair market value of the minority interest in thelimited partnership was only $185,000 at thetime of the transfer, the $65,000 minority dis-count will be treated as a gratuitous transfer asof March 1, 1999, for purposes of section 679and 6048 because the transaction was designedto avoid section 679. Therefore, A must reportthe $65,000 minority discount under section6048(a) in 1999. A must also report the$185,000 under section 1494 in 1999, since A isrelated to the foreign trust.Example 7. Nonqualified obligation.A, thefather of a U.S. beneficiary of FT, sells propertyworth $1,000,000 to FT in exchange for anobligation issued by FT. The obligation is not a‘‘qualified obligation.’’ Thus, A’s sale to FT willbe treated as a gratuitous transfer and A mustreport the transfer under section 6048(a). A willalso be treated as owning for purposes ofsection 679 the portion of the trust attributableto the property worth $1,000,000 that he trans-ferred to the trust.Example 8. Qualified obligation.A, a benefi-ciary of FT, sells property on January 1, 1998,worth $1,000,000 to FT in exchange for anobligation issued by FT due on January 1, 2001,with a stated interest rate equal to 100 percentof the applicable Federal rate. FT is not treatedas owned by any other person. To ensure thatthe obligation is a qualified obligation, A mustreport the transfer for purposes of section6048(a), properly extend the statute of limita-tions for each year in which the obligation isoutstanding, and report annually on the status ofthe obligation. Provided A complies with theserequirements, the obligation is a qualified obli-gation and A has not made a gratuitous transferto the trust in 1998 for purposes of section6048.Example 9. Subsequent transfer while qualifiedobligation is outstanding.Assume the samefacts asExample 8, except that A’s father, C,who is not a U.S. person, also loaned FT$900,000 on December 1, 2000, when theadjusted issue price on FT’s original obligationto A is $800,000, plus accrued but unpaidinterest of $10,000. FT’s obligation to C has amaturity date of December 1, 2004, more thanfive years after the issue date of A’s originalobligation. Because A is related to C, A’soriginal obligation is treated as having a matu-rity date of December 1, 2004. Thus, A will betreated as having made a gratuitous transfer toFT of $810,000 as of December 1, 2000. Amust report this transfer on Form 3520 for theyear 2000. However, if as of the date of A’soriginal transfer A knew or had reason to knowthat the obligation would not be repaid, thedistrict director could determine that A made agratuitous transfer to FT of $1,000,000 as ofJanuary 1, 1998.Example 10. Nongratuitous bank loan to FT.Afunds FT with a contribution of $1,000,000. A’sgrandchildren, who are U.S. citizens, are theonly possible beneficiaries of FT. A is treated asthe owner of FT under section 679. FT borrowsmoney from an unrelated U.S. bank at arm’slength terms to purchase U.S. real property.U.S. bank has made a nongratuitous transfer toFT, and is not required to report the transfer forpurposes of section 6048(a).Example 11. Non-arm’s length sale to relatedFT. FT is created by a foreign person to benefitB, A’s spouse, who is a U.S. citizen. FT is nottreated as owned by any other person. A sellsproperty worth $1,000,000 to FT in exchangefor $100,000 in cash. The $900,000 excess is a

1997–25 I.R.B. 25 June 23, 1997

gratuitous transfer by A. A must report thisexcess under section 6048(a). A must also reportthe $100,000 under section 1494, since A isrelated to FT.Example 12. Nongratuitous transfer to relatedFT. FT is created by a foreign person to benefitB, A’s spouse, who is a U.S. citizen. FT is nottreated as owned by any other person. Theoffice building in which A conducts his U.S.business is owned by FT. A makes fair marketvalue rental payments to FT. A’s rental pay-ments are not gratuitous transfers. Thus, A isnot required to report the rental payments undersection 6048(a). However, A must report theaggregate amount of the rental payments on anannual basis under section 1494 since A isrelated to FT.Example 13. Transfer that is gratuitous in partand nongratuitous in part.Assume the samefacts as Example 12, except that A’s rentalpayments to FT are in excess of fair marketvalue. The portion of each of A’s rental pay-ments that is in excess of fair market value is agratuitous transfer. Thus, A must report theexcess portion of each payment under section6048(a). In addition, A must report the fairmarket value portion of the payments undersection 1494.

Section IV. U.S. Owners of ForeignTrusts.

Each U.S. person treated as an ownerof a foreign trust under sections 671through 679 is responsible for ensuringthat the foreign trust files an annualreturn setting forth a full and completeaccounting of all trust activities, trustoperations and other relevant informa-tion. Section 6048(b)(1). In addition, theU.S. owner is responsible for ensuringthat the trust annually furnishes suchinformation as the Secretary prescribesto U.S. owners and U.S. beneficiaries ofthe trust. Section 6048(b)(1)(B). If thetrust does not furnish this information,the U.S. owner is subject to a penaltyequal to 5 percent of the gross value ofthe portion of the trust’s assets treatedas owned by that person. Section6677(b) and (c)(2). The penalty appliesto taxable years of U.S. owners begin-ning after December 31, 1995.

A. Annual Return

The Service plans to revise Form3520–A to allow that form to be usedby foreign trusts to satisfy their annualinformation reporting requirements. Un-til the revised Form 3520–A is available,the U.S. owner must ensure that atrustee who is authorized to sign Form3520–A: (1) files the unrevised Form3520–A, (2) writes ‘‘FOREIGNGRANTOR TRUST’’ at the top of theform, (3) completes the identifying in-formation on the form as if the foreigntrust were the U.S. owner required tofile the form, (4) signs the form, (5)

attaches a Foreign Grantor Trust Infor-mation Statement to the form, (6) sendsa Foreign Grantor Trust Owner State-ment (see part 4 of the Foreign GrantorTrust Information Statement) to eachU.S. owner of a portion of the trust, and(7) sends a copy of a Foreign GrantorTrust Beneficiary Statement (see part 5of the Foreign Grantor Trust InformationStatement) to each U.S. beneficiary whoreceived a distribution from the trustduring the taxable year. Except as pro-vided in Section VIII, Form 3520–Amust be filed and the required state-ments furnished to the U.S. grantors andU.S. beneficiaries by the fifteenth day ofthe third month after the end of thetrust’s taxable year (or later, if pursuantto an extension of time to file). SeeSection VIII for special filing deadlinesfor filing Form 3520–A for 1996.

The Foreign Grantor Trust Informa-tion Statement should be submitted insubstantially the following format:

FOREIGN GRANTOR TRUSTINFORMATION STATEMENT

1. Foreign Trust Background Informa-tion

A. Name, address and employer iden-tification number (‘‘EIN’’) of trust

B. Name, address and taxpayer iden-tification number (‘‘TIN’’) of theU.S. agent (if any)

C. Name, address and TIN (if any) ofthe trustee who signed Form3520–A

D. Method of accounting used by thetrust (cash or accrual)

E. The taxable year of the foreigntrust to which the statement ap-plies

2. Foreign Trust Balance Sheet. Theforeign trust balance sheet shouldcontain both beginning and end ofyear balances. Amounts may be ag-gregated within each category listedbelow and should be stated at theirapproximate fair market value. Agood faith estimate of fair marketvalue is satisfactory.A. Assets

1. Cash2. Accounts receivable3. Inventory4. Government obligations5. Other marketable securities6. Other non-marketable securities7. Depreciable (depletable) assets8. Real property9. Other assets (attach summary

schedule)10. Total assets

B. Liabilities1. Accounts payable2. Contributions, gifts, grants, etc.

payable3. Mortgages and notes payable4. Other liabilities (attach sum-

mary schedule)5. Total liabilities

C. Retained Earnings1. Contributions2. Accumulated trust income3. Other (state nature)4. Total net worth

3. Foreign Trust Income Statement. UseU.S. tax principles to determine thetrust’s income.A. Income

1. Interest2. Dividends3. Rents, royalties, distributive

share of partnership income, etc.4. Capital gains

a. Net short-term capital gainb. Net long-term capital gain

5. Other (state nature)6. Total income

B. Deductions1. Interest2. Foreign taxes3. State and local taxes4. Trustee and advisor fees5. Amortization and depreciation6. Other (state nature)7. Total deductions

C. Net Income or loss (A.6. less B.7.)D. Distributions to beneficiaries

(separately state for each U.S.beneficiary)

E. Tax credits (attach summaryschedule)

4. The Foreign Grantor Trust OwnerStatementA. Foreign Trust Background Infor-

mation1. Name, address and EIN of trust2. Name, address and TIN of U.S.

agent (if any)3. Name, address and TIN (if any)

of the trustee who signed Form3520–A

4. Method of accounting used bythe trust (cash or accrual)

5. The taxable year of the foreigntrust to which the statement ap-plies

6. Name, address and TIN of theU.S. owner

7. A good faith estimate of theU.S. owner’s gross reportableamount (the fair market value ofthe trust’s assets treated asowned by the U.S. person)

June 23, 1997 26 1997–25 I.R.B.

B. Statement of Net Income Attribut-able to the Owner. Use U.S. taxprinciples to determine the own-er’s income.

1. Income attributable to the ownera. Interestb. Dividendsc. Rents, royalties, distributive

share of partnership income,etc.

d. Capital gains1. Net short-term capital gain2. Net long-term capital gain

e. Other (state nature)f. Total income

2. Deductions attributable to theownera. Interestb. Foreign taxesc. State and local taxesd. Trustee and advisor feese. Amortization and depreciationf. Other (state nature)g. Total deductions

3. Net Income or loss attributableto the owner (B.1.f. less B.2.g.)

4. Tax credits attributable to theowner (attach summary sched-ule)

5. The Foreign Grantor Trust Benefi-ciary StatementA. Foreign Trust Background Infor-

mation1. Name, address and EIN of trust2. Name, address and TIN of U.S.

agent (if any)3. Name, address and TIN (if any)

of the trustee who signed Form3520–A

4. The taxable year of the foreigntrust to which the statement ap-plies

B. U.S. Beneficiary Information1. Name, address and TIN of U.S.

Beneficiary2. A description of the property

(including cash) distributed ortreated as distributed to the U.S.person during the taxable year,and the fair market value of theproperty distributed.

C. Owner Information.1. An explanation of the facts and

law (including the section of theInternal Revenue Code) that es-tablishes that the foreign trust(or the portion of the foreigntrust from which the beneficiaryreceived a distribution) is treatedfor U.S. tax purposes as ownedby another person.

2. A statement identifying whetherthe owner of the foreign trust(or the portion of the foreigntrust from which the beneficiaryreceived a distribution) is anindividual, trust, corporation orpartnership, and whether thatperson is a U.S. or foreign per-son. If the owner is a U.S.person, a foreign partnership, aforeign corporation, or a foreigntrust, attach the name, addressand TIN (if any) of the owner.

B. Appointment of U.S. Agent.

If a foreign trust with a U.S. ownerdoes not have a U.S. agent, the Secre-tary may determine the amounts re-quired to be taken into account withrespect to the foreign trust by the U.S.owner. Section 6048(b)(2). In order toavoid this result, a U.S. owner of aforeign trust should ensure that theforeign trust appoints a U.S. person toact as the foreign trust’s limited agentfor purposes of applying sections 7602,7603, and 7604 with respect to a requestby the Secretary to examine records orproduce testimony, or a summons by theSecretary for such records or testimony.Any U.S. citizen, resident alien, or do-mestic corporation (including a U.S.grantor or U.S. beneficiary of a foreigntrust) may act as the U.S. agent of thetrust.

In order to authorize a U.S. person toact as an agent under section 6048(b),the trust and the agent must enter into abinding agreement substantially in theform that follows:

AUTHORIZATION OF AGENT[Name of foreign trust] hereby ex-pressly authorizes [name of U.S.agent] to act as its agent solely forpurposes of sections 7602, 7603, and7604 of the Internal Revenue Codewith respect to any request to exam-ine records or produce testimony re-lated to the proper treatment ofamounts required to be taken intoaccount under the rules of section6048(b)(1)(A) or to any summons forsuch records or testimony. I certifythat I have the authority to executethis authorization of agent to act onbehalf of [name of foreign trust].

Signature of (title) (date)trustee (or otherauthorized person)

Type or print your name below

TIN (if any)

Address

[Name of agent] accepts this appoint-ment to act as agent for [name offoreign trust] for the above purpose. Icertify that I have the authority toexecute this authorization of agent toact on behalf of [name of foreigntrust] and agree to accept service ofprocess for the above purposes

Signature of agent (title) (date)

Type or print your name below

TIN (if any)

Address

The authorization of agent agreementmust be executed by the foreign trustand the U.S. agent prior to the due dateof the U.S. owner’s Form 3520 for thetaxable year that he or she is consideredthe owner of the trust. The authorizationmust remain in effect for as long as thestatute of limitations remains open forthe U.S. owner’s relevant taxable year.If the agent resigns, liquidates or itsresponsibility as an agent of the trust isterminated, the U.S. owner of the for-eign trust must ensure that the foreigntrust notifies the Commissioner within90 days, by filing an amended Form3520–A with the Philadelphia ServiceCenter. This notification must containthe name, address and TIN of the newU.S. agent (if any).

A foreign trust will not be treated ashaving a U.S. agent unless the foreigntrust identifies the name, address andtaxpayer identification number of theU.S. agent on Form 3520–A. Even if theforeign trust identifies a U.S. agent onForm 3520–A, however, the foreigntrust may be treated as providing incor-rect information and, therefore, the U.S.owner may be subject to the penaltydescribed in section 6677(a) and (b) ifeither the U.S. agent or the foreign trustdoes not comply with its obligationsunder the agreement (e.g., the foreigntrust fails to produce records requestedby the Service in reliance on the banksecrecy laws of the country where thetrust’s bank accounts are located).

1997–25 I.R.B. 27 June 23, 1997

Section V. U.S. Beneficiaries ofForeign Trusts

Generally, a U.S. person who receivesa distribution, directly or indirectly,from a foreign trust after August 20,1996, is required to report on Form3520 the name of the trust, the aggre-gate amount of distributions receivedfrom the trust during the taxable year,and such other information as the Secre-tary may prescribe. Section 6048(c).Reporting is required under section6048(c) only if the U.S. person knowsor has reason to know that the trust is aforeign trust. A U.S. beneficiary whofails to report a distribution receivedafter August 20, 1996, will be subject toa 35 percent penalty on the grossamount of the distribution. Section6677(a).

Except as otherwise provided below, adistribution from a foreign trust includesany gratuitous transfer of money orproperty from a foreign trust, whether ornot the trust is owned by another per-son. A distribution from a foreign trustincludes the receipt of trust corpus andthe receipt of a gift or bequest describedin section 663(a). In addition, a distribu-tion is reportable if it is either actuallyor constructively received. For example,if a U.S. beneficiary uses a credit card,and charges on that credit card are paidor otherwise satisfied by a foreign trustor guaranteed or secured by the assetsof a foreign trust, the amount chargedon that credit card will be treated as adistribution to the U.S. beneficiary thatmust be reported under section 6048(c)for the year in which the charge occurs.If a beneficiary writes a check on theforeign trust’s bank or brokerage ac-count or otherwise incurs a debt chargedto the foreign trust, the amount incurredwill be treated as a distribution to theU.S. beneficiary that must be reportedunder section 6048(c). Also, if a benefi-ciary receives a payment from a foreigntrust in exchange for property trans-ferred to the trust or services renderedto the trust, and the fair market value ofthe payment received exceeds the fairmarket value of the property transferredor services rendered, such excess will betreated as a distribution to the U.S.beneficiary that must be reported undersection 6048(c). For example, if a U.S.beneficiary receives a payment from aforeign trust purportedly in exchange forthe beneficiary’s performance of ser-vices as a trustee of the trust, and thepayment exceeds the fair market valueof the services actually performed by

the beneficiary, the excess will betreated as a distribution to the benefi-ciary.

The Secretary may suspend or modifyany requirement of this section. Section6048(d)(4). Reporting is not requiredunder section 6048(c) with respect todistributions from trusts that are taxableas compensation for services rendered,within the meaning of section672(f)(2)(B) and the regulations thereun-der, so long as the recipient of adistribution from such a trust reports thedistribution as compensation income onits applicable federal income tax return.Section 6048(d)(4). Reporting is also notrequired under section 6048(c) with re-spect to distributions from foreign trustsreceived by domestic organizations de-scribed in section 501(c)(3), providedthe organization has a determinationletter from the Service that has not beenrevoked recognizing its status as exemptfrom income taxation under section501(a).

A. Loans to U.S. Grantors and U.S.Beneficiaries

Section 643(i) provides that, except asprovided in regulations, if a foreign trustdirectly or indirectly makes a loan ofcash or marketable securities to a U.S.grantor or U.S. beneficiary of the trust,the amount of the loan will be treated asa distribution to that grantor or benefi-ciary. If such a loan is made to a U.S.person who is related to a U.S. grantoror U.S. beneficiary (within the meaningof section 643(i)(2)(B)), the amount ofthe loan will be treated as a distributionto the related grantor or beneficiary. Theamount of a loan is its issue price, asdetermined under § 1.446–2(d)(1),§ 1.1273–2 or § 1.1274–2 (whicheveris applicable).

For purposes of section 643(i), a loanof cash will be considered to include anextension of credit to a person related tothe trust upon the purchase of propertyfrom the trust. Sections 643(i) and643(a)(7); Rev. Rul. 85–13, 1985–1 C.B.184, 185. If a trust makes a loan to agrantor that causes the grantor to betreated as the owner of a portion of thetrust under section 675(3), the loan willnot be treated as a distribution undersection 643(i), and will not be reportableunder section 6048(c).

Congress intended that Treasury andthe Service would exercise regulatoryauthority to create an exception to thistreatment for certain loans. In exercisingthis regulatory authority, Congress ex-pected that Treasury and the Service

would give consideration to whetherthere is a reasonable expectation that thegrantor, beneficiary or related personwould repay the loan. H.R. Conf. Rep.No. 737, 104th Cong., 2d Sess. 334(1996).

This notice announces that regulationswill treat such a loan as a distributionunless the loan is in consideration for a‘‘qualified obligation’’ from the grantor,beneficiary or a related person. An obli-gation is a qualified obligation only if:

(i) The obligation is reduced to writ-ing by an express written agreement;

(ii) The term of the obligation doesnot exceed five years (for purposes ofdetermining the term of an obligation,the obligation’s maturity date is the lastpossible date that the obligation can beoutstanding under the terms of the obli-gation);

(iii) All payments on the obligationare denominated in U.S. dollars;

(iv) The yield to maturity of theobligation is not less than 100 percentof the applicable Federal rate and notgreater than 130 percent of the appli-cable Federal rate (the applicable Fed-eral rate for an obligation is the appli-cable Federal rate in effect under section1274(d) for the day on which the obli-gation is issued, as published in theInternal Revenue Bulletin);

(v) The U.S. person extends the pe-riod for assessment of any income taxattributable to the loan and any conse-quential income tax changes for eachyear that the obligation is outstanding,to a date not earlier than three yearsafter the maturity date of the obligationissued in consideration for the loan (thisextension is not necessary if the matu-rity date of the obligation does notextend beyond the end of the U.S.person’s taxable year and is paid withinsuch period); when properly executedand filed, such an agreement will bedeemed to be consented to by theService Center Director or the AssistantCommissioner (International) for pur-poses of § 301.6501(c)–1(d); and

(vi) The U.S. person reports the sta-tus of the obligation, including principaland interest payments, on Form 3520 foreach year that the obligation is outstand-ing.

If, while the original obligation isoutstanding, the U.S. grantor or U.S.beneficiary (or a person related to theU.S. grantor or U.S. beneficiary) di-rectly or indirectly issues another obli-gation to the trust the original obligationwill be deemed to have the maturitydate of any such subsequent obligation

June 23, 1997 28 1997–25 I.R.B.

in determining whether the term of theoriginal obligation exceeds the specified5-year term. In addition, a series ofobligations issued and repaid by theU.S. grantor or U.S. beneficiary (or aperson related to the U.S. grantor orU.S. beneficiary) will be treated as asingle obligation of the U.S. grantor orU.S. beneficiary if the transactions giv-ing rise to the obligations are structuredwith a principal purpose to avoid theapplication of this provision.

If an obligation treated as a qualifiedobligation subsequently fails to be aqualified obligation (e.g., a renegotiationof the terms of the obligation causes theterm of the obligation to exceed fiveyears), the U.S. grantor or U.S. benefi-ciary (or related person) will be treatedas receiving a distribution from the trustin an amount equal to the originalobligation’s adjusted issue price (withinthe meaning of § 1.1275–1(b)) plus anyaccrued but unpaid qualified stated in-terest (within the meaning of § 1.1273–1(c)) as of the date of the subsequentevent that causes the obligation to nolonger be a qualified obligation. If thematurity date is extended beyond fiveyears by reason of the issuance of asubsequent obligation by the U.S.grantor or U.S. beneficiary (or relatedperson), the amount of the distributionwill not exceed the issue price of thesubsequent obligation. The subsequentobligation will be separately tested todetermine if it is a qualified obligation.

Generally, as discussed above, a dis-tribution resulting from a failed quali-fied obligation will be deemed to occuron the date of the subsequent event thatcauses the obligation to no longer be aqualified obligation. However, based onall facts and circumstances, the districtdirector may deem the distribution tohave occurred on any date on or afterthe issue date of the original obligation.For example, if at the time the originalobligation was issued the transferorknew or had reason to know that theobligation would not be repaid, thedistrict director could deem the distribu-tion to have occurred on the issue dateof the original obligation. A demandloan does not have a specified term and,therefore, cannot be a ‘‘qualified obliga-tion.’’ In addition, an annuity contractcannot be a ‘‘qualified obligation.’’

Section 643(i) applies to any loan ofcash or marketable securities issued by aforeign trust after September 19, 1995,whether or not in accordance with apreexisting arrangement or understand-ing. For purposes of section 643(i), if an

obligation issued on or before Septem-ber 19, 1995, is modified after that date,and the modification is a significantmodification within the meaning of§ 1.1001–3, the obligation is treated asif it were issued on the date of themodification. However, the penalty con-tained in revised section 6677 will onlyapply to the failure to report loan inconsideration for an obligation issuedafter August 20, 1996.

B. Beneficiary Statements.

Section 6048(c)(2) provides that anydistribution from a foreign trust, whetherfrom income or corpus, to a U.S. benefi-ciary will be treated as an accumulationdistribution includible in the gross in-come of the distributee if adequaterecords are not provided to the Secretaryto determine the proper treatment of thedistribution. An accumulation distribu-tion from a foreign trust is generallytaxed pursuant to sections 665 through668. Section 668, as amended by theAct, generally imposes an interestcharge on distributions of accumulatedincome at the rate applicable to generalunderpayments of income tax.

A U.S. beneficiary will not be re-quired to treat the entire distribution asan accumulation distribution if the ben-eficiary obtains from the foreign trusteither a Foreign Grantor Trust Benefi-ciary Statement (see part 5 of the For-eign Grantor Trust Information State-ment as described in Section IV.A. ofthis notice) or a Foreign NongrantorTrust Beneficiary Statement (describedbelow) with respect to the distribution.If a U.S. beneficiary cannot obtain sucha beneficiary statement from the trust, itis expected that Form 3520 will allowthe U.S. beneficiary to avoid treating theentire amount as an accumulation distri-bution if the U.S. beneficiary can pro-vide certain information regarding actualdistributions from the trust for the priorthree years. Under this ‘‘default treat-ment,’’ the U.S. beneficiary will beallowed to treat a portion of the distri-bution as a distribution of current in-come based on the average of distribu-tions from the prior three years, withonly the excess amount of the distribu-tion treated as an accumulation distribu-tion (and therefore subject to the interestcharge of section 668). Form 3520 willdescribe this default treatment option ingreater detail. A U.S. beneficiary’s useof this default treatment will not affectcalculations by the trust (e.g., calcula-tions of the trust’s distributable netincome under section 643(a)).

To completely avoid default treat-ment, a beneficiary receiving a distribu-tion from a trust must obtain either aForeign Grantor Trust Beneficiary State-ment or a Foreign Nongrantor TrustBeneficiary Statement with respect tothe portion of the trust from which thebeneficiary received the distribution.The beneficiary must attach a copy ofthe relevant beneficiary statement(s) tohis or her Form 3520.

If a U.S. beneficiary receives a com-plete Foreign Grantor Trust BeneficiaryStatement with respect to a distributionduring the taxable year, the beneficiaryshould treat the distribution as a giftfrom the owner of the trust, and there-fore, generally as nontaxable. If a U.S.beneficiary receives a complete ForeignNongrantor Trust Beneficiary Statementthat provides adequate information todetermine the U.S. tax consequences ofthe distribution from the foreign trust,the beneficiary may determine the taxconsequences of the distribution on anactual basis and avoid the default treat-ment. The U.S. beneficiary may deter-mine the tax consequences of the distri-bution in accordance with theinformation in the beneficiary statementonly if the beneficiary has a copy of therelevant beneficiary statement(s) at thetime he or she files his or her incometax return. A U.S. beneficiary may notrely on a beneficiary statement if he orshe knows or has reason to know thatthe information contained in the state-ment is incorrect.

A Foreign Nongrantor Trust Benefi-ciary Statement must contain the follow-ing information and be set forth insubstantially the following format:

FOREIGN NONGRANTOR TRUSTBENEFICIARY STATEMENT

1. Foreign Trust Background Informa-tionA. Name, address and employer iden-

tification number (‘‘EIN’’) of thetrust

B. Name, address and taxpayer iden-tification number (‘‘TIN’’) (if any)of the trustee furnishing this state-ment

C. Method of accounting used by thetrust (cash or accrual)

D. The taxable year of the foreigntrust to which the statement ap-plies

E. A statement identifying whetherany grantor of the trust was apartnership or foreign corporation.If so, attach an explanation of therelevant facts.

1997–25 I.R.B. 29 June 23, 1997

2. U.S. Beneficiary InformationA. Name, address and TIN of U.S.

BeneficiaryB. A description of the property (in-

cluding cash) distributed ordeemed distributed to the U.S.person during the taxable year,and the fair market value of theproperty distributed.

3. Sufficient information to enable theU.S. beneficiary to establish the ap-propriate treatment of any distribu-tion or deemed distribution for U.S.tax purposes. Normally, informationsimilar to the information required bySchedule K–1 of Form 1041 wouldbe adequate for this purpose. If rel-evant, the trust must also provide thebeneficiary with adequate informationfor the beneficiary to complete Forms4970, 5471, and 8621.

4. Representation on Access to Booksand RecordsA. A statement that, upon request, the

trust will permit either the Serviceor the U.S. beneficiary to inspectand copy the trust’s permanentbooks of account, records, andsuch other documents that are nec-essary to establish the appropriatetreatment of any distribution ordeemed distribution for U.S. taxpurposes; or

B. The name, address and EIN of thetrust’s U.S. agent.

Regarding the procedures for the foreigntrust to appoint a U.S. agent, see SectionIV.B. of this notice.

Section VI. U.S. Recipients ofForeign Gifts.

The Act creates new reporting re-quirements under section 6039F for U.S.persons (other than an organization de-scribed in section 501(c) and exemptfrom tax under section 501(a)) thatreceive large gifts (including bequests)from foreign persons after August 20,1996. Generally, if the value of theaggregate foreign gifts received by aU.S. person during any taxable yearexceeds $10,000, the U.S. recipient mustprovide such information as the Secre-tary prescribes. Section 6039F(a). Theterm ‘‘foreign gift’’ means any amountreceived from a person other than aUnited States person that the recipienttreats as a gift or bequest, but does notinclude any qualified transfer within themeaning of section 2503(e)(2) (relatingto certain transfers for educational or

medical expenses) or any distributionproperly reported under section 6048(c).Section 6039F(b).

Reporting under section 6039F willbe required on an annual basis on Form3520. It is expected that Form 3520 willonly require the reporting of generalinformation necessary to determinewhether a purported gift is properlyclassified as a gift or income. Forexample, limited information will berequired regarding whether the foreigndonor is an individual, corporation, part-nership, or estate, and whether the for-eign donor was acting as a nominee orintermediary for another person. Also, abrief description of the property re-ceived will be required. It is expectedthat the form will not require informa-tion on the identity of the foreign donorunless the foreign donor is a partnershipor foreign corporation, or is acting as anominee or intermediary for such anentity. However, the U.S. donee may berequired to provide additional informa-tion, including the identity of the donor,to the IRS upon request.

If a gift is not reported on Form3520, the tax consequences of the re-ceipt of the gift shall be determined bythe Secretary. Section 6039F(c)(1)(A).In addition, the recipient is subject to apenalty equal to 5 percent of the valueof the gift for each month in which thegift is not reported (not to exceed 25percent). Section 6039F(c)(1)(B). Re-porting is only required under section6039F for gifts actually or construc-tively received by a U.S. person. Fur-thermore, reporting is required undersection 6039F only if the U.S. personknows or has reason to know that thedonor is a foreign person.

A. Application of section 6039F todistributions from and contributionsto trusts

If a foreign trust makes a distributionto a U.S. beneficiary, the beneficiaryshould report the amount as a distribu-tion from the trust under section6048(c), rather than as a gift undersection 6039F. Contributions of propertyby foreign persons to domestic or for-eign trusts that have U.S. beneficiariesare not reportable by the U.S. beneficia-ries under section 6039F unless the U.S.persons are treated as receiving thecontribution in the year of the transfer(e.g., the beneficiary is an owner of thatportion of the trust under section 678).A domestic trust that is not treated asowned by another person is required toreport the receipt of a contribution to

the trust from a foreign person as a giftunder section 6039F. A domestic trustthat is treated as owned by a foreignperson is not required to report thereceipt of a contribution to the trustfrom a foreign person. However, a U.S.person should report the receipt of adistribution from such a trust as a giftfrom a foreign person under section6039F.

B. Reporting thresholds

For purposes of determining whetherthe receipt of a gift from a foreignperson is reportable, Treasury and theService have determined that differentreporting thresholds are warranted forgifts received from nonresident alienindividuals, foreign estates, foreign part-nerships, and foreign corporations. Ac-cordingly, it is expected that Form 3520will apply the following reportingthresholds and requirements:

1. Gifts from foreign individualsand foreign estates.

A U.S. person is required to reportthe receipt of gifts from a nonresidentalien or foreign estate only if the aggre-gate amount of gifts from that nonresi-dent alien or foreign estate exceeds$100,000 during the taxable year. Oncethe $100,000 threshold has been met, itis expected that Form 3520 will requirethe donee to separately identify each giftin excess of $5,000, but will not requirethe identification of the donor.

2. Purported gifts from foreigncorporations or foreign part-nerships

A U.S. person is required to reportthe receipt of purported gifts from for-eign corporations and foreign partner-ships if the aggregate amount of pur-ported gifts from all such entitiesexceeds $10,000 (as modified by cost-of-living adjustments under section6039F(d)) during the taxable year.

Once the $10,000 threshold has beenmet, it is expected that Form 3520 willrequire the donee to separately identifyall purported gifts from a foreign corpo-ration or foreign partnership, includingthe identity of the donor entity. Pur-ported gifts from foreign corporations orforeign partnerships are subject torecharacterization under new section672(f)(4).

3. Aggregation rulesTo calculate if a U.S. person has

received gifts during the taxable yearfrom a particular foreign person in ex-cess of the relevant threshold, the U.S.person must aggregate gifts from foreignpersons that he knows or has reason to

June 23, 1997 30 1997–25 I.R.B.

know are related, within the meaning ofsection 643(i)(2)(B), whether or not thegifts from a related person would inde-pendently exceed the threshold for re-porting of gifts from that person. If therelevant reporting threshold is exceeded,it is expected that Form 3520 willrequire the donee to separately identifyeach aggregated gift in excess of $5,000from a nonresident alien or foreignestate, but will not require the identifica-tion of such a donor, and to separatelyidentify each aggregated purported giftfrom a foreign corporation or foreignpartnership, including the identity of thedonor entity.

Example 14. Gifts from related foreign individu-als. A is a U.S. citizen who is married to B. Band all of B’s brothers, C, D, and E, are notU.S. persons. In a single taxable year, B makesa gift of $90,000 to A, C makes a gift of$40,000 to A, D makes two gifts to A (one of$4,000 and one of $3,000), and E makes a giftof $4,000 to A. For that taxable year, A mustreport the receipt of $141,000 in gifts fromforeign persons. A must separately identify the$90,000 gift from B, because B and his brothersgave gifts in excess of $100,000. A must alsoseparately identify the $40,000 gift from C,because C and his brothers gave gifts in excessof $100,000. A must identify the receipt of$7,000 in total gifts from D because D and hisbrothers gave gifts in excess of $100,000, but isnot required to separately list information abouteach transaction because no gift is in excess of$5,000. A is not required to separately identifytransaction information about E’s gifts, becausegifts from foreign individuals of less than$5,000 are not required to be separately identi-fied. Because B, C, and D are individuals, Aneed not identify these donors when reportingthe transactions.Example 15. Gifts from related foreign indi-vidual and corporation.A is a U.S. citizen whois married to B. B is the sole shareholder of FC,a foreign corporation. B is not a U.S. person. Ina taxable year, B makes a gift of $6,000 to A,and FC makes a purported gift of $8,000 to A.Because A knows or has reason to know that Band FC are related, A must aggregate gifts fromB and FC ($14,000). Although the $14,000aggregate amount deemed received from B doesnot exceed the $100,000 threshold with respectto gifts from nonresident aliens, the $14,000aggregate amount deemed received from FCexceeds the $10,000 threshold with respect togifts from foreign corporations. Accordingly, Amust separately identify each gift from B andFC, and must provide identifying informationabout FC because it is a foreign corporation.

Section VII. Penalties for Failure toProvide Information

Substantial penalties under section6677 and 6039F(c) apply if informationrequired by section 6048 or section6039F is not reported or is reportedinaccurately. Generally, the penalty de-pends on the ‘‘gross value’’ or ‘‘grossamount’’ of the property involved.

In determining the gross value orgross amount of property, the valuationprinciples of section 2512 and the regu-lations thereunder must be used, withoutregard to any prohibitions or restrictionson a person’s interest in the property.

Penalties under sections 6677(a) and6039F will not be imposed if the failureto file was due to reasonable cause andnot willful neglect. A taxpayer will nothave reasonable cause merely because aforeign country would impose a civil orcriminal penalty on the trustee (or otherperson) for disclosing the required infor-mation. Section 6677(d). Also, refusalon the part of a foreign trustee toprovide information for any other rea-son, including difficulty in producingthe required information or provisions inthe trust instrument that prevent thedisclosure of required information, willnot be considered reasonable cause.

The penalties under section 6677 ap-ply only to the extent that the transac-tion is not reported or is reported inac-curately. Thus, if a U.S. person transfersproperty worth $1,000,000 to a foreigntrust, but reports only $400,000 of thatamount, penalties may be imposed onlyon the unreported $600,000.Moreover, if the penalties under bothsections 6677 and 1494(c) could applyto the failure to report the transfer ofproperty to a foreign trust, the penaltyunder section 6677 will be assessed andwill reduce any penalty otherwise im-posed under section 1494(c).

If the penalties under both sections6039F and section 6677 could apply tothe failure to report a distribution from aforeign trust treated as a gift, the penaltyunder section 6677 will be assessed, andwill reduce any penalty otherwise im-posed under section 6039F.

Section VIII. Transition Rules

A. Filing dates

Generally, to avoid penalties undersections 1494(c), 6039F, or 6677, Form3520 must be filed as an attachment tothe taxpayer’s income tax return by thedue date (including extensions) of thetaxpayer’s income tax return. In addi-tion, unless otherwise provided, a copyof Form 3520 must be sent to thePhiladelphia Service Center by the samedate. However, with respect to Form3520 for the taxable year that includesAugust 20, 1996 (the ‘‘1996 Form3520’’), no such penalties will be im-posed if the taxpayer files the 1996Form 3520 on or before November 15,1997, with the Philadelphia Service

Center. Alternatively, no section 1494(c),6039F, or 6677 penalties will be im-posed for a failure to file Form 3520 ifthe taxpayer files the 1996 Form 3520by the due date (including extensions)for the taxpayer’s income tax return forthe first taxable year beginning on orafter January 1, 1997, provided thetaxpayer’s income tax return for the taxyear that includes August 20, 1996,reflects the information contained in the1996 Form 3520. Taxpayers who file aForm 3520 that is not revised as de-scribed herein will not be considered tohave complied with the information re-porting requirements of revised sections1494 and 6048.

Generally, no section 6677 penaltywill be assessed on the U.S. owner of aforeign trust for a failure to file Form3520–A if the foreign trust files Form3520–A with the Philadelphia ServiceCenter by the fifteenth day of the thirdmonth following the end of the trust’staxable year (or later, if pursuant to anextension of time to file). However, withrespect to Form 3520–A for the taxableyear that includes August 20, 1996 (the‘‘1996 Form 3520–A’’), no such penaltywill be imposed if the foreign trust filesthe 1996 Form 3520–A on or beforeOctober 15, 1997. Alternatively, no sec-tion 6677 penalty will be imposed if theforeign trust files the 1996 Form3520–A by the due date (including ex-tensions) for the Form 3520–A for thefirst taxable year beginning on or afterJanuary 1, 1997, provided the U.S.owner reflects the information containedin the 1996 Form 3520–A on the own-er’s income tax return for the tax yearthat includes August 20, 1996.

Example 16. Time to report receipt of 1996 trustdistributions. A, a U.S. citizen whose taxableyear is the calendar year, receives a distributionfrom a foreign trust on November 1, 1996. Areports the distribution as ordinary income(without an interest charge under section 668)on his 1996 income tax return, which is filed onJune 15, 1997. No section 6677 penalty will beimposed if A files a 1996 Form 3520 byNovember 15, 1997. Alternatively, A will beallowed to delay filing his 1996 Form 3520until he files his 1997 income tax return (byApril 15, 1998, or a later date if the date forfiling the return is extended), but only if Areflects the correct information contained in theForm 3520 on his 1996 income tax return.Thus, if the 1996 Form 3520 indicates that thedistribution should be treated as ordinary in-come without an interest charge under section668, A may file the 1996 Form 3520 by April15, 1998, and need not amend his 1996 incometax return. However, if the Form 3520 indicatesthat the distribution is subject to an interestcharge under section 668, and A files the 1996Form 3520 on April 15, 1998, A will be liable

1997–25 I.R.B. 31 June 23, 1997

for the section 6677 penalty unless A alsoamends his 1996 income tax return to reflect theinterest charge.

B. Interaction with Notice 96–65

As described in Notice 96–65,1996–52 I.R.B. 28, the Act amendedsection 7701(a)(30) and (31) to set forthnew criteria that must be met for a trustto qualify as a domestic trust. Certaindomestic trusts will be treated as mak-ing section 1491 transfers on January 1,1997, as a result of becoming foreigntrusts under the new law. If a domestictrust relies in good faith on Notice96–65 to continue to file tax returns as adomestic trust, but is unable to meet thenew domestic trust criteria by the end ofthe two-year period set forth in thenotice, no U.S. person (transferor,owner, or beneficiary) will be requiredto treat the trust as a foreign trust andthereby report transfers to or distribu-tions from that trust on Form 3520during the two-year period. Further, thetrust will not be required to file Form3520-A for that two-year period. Finally,no penalty will be imposed under sec-tions 1494(c), 6039F, or 6677 for failureto report transactions with the trustduring that period, or for the trustfailing to file Form 3520–A for thatperiod. However, if the trust has notsuccessfully met the new domestic trustcriteria by the expiration of the two-yearperiod, penalties under sections 1494(c),6039F, or 6677 will be imposed unlessthe relevant Forms 3520 and 3520–Areporting all transactions during thattwo-year period are filed within 90 daysafter the expiration of the two-yearperiod.

C. Domestic Trusts with ForeignActivities

Section 6048(d)(2) provides that, tothe extent provided in regulations, adomestic trust may be treated as aforeign trust for purposes of sections6048 and 6677 if the trust has substan-tial activities, or holds substantial prop-erty, outside the United States. Treasuryand the Service are studying the appro-priate scope of section 6048(d)(2). Untilfurther guidance is issued, domestictrusts will not be treated as foreigntrusts pursuant to that section.

EFFECT ON OTHER GUIDANCE

Section II.B.4. of Notice 97–18,1997–10 I.R.B. 35, which provides thata U.S. person who makes a transfer to aforeign trust may satisfy that person’sreporting requirements under section1494 solely by complying with thereporting requirements of section6048(a), is hereby modified.

PUBLIC COMMENT INVITED

Treasury and the Service invite com-ments on the guidance provided by thisnotice. Written comments should be sub-mitted by August 1, 1997 to:

Internal Revenue ServiceP.O. Box 7604Ben Franklin StationAttention: CC:CORP:T:R:

(Notice 97–34)Room 5228Washington, DC 20044

or, alternatively, via the internet at:http://www.irs.ustreas.gov/prod/tax

regs/comments.html.The comments submitted will be

available for public inspection and copy-ing.

PAPERWORK REDUCTION ACT

The collections of information con-tained in this notice have been reviewedand approved by the Office of Manage-ment and Budget for review in accor-dance with the Paperwork ReductionAct (44 U.S.C. 3507) under controlnumber 1545–1538.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid control number.

The collections of information in thisnotice are in the sections III, IV, V, andVI. This information is required by theIRS to assure compliance with the newprovisions of the Small Business JobProtection Act of 1996. The likely re-spondents are individuals, business orother for-profit institutions, and not-for-profit institutions.

The estimated total annual reportingburden is 11,000 hours. The estimatedaverage annual burden per respondentvaries from .50 hours to 2 hours, de-

pending on individual circumstances,with an estimated average of 1 hour and3 minutes. The estimated number ofrespondents is 10,500. The estimatedannual frequency of responses is annu-ally.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become ma-terial in the administration of any inter-nal revenue law. Generally, tax returnsand tax return information are confiden-tial, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this notice isLeslie Cracraft, formerly of the Officeof Associate Chief Counsel (Interna-tional). For further information regard-ing sections 1491, 1494, 6039F, 6048and 6677, contact Michael Kirsch on(202) 622–3860. For further informationon section 679, contact Willard Yates on(202) 622–3870. For further informationregarding sections 7701(a)(30) and (31),contact James Quinn on (202) 622–3060. For further information regardingsection 672(f), contact Grace Fleemanon (202) 622–3850. These contact num-bers are not toll-free calls.

Weighted Average Interest RateUpdate

Notice 97–35

Notice 88–73 provides guidelines fordetermining the weighted average inter-est rate and the resulting permissiblerange of interest rates used to calculatecurrent liability for the purpose of thefull funding limitation of § 412(c)(7) ofthe Internal Revenue Code as amendedby the Omnibus Budget ReconciliationAct of 1987 and as further amended bythe Uruguay Round Agreements Act,Pub. L. 103–465 (GATT).

The average yield on the 30-yearTreasury Constant Maturities for May1997 is 6.94 percent.

The following rates were determinedfor the plan years beginning in themonth shown on next page.

June 23, 1997 32 1997–25 I.R.B.

Month YearWeightedAverage

90% to 107%Permissible

Range

90% to 110%Permissible

Range

June 1997 6.87 6.18 to 7.35 6.18 to 7.56

Drafting Information

The principal author of this notice isDonna Prestia of the Employee Plans

Division. For further information regard-ing this notice, call (202) 622–6076between 2:30 and 4:00 p.m. Eastern

time (not a toll-free number). Ms.Prestia’s number is (202) 622–7377(also not a toll-free number).

1997–25 I.R.B. 33 June 23, 1997

Part IV. Items of General InterestFoundations Status of CertainOrganizations

Announcement 97–62

The following organizations havefailed to establish or have been unableto maintain their status as public chari-ties or as operating foundations. Accord-ingly, grantors and contributors may not,after this date, rely on previous rulingsor designations in the Cumulative Listof Organizations (Publication 78), or onthe presumption arising from the filingof notices under section 508(b) of theCode. This listing doesnot indicate thatthe organizations have lost their statusas organizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities. The follow-ing organizations (which have beentreated as organizations that are notprivate foundations described in section509(a) of the Code) are now classifiedas private foundations:Academy of Sacred Music, Washington,

DCAmerican International Health Alliance,

Inc., Washington, DCApalachee Bay Volunteer Fire

Department, Inc., Crawfordville, FLArts and Crafts Guild of Macon County,

Inc., Lafayette, TNAsociacion De Vecinos Para Servicios

Para Socorro T.U., El Paso, TXAtlanta Area Deming Study Group Inc.,

Chamblee, GACatholic Faith Alive Inc., Silver Spring,

MDClean Florida Keys Inc., Key West, FLCross of Christ Ministries Inc., Tulsa,

OKBelmont Rotary Senior Housing

Program, Inc., Belmont, CABetter Living All Concerned, Los

Angeles, CABrisbane Educational Support Team,

Brisbane, CACalabasas Residential Treatment Center,

West Hills, CACentral Health Initiative Inc., Mt.

Pleasant, MIColorado Consortium for Experiential

Education, Greeley, CO

Columbia River Institute, Portland, ORColumbia Valley Gardens PTA, Tacoma,

WAColumbia Youth Soccer Association,

Inc., Lake City, FLColumbus Grove Gift Corporation,

Tucson, AZCommon Ground, Charlotte, NCCommon Ground Ministries,

Waxahachie, TXCommonwealth of Independent States

American Alliance, Inc., HighlandPark, IL

Esther Ministries Eternally SettledThrough Honoring Every Righteous,Philadelphia, PA

Forum for a Common Agenda, Reno,NV

Friends for Excellence in Education,Mendocino, CA

Friends of Albuquerque Gymnastics,Albuquerque, NM

Friends of Al Pi Darko Charitable Trust,Brooklyn, NY

Friends of Blanches Park, SanFrancisco, CA

Friends of Brown Band, Inc., New York,NY

Friends of Mental Health, El Centro,CA

Friends of Petrified Sea Gardens,Saratoga Springs, NY

House of Prayer Ministries Inc., LakePlacid, FL

Housing and Services, Bangor, MEInternational Institute of Molecular

Physiology, Inc., Cambridge, MAInternational Sisterhood, Los Angeles,

CALincoln-Woodstock Housing

Opportunities, Inc., N. Woodstock,NH

Maclaren Foundation, Marblehead, MAMajority Peoples Fund, New York, NYMalta Human Services Foundation, New

York, NYMariachi O, Alhambra, CANorth Side Family Center, St. Louis,

MOOcean-Five Cities Swimming Pool

Foundation, Oceano, CA

Oregon Area General Service Assemblyof AA, Bend, OR

Parent Teacher Student Organization ofMountain View Elementary School,Shelton, WA

Rose Marie Wameling Ministries, Inc.,Tulsa, OK

Rotary Club of Carbondale, Carbondale,IL

Rotary Club of Central MarinFoundation, Ross, CA

Rotary Foundation of Lake Forest,Irvine, CA

Santas Cause, Oak View, CAShelter Institute of America, Springfield,

ILSpecial Activities Unit for the Aged,

Columbus, OHStrongsville High School Swim Team

Boosters, Strongsville, OHStudent Parent Support Services Corp.,

Schenevus, NYUnited Dyslexia Association, Elko, NVUniversity City Development Corp.,

Detroit, MIVeterans Care Project of Calif., Inc.,

Grand Terrace, CAVinita Senior Citizens Center, Vinita,

OKVisions for Youth, Santa Rosa, CAVista Educational Media, Redondo

Beach, CAWestern North Carolina Sports Inc.,

Asheville, NCWest Lane Baseball Association,

Florence, ORIf an organization listed above sub-

mits information that warrants the re-newal of its classification as a publiccharity or as a private operating founda-tion, the Internal Revenue Service willissue a ruling or determination letterwith the revised classification as tofoundation status. Grantors and con-tributors may thereafter rely upon suchruling or determination letter as pro-vided in section 1.509(a)–7 of theIncome Tax Regulations. It is notthe practice of the Service to announcesuch revised classification of foundationstatus in the Internal Revenue Bulletin.

June 23, 1997 34 1997–25 I.R.B.

Announcement of the Disbarment, Suspension, or Consent to VoluntarySuspension of Attorneys, Certified Public Accountants, Enrolled Agents, andEnrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regula-tions, Part 10, an attorney, certified pub-lic accountant, enrolled agent, or en-rolled actuary, in order to avoid theinstitution or conclusion of a proceedingfor his disbarment or suspension frompractice before the Internal Revenue Ser-vice, may offer his consent to suspensionfrom such practice. The Director ofPractice, in his discretion, may suspendan attorney, certified public accountant,enrolled agent, or enrolled actuary inaccordance with the consent offered.

Attorneys, certified public accoun-tants, enrolled agents, and enrolled actu-aries are prohibited in any Internal Rev-

enue Service matter from directly orindirectly employing, accepting assis-tance from, being employed by or shar-ing fees with, any practitioner disbarredor suspended from practice before theInternal Revenue Service.

To enable attorneys, certified publicaccountants, enrolled agents, and en-rolled actuaries to identify practitionersunder consent suspension from practicebefore the Internal Revenue Service, theDirector of Practice will announce in theInternal Revenue Bulletin the names andaddresses of practitioners who havebeen suspended from such practice, theirdesignation as attorney, certified public

accountant, enrolled agent, or enrolledactuary and date or period of suspen-sion. This announcement will appear inthe weekly Bulletin at the earliest practi-cable date after such action and willcontinue to appear in the weekly Bulle-tins for five successive weeks or for asmany weeks as is practicable for eachattorney, certified public accountant, en-rolled agent, or enrolled actuary sosuspended and will be consolidated andpublished in the Cumulative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal RevenueService:

Name Address Designation Date of Suspension

Bert Jr., Earol L. Severna Park, MD CPA February 1, 1997 to July 31, 1997

Bernard, Lucius P. Corte Medera, CA Attorney March 10, 1997 to March 9, 2000

Parker, David A. Willmar, MN CPA April 13, 1997 to April 12, 2000

Sheldon, Donald Nashville, TN CPA April 24, 1997 to September 23, 1997

Grandt, Lawrence E. Barrington, IL CPA April 24, 1997 to January 23, 1998

Reese, Rex E. Alexandria, VA Attorney May 1, 1997 to April 30, 1999

Glasl, John E. Emporium, PA CPA May 1, 1997 to September 30, 1997

Coulter, Diane E. Monroeville, PA CPA May 1, 1997 to April 30, 1998

Groves, J. Randall Matthews, NC Attorney May 1, 1997 to October 31, 1998

Lupiloff, Steven Bloomfield, MI Attorney Indefinite from May 6, 1997

Wilson, Robert L. Spring Hill, FL CPA May 7, 1997 to October 6, 1998

Sloop, Wayne F. Winston-Salem, NC CPA Indefinite from May 7, 1997

Wilnewic, Mark V. Crystal Lake, IL CPA May 8, 1997 to November 7, 1997

Lenihan, Michael Cincinnati, OH CPA May 14, 1997 to July 13, 1997

Bergmann, Frederick Tampa, FL CPA June 1, 1997 to May 30, 1999

Farmer, Craig Arlington Hghts, IL CPA June 1, 1997 to August 31, 1997

Denny, Richard Pine Bluff, AR CPA June 1, 1997 to July 31, 1997

1997–25 I.R.B. 35 June 23, 1997

Announcement of the Expedited Suspension of Attorneys, Certified PublicAccountants, Enrolled Agents, and Enrolled Actuaries From Practice Before theInternal Revenue Service

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the Inter-nal Revenue Service any practitionerwho, within five years, from the datethe expedited proceeding is instituted,(1) has had a license to practice as anattorney, certified public accountant, oractuary suspended or revoked for cause;or (2) has been convicted of any crimeunder title 26 of the United States Codeor, of a felony under title 18 of theUnited States Code involving dishonestyor breach of trust.

Attorneys, certified public accoun-tants, enrolled agents, and enrolled actu-

aries are prohibited in any Internal Rev-enue Service matter from directly orindirectly employing, accepting assis-tance from, being employed by, or shar-ing fees with, any practitioner disbarredor suspended from practice before theInternal Revenue Service.

To enable attorneys, certified publicaccountants, enrolled agents, and en-rolled actuaries to identify practitionersunder expedited suspension from prac-tice before the Internal Revenue Service,the Director of Practice will announce inthe Internal Revenue Bulletin the namesand addresses of practitioners who havebeen suspended from such practice, theirdesignation as attorney, certified public

accountant, enrolled agent, or enrolledactuary, and date or period of suspen-sion. This announcement will appear inthe weekly Bulletin at the earliest practi-cable date after such action and willcontinue to appear in the weekly Bulle-tins for five successive weeks or for asmany weeks as is practicable for eachattorney, certified public accountant, en-rolled agent, or enrolled actuary sosuspended and will be consolidated andpublished in the Cumulative Bulletin.

The following individuals have beenplaced under suspension from practicebefore the Internal Revenue Service byvirtue of the expedited proceeding pro-visions of the applicable regulations:

Name Address Designation Date of Suspension

Dally, Candace L. Winston-Salem, NC CPA Indefinite from April 16, 1997

Mellor, Gary D. Norton, KS Attorney Indefinite from April 16, 1997

Gottesman, Milton New York, NY CPA Indefinite from April 16, 1997

Wiener, James Germantown, NY Attorney Indefinite from April 16, 1997

Lunblad, Gerald Sacramento, CA CPA Indefinite from April 16, 1997

Driscoll, Robert J. Denver, CO Attorney Indefinite from April 16, 1997

Alico, Kenneth N. Orchard Park, NY CPA Indefinite from April 16, 1997

Mack, Roland G. Hyattsville, MD CPA Indefinite from May 1, 1997

June 23, 1997 36 1997–25 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as ‘‘rulings’’)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a priorpublished position, but the prior positionis being extended to apply to a variationof the fact situation set forth therein.Thus, if an earlier ruling held that aprinciple applied to A, and the newruling holds that the same principle alsoapplies to B, the earlier ruling is ampli-fied. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an es-sential difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that itapplies to both A and B, the prior ruling

is modified because it corrects a pub-lished position. (Compare withamplifiedand clarified, above).

Obsoleteddescribes a previously pub-lished ruling that is not considered de-terminative with respect to future trans-actions. This term is most commonlyused in a ruling that lists previouslypublished rulings that are obsoleted be-cause of changes in law or regulations.A ruling may also be obsoleted becausethe substance has been included in regu-lations subsequently adopted.

Revoked describes situations wherethe position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.

Supersededdescribes a situationwhere the new ruling does nothing morethan restate the substance and situationof a previously published ruling (orrulings). Thus, the term is used torepublish under the 1986 Code andregulations the same position publishedunder the 1939 Code and regulations.The term is also used when it is desiredto republish in a single ruling a series ofsituations, names, etc., that were previ-ously published over a period of time inseparate rulings. If the new ruling does

more than restate the substance of aprior ruling, a combination of terms isused. For example,modified and super-seded describes a situation where thesubstance of a previously published rul-ing is being changed in part and iscontinued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is su-perseded.

Supplementedis used in situations inwhich a list, such as a list of the namesof countries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may bepublished that includes the list in theoriginal ruling and the additions, andsupersedes all prior rulings in the series.

Suspendedis used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use andformerly used will appear in material published inthe Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

37

Numerical Finding List1

Bulletins 1997–1 through 1997–24

Announcements:

97–1, 1997–2 I.R.B.6397–2, 1997–2 I.R.B.6397–3, 1997–2 I.R.B.6397–4, 1997–3 I.R.B.1497–5, 1997–3 I.R.B.1597–6, 1997–4 I.R.B.1197–7, 1997–4 I.R.B.1297–8, 1997–4 I.R.B.1297–9, 1997–5 I.R.B.2797–10, 1997–10 I.R.B.6497–11, 1997–6 I.R.B.1997–12, 1997–7 I.R.B.5597–13, 1997–8 I.R.B.3897–14, 1997–8 I.R.B.3897–15, 1997–9 I.R.B.2397–16, 1997–9 I.R.B.2397–17, 1997–9 I.R.B.2397–18, 1997–10 I.R.B.6797–19, 1997–10 I.R.B.6897–20, 1997–11 I.R.B.2297–21, 1997–11 I.R.B.2397–22, 1997–12 I.R.B.4797–23, 1997–11 I.R.B.2397–24, 1997–11 I.R.B.2497–25, 1997–12 I.R.B.4797–26, 1997–12 I.R.B.4897–27, 1997–13 I.R.B.3097–28, 1997–14 I.R.B.1597–29, 1997–14 I.R.B.1697–30, 1997–14 I.R.B.1697–31, 1997–14 I.R.B.1697–32, 1997–14 I.R.B.1797–33, 1997–15 I.R.B.897–34, 1997–15 I.R.B.897–35, 1997–15 I.R.B.997–36, 1997–15 I.R.B.1097–37, 1997–15 I.R.B.1097–38, 1997–15 I.R.B.1097–39, 1997–16 I.R.B.2797–40, 1997–16 I.R.B.2897–41, 1997–16 I.R.B.2897–42, 1997–17 I.R.B.1997–43, 1997–17 I.R.B.1997–44, 1997–17 I.R.B.1997–45, 1997–17 I.R.B.2097–46, 1997–18 I.R.B.5397–47, 1997–19 I.R.B.9497–48, 1997–20 I.R.B.897–49, 1997–20 I.R.B.897–50, 1997–20 I.R.B.897–51, 1997–20 I.R.B.997–52, 1997–21 I.R.B.2297–53, 1997–21 I.R.B.2297–54, 1997–22 I.R.B.2397–55, 1997–22 I.R.B.2397–56, 1997–23 I.R.B.1797–57, 1997–23 I.R.B.1897–58, 1997–24 I.R.B.1397–59, 1997–24 I.R.B.1397–60, 1997-24 I.R.B.14

Notices:

97–1, 1997–2 I.R.B.2297–2, 1997–2 I.R.B.2297–3, 1997–1 I.R.B.897–4, 1997–2 I.R.B.2497–5, 1997–2 I.R.B.2597–6, 1997–2 I.R.B.26

Notices—Continued

97–7, 1997–1 I.R.B.897–8, 1997–4 I.R.B.797–9, 1997–2 I.R.B.3597–10, 1997–2 I.R.B.4197–11, 1997–2 I.R.B.5097–12, 1997–3 I.R.B.1197–13, 1997–6 I.R.B.1397–14, 1997–8 I.R.B.2397–15, 1997–8 I.R.B.2397–16, 1997–9 I.R.B.1597–17, 1997–10 I.R.B.3497–18, 1997–10 I.R.B.3597–19, 1997–10 I.R.B.4097–20, 1997–10 I.R.B.5297–21, 1997–11 I.R.B.997–22, 1997–13 I.R.B.997–23, 1997–14 I.R.B.897–24, 1997–16 I.R.B.697–25, 1997–16 I.R.B.897–26, 1997–17 I.R.B.697–27, 1997–17 I.R.B.797–28, 1997–18 I.R.B.4597–29, 1997–20 I.R.B.697–30, 1997–20 I.R.B.697–31, 1997–21 I.R.B.597–32, 1997–21 I.R.B.897–33, 1997–22 I.R.B.22

Proposed Regulations:

REG–209332–80, 1997–14 I.R.B.9REG–209040–88, 1997–7 I.R.B.34REG–209121–89, 1997–11 I.R.B.15REG–208288–90, 1997–11 I.R.B.14REG–209494–90, 1997–8 I.R.B.24REG–208172–91, 1997–10 I.R.B.59REG–209672–93, 1997–6 I.R.B.15REG–209709–94 1997–13 I.R.B.12REG–209729–94, 1997–11 I.R.B.19REG–209762–95, 1997–3 I.R.B.12REG–209785–95, 1997–18 I.R.B.46REG–209817–96, 1997–7 I.R.B.41REG–209824–96, 1997–11 I.R.B.19REG–254394–96, 1997–14 I.R.B.14REG–209823–96, 1997–18 I.R.B.47REG–209828–96, 1997–6 I.R.B.15REG–209830–96, 1997–15 I.R.B.7REG–209834–96, 1997–4 I.R.B.9REG–209837–96, 1997–23 I.R.B.8REG–209839–96, 1997–8 I.R.B.26REG–242996–96, 1997–9 I.R.B.18REG–246018–96, 1997–8 I.R.B.30REG–247678–96, 1997–6 I.R.B.17REG–247862–96, 1997–8 I.R.B.32REG–248770–96, 1997–8 I.R.B.33REG–249819–96, 1997–7 I.R.B.50REG–252231–96, 1997–7 I.R.B.52REG–252233–96, 1997–9 I.R.B.19REG–252665–96, 1997–12 I.R.B.46REG–253578–96, 1997–19 I.R.B.93REG–105299–97, 1997–23 I.R.B.8

Public Law:

105–2, 1997–18 I.R.B.14

Railroad Retirement Quarterly Rate:

1997–21 I.R.B.4

Revenue Procedures:

97–1, 1997–1 I.R.B.1197–2, 1997–1 I.R.B.6497–3, 1997–1 I.R.B.8497–4, 1997–1 I.R.B.96

Revenue Procedures—Continued

97–5, 1997–1 I.R.B.13297–6, 1997–1 I.R.B.15397–7, 1997–1 I.R.B.18597–8, 1997–1 I.R.B.18797–9, 1997–2 I.R.B.5697–10, 1997–2 I.R.B.5997–11, 1997–6 I.R.B.1397–12, 1997–4 I.R.B.797–13, 1997–5 I.R.B.1897–14, 1997–5 I.R.B.2097–15, 1997–5 I.R.B.2197–16, 1997–5 I.R.B.2597–17, 1997–9 I.R.B.1597–18, 1997–10 I.R.B.5397–19, 1997–10 I.R.B.5597–20, 1997–11 I.R.B.1097–21, 1997–12 I.R.B.4497–22, 1997–13 I.R.B.997–23, 1997–17 I.R.B.797–24, 1997–16 I.R.B.1097–24A, 1997–20 I.R.B.797–25, 1997–17 I.R.B.897–26, 1997–17 I.R.B.1797–27, 1997–21 I.R.B.1097–28, 1997–23 I.R.B.997–29, 1997–24 I.R.B.9

Revenue Rulings:

97–1, 1997–2 I.R.B.1097–2, 1997–2 I.R.B.797–3, 1997–2 I.R.B.597–4, 1997–3 I.R.B.697–5, 1997–4 I.R.B.597–6, 1997–4 I.R.B.497–7, 1997–5 I.R.B.1497–8, 1997–7 I.R.B.497–9, 1997–9 I.R.B.497–10, 1997–10 I.R.B.3197–11, 1997–10 I.R.B.597–12, 1997–11 I.R.B.597–13, 1997–16 I.R.B.497–14, 1997–11 I.R.B.597–15, 1997–12 I.R.B.4297–16, 1997–13 I.R.B.497–17, 1997–14 I.R.B.597–18, 1997–15 I.R.B.497–19, 1997–18 I.R.B.1197–20, 1997–19 I.R.B.497–21, 1997–18 I.R.B.897–22, 1997–20 I.R.B.597–23, 1997–22 I.R.B.1897–24, 1997–22 I.R.B.1797–25, 1997–23 I.R.B.497–26, 1997–24 I.R.B.4

Social Security Domestic Coverage Threshold:

1997–9, I.R.B.17

Tax Conventions:

1997–17 I.R.B.5

Treasury Decisions:

8688, 1997–3 I.R.B.78689, 1997–3 I.R.B.98690, 1997–5 I.R.B.58691, 1997–5 I.R.B.168692, 1997–3 I.R.B.48693, 1997–6 I.R.B.98694, 1997–6 I.R.B.118695, 1997–4 I.R.B.58696, 1997–6 I.R.B.48697, 1997–2 I.R.B.11

1See footnote at end of list.

38

Numerical Finding List—ContinuedBulletins 1997–1 through 1997–24Treasury Decisions—Continued

8698, 1997–7 I.R.B.298699, 1997–6 I.R.B.48700, 1997–7 I.R.B.58701, 1997–7 I.R.B.238702, 1997–8 I.R.B.48703, 1997–8 I.R.B.188704, 1997–8 I.R.B.128705, 1997–8 I.R.B.168706, 1997–9 I.R.B.118707, 1997–7 I.R.B.178708, 1997–10 I.R.B.148709, 1997–9 I.R.B.58710, 1997–13 I.R.B.48711, 1997–12 I.R.B.358712, 1997–12 I.R.B.48713, 1997–14 I.R.B.48714, 1997–15 I.R.B.58715, 1997–18 I.R.B.58716, 1997–19 I.R.B.58717, 1997–24 I.R.B.58718, 1997–22 I.R.B.48719, 1997–23 I.R.B.48720, 1997–23 I.R.B.6

1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1996–27through 1996–53 will be found in InternalRevenue Bulletin 1997–1, dated January 6, 1997.

39

Finding List of Current Action onPreviously Published Items1

Bulletins 1997–1 through 1997–24

*Denotes entry since last publication

Revenue Procedures:

66–3Modified by97–11, 1997–6 I.R.B.13

87–21Modified by97–11, 1997–6 I.R.B.13

92–20Modified by97–1, 1997–1 I.R.B.11

92–20Modified by97–10, 1997–2 I.R.B.59

92–90Superseded by97–1, 1997–1 I.R.B.11

94–52Revoked by97–11, 1997–6 I.R.B.13

96–1Superseded by97–1, 1997–1 I.R.B.11

96–2Superseded by97–2, 1997–1 I.R.B.64

96–3Superseded by97–3, 1997–1 I.R.B.84

96–4Superseded by97–4, 1997–1 I.R.B.96

96–5Superseded by97–5, 1997–1 I.R.B.132

96–6Superseded by97–6, 1997–1 I.R.B.153

96–7Superseded by97–7, 1997–1 I.R.B.185

96–8Superseded by97–8, 1997–1 I.R.B.187

96–2496–24ASuperseded by97–24, 1997–16 I.R.B.10

96–37Obsoleted by97–26, 1997–17 I.R.B.17

97–2Amplified by97–21, 1997–12 I.R.B.44

Revenue Procedures—Continued

97–3Amplified by97–23, 1997–17 I.R.B.7

Revenue Rulings:

70–480Revoked by97–6, 1997–4 I.R.B.4

72–527Obsoleted by8704, 1997–8 I.R.B.12

74–59Revoked by8708, 1997–10 I.R.B.14

86–73Obsoleted byTD 8717, 1997–24 I.R.B.5

87–50Obsoleted byTD 8717, 1997–24 I.R.B.5

87–51Obsoleted byTD 8717, 1997–24 I.R.B.5

88–42Obsoleted byTD 8717, 1997–24 I.R.B.5

92–19Supplemented in part by97–2, 1997–2 I.R.B.7

93–90Obsoleted byTD 8717, 1997–24 I.R.B. 5

96–12Superseded by97–3, 1997–1 I.R.B.84

96–13Modified by97–1, 1997–1 I.R.B.11

96–22Superseded by97–3, 1997–1 I.R.B.84

96–34Superseded by97–3, 1997–1 I.R.B.84

96–39Superseded by97–3, 1997–1 I.R.B.84

96–43Superseded by97–3, 1997–1 I.R.B.84

96–56Superseded by97–3, 1997–1 I.R.B.84

1A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1996–27 through 1996–53 will be found in Inter-nal Revenue Bulletin 1997–1, dated January 6,1997.

40

NOTES

41

NOTES

42

INTERNAL REVENUE BULLETINThe Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is

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detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402.Please allow two to six weeks, plus mailing time, for delivery.

Superintendent of Documents First Class MailPostage and Fees PaidGPOPermit No. G–26

U.S. Government Printing OfficeWashington, DC 20402

Official BusinessPenalty for Private Use, $300

INTERNAL REVENUE BULLETINThe Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is

sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendentof Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These

are sold on a single copy basis andare not included as part of the subscription to the Internal Revenue Bulletin. Subscribers tothe weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletinsare out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, maypurchase them from the Superintendent of Documents.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402.Please allow two to six weeks, plus mailing time, for delivery.

Internal Revenue ServiceWashington, DC 20224

Official BusinessPenalty for Private Use, $300