Par. 9. Sections 1.6048-1 through 1.6048-7 are added to read as follows:
(a) Reporting of trust distributions. Unless an exception in § 1.6048-5 applies, any U.S. person who receives directly or indirectly any distribution from a foreign trust (without regard to whether any person is treated as the owner of the foreign trust under the rules of subpart E of part I of subchapter J of chapter 1) must file Part III of Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, by the due date of the U.S. person's Form 3520, as described in § 1.6048-2(a)(2) by replacing “responsible party” with “U.S. person” in § 1.6048-2(a)(2)(i) and by replacing “grantor or transferor” with “U.S. person” in § 1.6048-2(a)(2)(ii) and (iii), as applicable. See § 1.6048-6(d) for information reporting by married U.S. persons who file a joint income tax return.
(b) Distribution —(1) In general. Except as provided in paragraphs (b)(5)(ii) and (b)(6)(ii) of this section, a distribution means any transfer of property (including cash) from a foreign trust received directly or indirectly by a U.S. person to the extent such property exceeds the fair market value of any property or services received by the foreign trust in exchange for the property transferred, without regard to whether any portion of the foreign trust is treated as owned by the grantor or another person under the rules of subpart E of part I of subchapter J of chapter 1, whether the recipient is designated as a beneficiary by the terms of the foreign trust, or whether the distribution has any income tax consequences. A distribution includes any amount, including without limitation a gift or bequest described in section 663(a), actually or constructively received by a U.S. person. For these purposes, a transfer of property from a foreign trust to a grantor trust or to a disregarded entity (as defined in § 1.643(i)-1(d)(3) of this chapter) is treated as a distribution to the owner of the grantor trust or of the disregarded entity, respectively. For example, a transfer of property from a foreign trust to a single member LLC treated as a disregarded entity is treated as a distribution to the owner of the LLC. For distributions through intermediaries, see paragraph (b)(2) of this section; for distributions from entities owned by a foreign trust, see paragraph (b)(3) of this section; for inbound migrations of foreign trusts, see paragraph (b)(4) of this section; for loans of cash or marketable securities, see paragraph (b)(5) of this section; for use of trust property, see paragraph (b)(6) of this section; and for the receipt of covered gifts or bequests from a foreign trust, see paragraph (b)(7) of this section.
(2) Distributions from foreign trusts through intermediaries —(i) In general. A distribution includes any transfer of property from a foreign trust received by a U.S. person through an intermediary, nominee, or agent. In such a case, except as otherwise provided in paragraph (b)(2)(ii) of this section, the intermediary, nominee, or agent is treated as an agent of the foreign trust and the property is treated as distributed from the foreign trust to the U.S. person in the year the property is received by or made available by the intermediary, nominee, or agent to the U.S. person.
(ii) Special rule. If the Commissioner determines that the intermediary, nominee, or agent is an agent of the U.S. person, the property is treated as distributed from the foreign trust to the U.S. person in the year the property is received by the intermediary, nominee, or agent. In such case, the intermediary, nominee, or agent is not treated as distributing the property to the U.S. person when the property is subsequently received by or made available by the intermediary, nominee, or agent to the U.S. person.
(iii) Reporting indirect transfers of property. An indirect transfer of property from a foreign trust must be reported on Part III of Form 3520 without regard to whether the receipt of such property would be treated as having any income tax consequences to the U.S. person receiving such property, to a U.S. grantor or beneficiary of the foreign trust, or to a U.S. owner of the foreign trust.
(3) Distributions from entities owned by a foreign trust. A distribution includes any transfer of property from an entity in which a foreign trust directly or indirectly holds an ownership interest that is received by a U.S. person who is a related person (as defined in § 1.679-1(c)(5)) with respect to the foreign trust. In such case, the transfer of the property by the entity owned by the foreign trust to the U.S. person is treated as a distribution of such property by the entity to the foreign trust followed by a distribution of the property from the foreign trust to the U.S. person, unless the U.S. person demonstrates to the satisfaction of the Commissioner that the distribution from the entity is properly attributable to the U.S. person's ownership interest in the entity.
(4) Inbound migrations of foreign trusts. A distribution includes an inbound migration of a foreign trust. An inbound migration of a foreign trust occurs when a foreign trust becomes a domestic trust. In such case, the foreign trust is treated as distributing the trust corpus and income to the domestic trust on the date the foreign trust becomes a domestic trust.
(5) Loans of cash or marketable securities —(i) In general. A distribution includes any loan of cash or marketable securities made from a foreign trust (whether from trust corpus or income) directly or indirectly to a U.S. person. For these purposes, a loan to a grantor trust or to a disregarded entity (as defined in § 1.643(i)-1(d)(3) of this chapter) will be treated as a loan to the owner of the grantor trust or of the disregarded entity, respectively. For example, a loan to a single member LLC treated as a disregarded entity will be treated as a loan to the owner of the LLC. Loans from a foreign trust include:
(A) A loan of cash or marketable securities made by any person to a U.S. person, if the foreign trust provides a guarantee (within the meaning of § 1.679-3(e)(4)) for the loan, and
(B) A loan of cash or marketable securities made by any intermediary, nominee or agent of a foreign trust to a U.S. person.
(ii) Section 643(i) loans of cash or marketable securities. A distribution includes a direct or indirect loan of cash or marketable securities from a foreign nongrantor trust to any U.S. grantor or beneficiary (within the meaning of § 1.643(i)-1(d)(11) or (1), respectively) or a U.S. person related (within the meaning of § 1.643(i)-1(d)(9)) to a U.S. grantor or beneficiary regardless of whether the loan was made in exchange for a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). For these purposes, indirect loans include loans described in § 1.643(i)-1(b)(2).
(iii) Reporting loans of cash or marketable securities. A loan of cash or marketable securities made from a foreign trust must be reported by the U.S. person described under paragraph (b)(5)(i) of this section and by the U.S. grantor or beneficiary described under paragraph (b)(5)(ii) of this section on Part III of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, without regard to whether the loan would be treated as having any income tax consequences to a U.S. grantor or beneficiary (within the meaning of § 1.643(i)-1(d)(11) or (1), respectively) of the foreign trust.
(6) Use of trust property —(i) In general. A distribution includes the fair market value of the direct or indirect use of any property of a foreign trust by a U.S. person. For these purposes, use of property of a foreign trust by a grantor trust or by a disregarded entity (as defined in § 1.643(i)-1(d)(3)) will be treated as the use of trust property by the owner of the grantor trust or of the disregarded entity, respectively. For example, use of trust property by a single member LLC treated as a disregarded entity will be treated as use of trust property by the owner of the LLC.
(ii) Section 643(i) use of trust property. A distribution includes the fair market value of the direct or indirect use of any property of a foreign nongrantor trust by a U.S. grantor or beneficiary (within the meaning of § 1.643(i)-1(d)(11) or (1), respectively) or a U.S. person related (within the meaning of § 1.643(i)-1(d)(9)) to a U.S. grantor or beneficiary without regard to whether the foreign trust is paid the fair market value for such use. For these purposes, indirect use of trust property includes the use described in § 1.643(i)-1(c)(2).
(iii) Reporting use of trust property. The use of trust property must be reported by the U.S. person described under paragraph (b)(6)(i) of this section and by the U.S. grantor or beneficiary described under paragraph (b)(6)(ii) of this section on Part III of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, without regard to whether the use of trust property would be treated as having any income tax consequences to a U.S. grantor or beneficiary (within the meaning of § 1.643(i)-1(d)(11) or (1), respectively) of the foreign trust.
(7) Certain covered gifts or bequests. A distribution includes any covered gift or bequest (described in section 2801(e)) that is received as a distribution from a foreign trust.
(c) Statements provided by foreign trust —(1) Foreign grantor trust with U.S. owner —(i) Owner statement. Pursuant to § 1.6048-3(a)(1)(ii), a U.S. owner of a foreign trust (or portion of a foreign trust) should receive a Foreign Grantor Trust Owner Statement.
(ii) Statement for U.S. person receiving a distribution. Pursuant to § 1.6048-3(a)(1)(iii), a U.S. person, other than a U.S. owner, who receives a distribution from a foreign grantor trust (or portion of a foreign grantor trust) should receive a Foreign Grantor Trust Beneficiary Statement.
(2) Foreign nongrantor trust. A foreign nongrantor trust may issue, by the fifteenth day of the third month after the end of the trust's taxable year, a Foreign Nongrantor Trust Beneficiary Statement to each U.S. person who receives a distribution from the foreign trust during the trust's taxable year.
(3) Foreign grantor trust with foreign owner. A foreign trust that is treated as owned by a foreign person under the grantor trust rules may issue, by the fifteenth day of the third month after the end of the trust's taxable year, a Foreign-Owned Grantor Trust Beneficiary Statement to each U.S. person who receives a distribution.
(d) Tax consequences of distributions —(1) In general. Subject to paragraph (e) of this section, a U.S. person (other than a U.S. person described in § 1.6048-4(c)(1)(i)) who receives a distribution (other than a distribution described in § 1.6048-4(b)(5) or (6) that is not treated as a section 643(i) distribution under § 1.643(i)-1) from a foreign trust must determine the tax consequences of the distribution as follows, unless the distribution is received in a year that the foreign trust terminates. For rules determining the tax consequences of a distribution in the year a foreign trust terminates, see paragraphs (d)(3)(i)(B) and (d)(3)(iii) of this section.
(i) A U.S. person who receives a Foreign Grantor Trust Beneficiary Statement or a Foreign-Owned Grantor Trust Beneficiary Statement before the due date of the U.S. person's income tax return (including extensions) must determine the income tax consequences of the distribution from the trust as a distribution being made from a grantor trust.
(ii) A U.S. person who receives a Foreign Nongrantor Trust Beneficiary Statement before the due date of the U.S. person's income tax return (including extensions) may determine the income tax consequences of the distribution under either the actual calculation method described in paragraph (d)(2) of this section or the default calculation method described in paragraph (d)(3) of this section, unless the U.S. person knows or has reason to know that the information in the statement is incorrect or the U.S. person has previously used the default calculation method with respect to distributions from the same foreign trust.
(iii) In all other cases, including when a U.S. person does not receive a statement described in § 1.6048-4(c) before the due date of the U.S. person's income tax return (including extensions), the U.S. person must use the default calculation method described in paragraph (d)(3) of this section.
(2) Actual calculation method. Under the actual calculation method, the tax consequences of the distribution are determined by using actual information about the foreign trust as provided in the Foreign Nongrantor Trust Beneficiary Statement described in § 1.6048-4(c)(2) and applying the rules of subparts C and D of Part I of subchapter J of chapter 1 of the Internal Revenue Code.
(3) Default calculation method —(i) Consequences to U.S. person who receives a distribution from a foreign trust —(A) In general. Under the default calculation method, the tax consequences of the distribution are determined by allocating the distribution between a distribution of current income and a distribution of accumulated income under the rules of this paragraph (d)(3). The portion of the distribution that is treated as a distribution of current income is 125% of the average distribution that the U.S. person received from the foreign trust during the immediately preceding three taxable years (or the number of years during which the trust has been a foreign trust, if fewer than three years). The remainder of the distribution, if any, is treated as an accumulation distribution within the meaning of section 665(b) that is subject to an interest charge under section 668. For purposes of computing the interest charge (in the absence of actual information provided on a statement described in § 1.6048-4(c)), the U.S. person must assume that the applicable number of years the trust has been in existence is ten years and that no taxes described in section 665(d) have been imposed on the trust in any applicable previous year (even if a distribution had been made and tax under section 665(d) had been imposed).
(B) Year of trust termination. Unless paragraph (d)(3)(iii) of this section applies, the tax consequences of a distribution in the year a foreign trust terminates are determined by treating the distribution as an accumulation distribution within the meaning of section 665(b) that is subject to an interest charge under section 668 for any amount in excess of the portion of the distribution that is treated as a distribution of current income described in paragraph (d)(3)(i)(A) of this section.
(ii) Consequences to trust. A foreign trust must determine the income tax consequences of distributions to U.S. persons by applying the applicable rules of part I of subchapter J of chapter 1 of the Internal Revenue Code.
(iii) Actual calculation method in year of foreign trust termination after using the default calculation method. A U.S. person who has previously used the default calculation method with respect to distributions from a foreign trust may, for the year in which the foreign trust terminates, determine the tax consequences of a distribution from the same trust by using the actual calculation method provided that, before the due date of the U.S. person's income tax return (including extensions), the trust provides to the U.S. person complete and accurate information about all previous distributions from such foreign trust. The U.S. person must use this information to recalculate the tax effect of all previous distributions from such foreign trust under the actual calculation method in order to determine the portion attributable to current income, accumulated income, and principal in the year that the foreign trust terminates. A U.S. person described in this paragraph (d)(3)(iii) may not use the actual calculation method for the year that the foreign trust terminates if the U.S. person knows or has reason to know that the information provided by the foreign trust is incorrect.
(iv) Example. The following example illustrates the rules of paragraph (d)(3)(i) of this section. B, a U.S. person, is a beneficiary of a foreign nongrantor trust, FT, that was established in Year 1. In Year 2, Year 3, and Year 4, B received distributions from FT of $100x, $200x, and $300x respectively. In Year 5, B receives a $400x distribution from FT. To determine the tax consequences of the Year 5 distribution, B applies the default calculation method. Under the default calculation method, the average distribution that B received from FT during the preceding three years is $200x and 125% of such average distribution is $250x. Therefore, $250x of the Year 5 distribution is treated as a distribution of current income and the remaining $150x is treated as an accumulation distribution. The $150x that is treated as an accumulation distribution is subject to an interest charge under section 668. B must report the distribution and the default calculation on Part III of Form 3520 for Year 5.
(e) Distribution treated as accumulation distribution if records are not provided. If adequate records are not provided to the Commissioner to determine the proper treatment of any distribution from a foreign trust (within the meaning of paragraph (b) of this section) other than a loan or use of trust property that is not treated as a section 643(i) distribution under § 1.643(i)-1, the entire distribution will be treated as an accumulation distribution includible in the gross income of the U.S. person who received the distribution under chapter 1 of the Internal Revenue Code. However, if the trustee of a foreign trust authorizes a U.S. person to act as the trust's limited agent under rules prescribed in § 1.6048-3(d), then the tax consequences of the distribution may be determined under the rules described in paragraph (d)(1) of this section.
(f) Interaction with § 1.6039F-1. If a U.S. person receives a distribution from a foreign trust, the U.S. person must report the distribution under paragraph (a) of this section and not under § 1.6039F-1(a), regardless of whether the distribution is taxable to the U.S. person receiving the distribution. See § 1.6039F-1(b).
(g) Examples. The following examples illustrate the rules of this section. In each example, X is a U.S. citizen, FT is a foreign trust, and FC is a foreign corporation.
(1) Example 1: Payment of liability treated as distribution. X owes $1,000x to Y for services that Y performed for X. In satisfaction of X's liability to Y, FT transfers to Y property with a fair market value of $1,000x. Under paragraph (b)(1) of this section, FT's transfer of property to Y is constructively received by X from FT, and is a distribution in the amount of $1,000x to X for purposes of this section. Under paragraph (a) of this section, X must report the distribution on Part III of Form 3520.
(2) Example 2: Assumption of liability treated as distribution. The facts are the same as in paragraph (g)(1) of this section ( Example 1 ) except that FT assumes X's liability to pay Y. The result is the same as in paragraph (g)(1) of this section ( Example 1 ).
(3) Example 3: Trust's partial guarantee of U.S. person's obligation treated as distribution from foreign trust. Y lends $1,000x of cash to X in exchange for X's obligation to repay the loan. X is a U.S. person. FT guarantees the repayment of $600x of X's obligation. Under paragraph (b)(5)(i)(A) of this section, FT's guarantee of X's obligation is a distribution from FT to X in the amount of $600x. Under paragraph (a) of this section, X must report the distribution on Part III of Form 3520.
(4) Example 4: Section 643(i) loan not in exchange for qualified obligation. X's sister, A, and A's husband, B, are both U.S. citizens. X, A, and B are U.S. persons within the meaning of § 1.643(i)-1(d)(12), and X is related to B under § 1.643(i)-1(d)(9). B is a beneficiary of FT, a nongrantor trust. In Year 1, FT lends $100x to X in exchange for a demand note that permits FT to require repayment by X at any time. The demand note issued by X is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii) because X's obligation to FT could remain outstanding for more than five years. Accordingly, the loan from FT to X is treated as a section 643(i) distribution of $100x to B under § 1.643(i)-1(a). The loan is a distribution from FT to X and B under paragraph (b)(5)(ii) of this section. Under paragraphs (a) and (b)(5)(iii) of this section, X and B each must report the distribution on Part III of Form 3520.
(5) Example 5: Section 643(i) loan in exchange for qualified obligation. The facts are the same as in paragraph (g)(4) of this section ( Example 4 ) except that the loan cannot remain outstanding for more than five years and it is a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Although the loan is not a section 643(i) distribution within the meaning of § 1.643(i)-1(a), the loan nevertheless is a distribution from FT to X and to B under paragraph (b)(5)(ii) of this section. Under paragraphs (a) and (b)(5)(iii) of this section, X and B each must report the distribution on Part III of Form 3520.
(6) Example 6: Distribution through intermediary. Y, a nonresident alien, created FT in 1980 for the benefit of Y's children and their descendants, all of whom are U.S. persons. FT's trustee, T, determines that $100x of accumulated income should be distributed to X, one of Y's children. Pursuant to a plan with a principal purpose of avoiding the interest charge that would be imposed on an accumulation distribution from a foreign trust by section 668, T makes a gratuitous transfer from FT of $100x to N, a foreign person. N subsequently makes a gratuitous transfer of $100x to X. Under § 1.643(h)-1(a)(1), FT is deemed to have made an accumulation distribution of $100x to X. The distribution through N as the intermediary is treated as a distribution under paragraph (b)(2)(i) of this section. Under paragraphs (a) and (b)(2)(iii) of this section, X must report the distribution on Part III of Form 3520.
(7) Example 7: Excess payment in exchange for property. X transfers to FT property with a fair market value of $200x in exchange for a payment of $500x. Under paragraph (b)(1) of this section, the excess amount of $300x is treated as a distribution from FT to X. Under paragraph (a) of this section, X must report the distribution of $300x on Part III of Form 3520.
(8) Example 8: Excess payment in exchange for services. X receives a payment of $100x from FT purportedly in exchange for X's performance of services as a trustee of FT. The fair market value of the services performed is $20x. Under paragraph (b)(1) of this section, X is treated as receiving a distribution of $80x from FT. Under paragraph (a) of this section, X must report the distribution of $80x on Part III of Form 3520.
(9) Example 9: Distribution from entity owned by foreign trust. FT owns all of the outstanding stock of FC. FC distributes $100x directly to X, a related person within the meaning of § 1.679-1(c)(5) with respect to FT. Because FT is the sole shareholder of FC, X is unable to demonstrate to the satisfaction of the Commissioner that the distribution is properly attributable to X's ownership interest in FC. Accordingly, under paragraph (b)(3) of this section, X is treated as receiving a distribution of $100x from FT. Under paragraph (a) of this section, X must report the distribution of $100x on Part III of Form 3520.
(10) Example 10: Distribution from entity co-owned by foreign trust. FC has 100 outstanding shares of stock. FT owns 25 shares of FC stock, X owns 50 shares, and N, a nonresident alien, owns the remaining 25 shares. In Year 1, FC distributes a dividend of $25x to each of FT and N and $50x to X. Because the distribution was made to FT, X, and N in proportion to their ownership interests in FC and X reports $50x as a dividend on X's timely filed income tax return for Year 1, X is able to demonstrate to the satisfaction of the Commissioner that the distribution is properly attributable to X's ownership interest in FC. Accordingly, under paragraph (b)(3) of this section, X is not treated as receiving a reportable distribution of $50x from FT.
(11) Example 11: Foreign trust becomes domestic trust. FB, a foreign bank, resigns as trustee of FT, and DB, a domestic bank, becomes the new trustee of FT. Pursuant to section 7701(a)(30)(E), FT becomes a domestic trust, DT. Under paragraph (b)(4) of this section, DT is treated as receiving a distribution of the trust corpus and income from FT. Under paragraph (a) of this section, DT must report the deemed distribution of the trust corpus and income on Part III of Form 3520 for the year in which the inbound migration occurs.
(12) Example 12: Distribution received by domestic trust. T, as trustee of FT, has the power to decant. Exercising that power, T distributes the trust corpus and income of FT to DT, a domestic trust. Neither FT nor DT is a grantor trust. Under paragraph (b)(1) and (4) of this section, DT receives a distribution of the trust corpus and income from FT. Under paragraph (a) of this section, DT must report the distribution of the trust corpus and income on Part III of Form 3520 for the year in which the decanting occurs.
(13) Example 13: Distribution received by U.S. owner. X is treated as the owner of FT under section 679. X receives a distribution from FT. Under paragraph (a) of this section, X must report the distribution on Part III of Form 3520.
(14) Example 14: Distribution from trust owned by another person. X receives a distribution from FT. Y, a nonresident alien, is treated as the owner of FT under the grantor trust rules. X receives a completed Foreign-Owned Grantor Trust Beneficiary Statement. Under paragraph (a) of this section and § 1.6048-6(b), X must file Form 3520 for the year of the distribution.
(15) Example 15: Use of default calculation method if statement not provided. The facts are the same as in paragraph (g)(14) ( Example 14 ) except that X does not receive a Foreign-Owned Grantor Trust Beneficiary Statement from FT. Pursuant to paragraph (d)(3) of this section, X must determine the tax consequences of the distribution using the default calculation method. Under the default calculation method, X must include the distribution in income in accordance with rules prescribed in paragraph (d)(3) of this section and in the Instructions for Form 3520 for the applicable taxable year.
(16) Example 16: Distribution attributable to covered gift. Z relinquishes Z's U.S. citizenship on September 15, Year 1. Z is a covered expatriate within the meaning of section 877A(g)(1). On August 1, Year 2, Z creates and transfers $300x to a foreign trust, FT, for the benefit of Z's son, S, a U.S. citizen. On December 30, Year 3, S receives a $40x distribution from FT. Whether or not the entire amount of the distribution is a covered gift within the meaning of section 2801(e), under paragraph (b)(7) of this section, the $40x is a distribution. Under paragraph (a) of this section, S must report the distribution on Part III of Form 3520. S also may have additional reporting requirements under section 2801 for the covered gift.