Par. 2. Sections 1.643(i)-1, 1.643(i)-2, 1.643(i)-3, 1.643(i)-4, and 1.643(i)-5 are added to read as follows:
(a) Loans and use of trust property —(1) In general. For purposes of subparts B, C, and D of part I of subchapter J of chapter 1 of the Internal Revenue Code, a loan or use of trust property described in paragraph (b) or (c) of this section is treated as a section 643(i) distribution from a foreign trust to a U.S. grantor or beneficiary of the foreign trust under subchapter J of chapter 1 of the Internal Revenue Code, as provided in such paragraphs. Paragraph (d) of this section provides definitions for this section and §§ 1.643(i)-2 through 1.643(i)-5. Section 1.643(i)-2 provides exceptions to the general rules of this section. Section 1.643(i)-3 provides rules relating to the determination of the amount treated as a section 643(i) distribution and the tax consequences of a section 643(i) distribution. Section 1.643(i)-4 provides examples, and § 1.643(i)-5 provides the applicability date for the rules in this section and §§ 1.643(i)-2 through 1.643(i)-4.
(2) Interaction with section 6048(c). For rules relating to information reporting of loans from foreign trusts and the use of property of a foreign trust, see § 1.6048-4. That provision applies without regard to whether the loan or use of property is treated as a section 643(i) distribution or has any other tax consequences, and without regard to whether the foreign trust is a nongrantor or grantor trust.
(b) Loan of cash or marketable securities from foreign nongrantor trust generally treated as a distribution —(1) In general. Except as provided in § 1.643(i)-2, any direct or indirect loan of cash or marketable securities from a foreign nongrantor trust (whether from trust corpus or income) to any U.S. grantor or beneficiary of that trust or any U.S. person related to such a U.S. grantor or beneficiary is treated as a section 643(i) distribution to the U.S. grantor or beneficiary on the date such loan is made. For these purposes, a loan from a nongrantor trust to a grantor trust or to a disregarded entity is treated as a loan to the owner of the grantor trust or of the disregarded entity, respectively. For example, a loan to a single member LLC treated as a disregarded entity is treated as a loan to the owner of the LLC.
(2) Indirect loans —(i) In general. Except as provided in paragraph (b)(2)(ii) of this section, an indirect loan of cash or marketable securities from a foreign nongrantor trust includes a loan of cash or marketable securities made by an intermediary, agent, or nominee of the trust, as well as a loan made to an intermediary, agent, or nominee of a U.S. grantor or beneficiary or of a U.S. person related to a U.S. grantor or beneficiary. For example, such indirect loans include:
(A) Loans made by any person other than the trust to either a U.S. grantor or beneficiary of a foreign trust or any U.S. person related to a U.S. grantor or beneficiary if the foreign trust provides a guarantee (within the meaning of § 1.679-3(e)(4)) for the loan;
(B) Loans made by any person related to a foreign trust, to either a U.S. grantor or beneficiary of the trust, or a U.S. person related to a U.S. grantor or beneficiary; and
(C) Loans made by a foreign trust to a foreign person, other than to a nonresident alien individual grantor or beneficiary of the trust, if the foreign person is related to a U.S. grantor or beneficiary of the trust.
(ii) Limitation. The loans described in paragraphs (b)(2)(i)(B) and (b)(2)(i)(C) of this section will not be treated as a section 643(i) distribution if the U.S. grantor or beneficiary:
(A) Satisfies the information reporting requirements of § 1.6048-4 with respect to the loan, and
(B) Includes an explanatory statement attached to the U.S. grantor or beneficiary's Federal income tax return that demonstrates to the satisfaction of the Commissioner that the loan would have been made without regard to the fact that the U.S. grantor or beneficiary is a grantor or beneficiary of the foreign trust.
(iii) Effect of indirect loans —(A) In general. In the case of a loan described in paragraph (b)(2)(i)(A) or (B) of this section, the person making the loan is treated as an agent of the foreign trust.
(B) Loans to a foreign person related to a U.S. grantor or beneficiary. In the case of a loan described in paragraph (b)(2)(i)(C) of this section, the foreign person related to the U.S. grantor or beneficiary is treated as an agent of the U.S. grantor or beneficiary, and the date the loan is made to the foreign person is treated as the date the loan is made to the U.S. grantor or beneficiary.
(3) Rule for nonresident alien individual grantors or beneficiaries of a foreign trust who become U.S. persons. If a nonresident alien individual who is a grantor or beneficiary of a foreign trust receives a loan from the trust and, while the loan is outstanding, becomes a U.S. resident (within the meaning of section 7701(b)) or a U.S. citizen within two years after the date the loan was made, the loan will be treated as a section 643(i) distribution with respect to the outstanding amount of the loan as of the date the individual acquires U.S. residence or citizenship unless an exception described in § 1.643(i)-2 applies.
(c) Use of trust property generally treated as a distribution —(1) In general. Except as provided in § 1.643(i)-2, any direct or indirect use of property of a foreign trust, other than a loan of cash or marketable securities, by any U.S. grantor or beneficiary of the trust or any U.S. person related to a U.S. grantor or beneficiary is treated as a section 643(i) distribution to the U.S. grantor or beneficiary in the taxable year in which the use occurs. For these purposes, use of property of a nongrantor trust by a grantor trust or by a disregarded entity is treated as use by the owner of the grantor trust or of the disregarded entity, respectively. For example, use of trust property by a single member LLC treated as a disregarded entity would be treated as use by the owner of the LLC.
(2) Indirect use of trust property —(i) In general. Indirect use of property of a foreign trust includes use by an agent or nominee of a U.S. grantor or beneficiary of the trust or an agent or nominee of a U.S. person related to a U.S. grantor or beneficiary. Indirect use of trust property also includes use by a foreign person, other than a nonresident alien individual beneficiary of the trust, if the foreign person is related to a U.S. grantor or beneficiary of the trust, unless paragraph (c)(2)(ii) of this section applies.
(ii) Limitation. The use of trust property described in the second sentence of paragraph (c)(2)(i) of this section is not treated as a section 643(i) distribution to the U.S. grantor or beneficiary if the U.S. grantor or beneficiary:
(A) Satisfies the information reporting requirements of § 1.6048-4 with respect to the use; and
(B) Includes an explanatory statement attached to the U.S. grantor's or beneficiary's Federal income tax return that demonstrates to the satisfaction of the Commissioner that the use of trust property would have been allowed without regard to the fact that the U.S. grantor or beneficiary is a grantor or beneficiary of the foreign trust.
(iii) Effect of indirect use of trust property. In the case of the use of trust property by a foreign person related to the U.S. grantor or beneficiary described in paragraph (c)(2)(i) of this section, such foreign person is treated as an agent of the U.S. grantor or beneficiary.
(d) Definitions. The following definitions apply for purposes of this section and §§ 1.643(i)-2 through 1.643(i)-5:
(1) Beneficiary. The term beneficiary means a person to whom or for whose benefit, under the terms of the trust instrument or applicable local law, at any time during the term of the trust or upon termination, trust income or corpus may be paid (including pursuant to a power of appointment that has been exercised in favor of that person) or accumulated, directly or indirectly. All references to a U.S. beneficiary mean a beneficiary who is a U.S. person.
(2) Cash. The term cash includes foreign currencies and cash equivalents.
(3) Disregarded entity. The term disregarded entity means an entity that, under §§ 301.7701-1 through 301.7701-3 of this chapter, is disregarded as an entity separate from its owner.
(4) Foreign person. The term foreign person means any person who is not a U.S. person within the meaning of section 7701(a)(30).
(5) Grantor trust. The term grantor trust means a trust or any portion of a trust that is treated as owned by any person under subpart E of part I of subchapter J of chapter 1 of the Internal Revenue Code.
(6) Loan of cash. Except as provided in § 1.643(i)-2(a)(1), the term loan of cash includes an extension of credit.
(7) Marketable securities. The term marketable securities means marketable securities within the meaning of section 731(c)(2)(A), but not including foreign currencies.
(8) Nongrantor trust. The term nongrantor trust means a trust or any portion of a trust that is not treated as owned by any person under subpart E of part I of subchapter J of chapter 1 of the Internal Revenue Code.
(9) Related. A person will be considered to be related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b). In applying section 267 for purposes of the previous sentence, section 267(c)(4) is applied as if the family of an individual includes the spouses of the members of the individual's family.
(10) Section 643(i) distribution. The term section 643(i) distribution means a transaction described in paragraph (b) or (c) of this section.
(11) U.S. grantor. The term U.S. grantor means a U.S. person described in § 1.671-2(e).
(12) U.S. person —(i) In general. Subject to paragraph (d)(12)(ii) of this section, the term U.S. person means a United States person as defined in section 7701(a)(30) but does not include an entity that is exempt from tax under chapter 1 of the Internal Revenue Code.
(ii) Special rules —(A) Dual resident taxpayers. If a dual resident taxpayer (within the meaning of § 301.7701(b)-7(a)(1) of this chapter) computes U.S. income tax liability as a nonresident alien on the last day of the taxable year and complies with the filing requirements of § 301.7701(b)-7(b) and (c) of this chapter, the dual resident taxpayer is not treated as a U.S. person for purposes of section 643(i) with respect to the portion of the taxable year the dual resident taxpayer was treated as a nonresident alien for purposes of computing U.S. income tax liability.
(B) Dual status taxpayers. Except as provided in paragraph (b)(3) of this section, if a taxpayer abandons U.S. citizenship or residence during the tax year or acquires U.S. citizenship or residence during the taxable year as provided in § 1.6012-1(b)(2)(ii), the taxpayer is not treated as a U.S. person with respect to the portion of the taxable year the taxpayer was treated as a nonresident alien for purposes of computing U.S. income tax liability.