# Prop. Treas. Reg. § 1.643(i)-4: Examples. Proposed regulation, not in force. REG-124850-08, 89 FR 39440, published 2024-05-08 . Interprets 26 U.S.C. § 643. 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) Scope. The examples in this section illustrate the rules of §§ 1.643(i)-1 through 1.643(i)-3. (b) Example 1: Loan to contingent remainder beneficiary treated as loan to U.S. beneficiary. Y, a nonresident alien, created and funded a foreign nongrantor trust, FT, for the benefit of Y's two children from Y's first marriage, A and B, who are both nonresident aliens. FT's governing trust instrument provides that, upon the death of the second to die of A and B, the trust may make a distribution to any of Y's surviving children, in the discretion of the trustee. In Year 1, X, a U.S. person who is Y's daughter from Y's second marriage, receives a loan of $100,000 from FT in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Under § 1.643(i)-1(d)(1), X is a U.S. beneficiary of FT because X is a U.S. person to whom, at some point before the termination of the trust, the trust income or corpus may be paid at the discretion of the trustee. Under §§ 1.643(i)-1(b)(1) and 1.643(i)-3(a)(1), X is treated as receiving a section 643(i) distribution from FT in the amount of $100,000. X must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under § 1.6048-4(a), X is required to report the section 643(i) distribution on Part III of Form 3520 for Year 1 as a distribution from a foreign trust. (c) Example 2: Loan from foreign nongrantor trust to a foreign grantor trust treated as section 643(i) distribution to U.S. owner. The facts are the same as in paragraph (b) of this section ( Example 1 ), except that instead of a loan to X, in Year 1, FT makes a loan of $100,000 to GT, a foreign grantor trust treated as wholly owned by X, in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Under § 1.643(i)-1(d)(1), X is a U.S. beneficiary of FT as explained in paragraph (b) of this section ( Example 1 ). Under §§ 1.643(i)-1(b)(1) and 1.643(i)-3(a)(1), X, who is treated as the owner of GT, is treated as receiving a section 643(i) distribution from FT in the amount of $100,000. X must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under § 1.6048-4(a), X is required to report the section 643(i) distribution on Part III of Form 3520 for Year 1 as a distribution from a foreign trust. (d) Example 3: Loan by a person related to a foreign nongrantor trust treated as a section 643(i) distribution. X, a U.S. person, is a beneficiary of FT, a foreign nongrantor trust. FT owns 55% of the stock of FC, a foreign corporation that is not a controlled foreign corporation within the meaning of section 957 or a passive foreign investment company within the meaning of section 1297. FC is related to FT within the meaning of § 1.643(i)-1(d)(9). On January 2, Year 1, FC lends cash to X in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Under § 1.643(i)-1(b)(2)(iii), FC is treated as the agent of FT with respect to the loan, and under § 1.643(i)-1(b)(1) and (2)(i), X is treated as receiving the loan from FT on January 2, Year 1. Nevertheless, under § 1.643(i)-1(b)(2)(ii), the loan is not treated as a section 643(i) distribution if X satisfies the reporting requirements of § 1.6048-4 and attaches a statement to X's income tax return that demonstrates to the satisfaction of the Commissioner that the loan would have been made without regard to X's relationship with FT. Otherwise, X is treated as receiving a section 643(i) distribution and must determine the tax consequences of the distribution under § 1.643(i)-3(c). Regardless of whether X claims the exception described in § 1.643(i)-1(b)(2)(ii), under § 1.6048-4(a), X is required to report the loan on Part III of Form 3520 for Year 1 as a distribution from a foreign trust. (e) Example 4: Guaranteed loan by an unrelated person treated as a section 643(i) distribution. X is a U.S. beneficiary of FT, a foreign nongrantor trust. On January 2, Year 1, X borrows $100,000 from Bank in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii), and FT provides a guarantee (within the meaning of § 1.679-3(e)(4)) for the loan. Under § 1.643(i)-1(b)(1) and (2)(i), X is treated as receiving a loan from FT on January 2, Year 1, in the amount of $100,000 because FT guaranteed the loan from Bank to X. On January 2, Year 1, X is treated as receiving a section 643(i) distribution. X must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under § 1.6048-4(a), X is required to report the section 643(i) distribution on Part III of Form 3520 as a distribution from a foreign trust. (f) Example 5: Loan to a foreign person related to a U.S. beneficiary. X is a U.S. beneficiary of FT, a foreign nongrantor trust. X is also the sole shareholder of CFC, a foreign corporation, treated as a controlled foreign corporation under section 957. On January 2, Year 1, FT lends $100,000 to CFC in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). CFC is related to X within the meaning of § 1.643(i)-1(d)(9). Under § 1.643(i)-1(b)(1) and (2)(i), X is treated as receiving a loan from FT on January 2, Year 1, in the amount of $100,000 because FT made the loan to CFC, a foreign person related to X. Under § 1.643(i)-1(b)(2)(ii), the loan is not treated as a section 643(i) distribution if X reports the loan consistent with the requirements of § 1.6048-4 and attaches a statement to X's income tax return that demonstrates to the satisfaction of the Commissioner that the loan from FT to CFC would have been made without regard to X's relationship with FT. Otherwise, X is treated as receiving a section 643(i) distribution and must determine the tax consequences of the distribution under § 1.643(i)-3(c). Regardless of whether X claims the limitation described in § 1.643(i)-1(b)(2)(ii), under § 1.6048-4(a), X is required to report the loan on Part III of Form 3520 for Year 1 as a distribution from a foreign trust. (g) Example 6: Loan to wholly owned corporation of U.S. beneficiary. Y, a nonresident alien, created and funded a foreign nongrantor trust, FT, for the benefit of Y's child, X, a U.S. person. X is a U.S. beneficiary within the meaning of § 1.643(i)-1(d)(1). X wholly owns XYZ Corp, a domestic corporation. On July 1, Year 1, FT lends $100,000 to XYZ Corp in exchange for an obligation that is not a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Under § 1.643(i)-1(d)(9) and (12), XYZ Corp is a U.S. person related to X. Under § 1.643(i)-1(b)(1) and (2)(i) and § 1.643(i)-3(a)(1), X is treated as receiving a section 643(i) distribution from FT in the amount of $100,000. X must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under §§ 1.6048-4(a), X and XYZ Corp are required to report the loan on Part III of Form 3520 for Year 1 as a distribution from a foreign trust. (h) Example 7: Subsequent transactions with respect to loan treated as a section 643(i) distribution. The facts are the same as in paragraph (g) of this section ( Example 6 ). In Year 1, XYZ Corp makes a payment to FT that it characterizes in part as a partial repayment of principal and in part as interest on its obligation to FT. Under § 1.643(i)-3(d)(3)(i), the portion of the payment that is characterized as a repayment of principal will be treated as a transfer that is not a gratuitous transfer by a U.S. person for purposes of § 1.671-2(e)(2)(i) and chapter 1 of the Internal Revenue Code. Under § 1.643(i)-3(d)(2), the transfer of principal will have no tax consequences to FT. Furthermore, under § 1.643(i)-3(d)(2), the portion of the payment that is characterized as interest by XYZ Corp will be treated as income to FT. (i) Example 8: Uncompensated use of trust property. Y, a nonresident alien, created and funded a foreign nongrantor trust, FT, for the benefit of Y's daughter, A, a U.S. person. A is a U.S. beneficiary of FT within the meaning of § 1.643(i)-1(d)(1). FT owns real property that could be rented to an unrelated person at fair market value for $10,000 a month. During all of Year 1, A lives in the property rent-free. Under §§ 1.643(i)-1(c) and § 1.643(i)-3(a)(3), A is treated as receiving a section 643(i) distribution from FT in Year 1 in the amount of $120,000 (12 × $10,000). A must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under § 1.6048-4(a), A must report the section 643(i) distribution on Part III of Form 3520 for Year 1 as a distribution from FT. (j) Example 9: Partially compensated use of trust property. The facts are the same as in paragraph (i) of this section ( Example 8 ) except that A pays FT $2,000 on the first of each month for the use of the property even though the fair market value is $10,000. Under §§ 1.643(i)-1(c), 1.643(i)-2(a)(2), and 1.643(i)-3(a)(3), A is treated as receiving a section 643(i) distribution in Year 1 from FT in the amount of $96,000 (12 × ($10,000−$2,000)). A must determine the tax consequences of the distribution under § 1.643(i)-3(c). Under §§ 1.6048-4(a), A must report the entire fair market value of $120,000 on Part III of Form 3520 for Year 1 as a distribution from FT even through only a portion of the fair market value is treated as a section 643(i) distribution due to partial compensation. (k) Example 10: Uncompensated use of trust property treated as distribution from accumulated income. On January 1, Year 1, Y, a nonresident alien, creates and funds a foreign nongrantor trust, FT, for the benefit of Y's son, X, a U.S. person. X is a U.S. beneficiary of FT within the meaning of § 1.643(i)-1(d)(1). FT has $60,000 of distributable net income (DNI), as defined under section 643(a), in Year 1, $80,000 of DNI in Year 2, and $90,000 of DNI in Year 3. FT has never made any distributions. FT owns real property that could be rented to an unrelated person for $10,000 a month. During all of Year 3, X occupies the property rent free. Under § 1.643(i)-1(c) and § 1.643(i)-3(a)(3), X is treated as receiving a section 643(i) distribution from FT in Year 3 in the amount of $120,000, the fair market value use of the trust property (12 × $10,000). Under § 1.6048-4(a), X must report the section 643(i) distribution on Part III of Form 3520 for Year 3 as a distribution from FT. X receives a Foreign Nongrantor Trust Beneficiary Statement from FT and uses the actual calculation method under § 1.643(i)-3(c)(3)(i) to determine the tax consequences of the section 643(i) distribution. The $120,000 is treated as an amount properly paid, credited, or required to be distributed by the trust as described in section 662(a)(2). As a result of X's uncompensated use of FT's property, X's section 643(i) distribution consists of a distribution of DNI of $90,000 (FT's DNI in Year 3) and an accumulation distribution of $30,000 under subpart D of subchapter J of chapter 1 of the Internal Revenue Code. (l) Example 11: Use of property of partial grantor trust not treated as section 643(i) distribution. X and Y are married. X is a U.S. person and Y is a nonresident alien. X and Y have three children, A, B, and C. A and B are both nonresident aliens. C is a U.S. person. In Year 1, X and Y created a foreign trust, FT, for the benefit of A and B to which X contributed a vacation home and Y contributed cash and securities. Neither X nor Y retained any powers described in sections 673 through 677. In Year 2, C lived in the vacation home rent free. Although C is not a beneficiary of FT under the terms of the trust, under § 1.679-2(a)(5), C's uncompensated use of the vacation home causes FT to be treated as having a U.S. beneficiary. Thus, under § 1.679-1(a), X will be treated as the owner of the portion of FT attributable to the vacation home. Under § 1.643(i)-2(c)(2), C's use of the vacation home will be treated as the use of property from the grantor trust portion of FT. C will not be treated as receiving a section 643(i) distribution. Under §§ 1.6048-4(a), C must report the use of the vacation home on Part III of Form 3520 for Year 2 as a distribution from FT. (m) Example 12: Use of trust property by exempt entity not treated as section 643(i) distribution. In Year 1, X, a nonresident alien, creates a foreign nongrantor trust, FT, and funds the trust with cash and a valuable painting. In Year 1, pursuant to the terms of the trust instrument, FT lends the painting to E, a U.S. organization described in section 501(c)(3) with a valid determination letter from the Commissioner. E exhibits the painting and does not reimburse FT for the use of the painting. E is not a U.S. person within the meaning of § 1.643(i)-1(d)(12) because E is an entity that is exempt from tax under chapter 1 of the Internal Revenue Code. Accordingly, E's use of the painting is not a section 643(i) distribution under § 1.643(i)-1(c). E's use of the painting, however, is a distribution within the meaning of § 1.6048-4(b). Nevertheless, under § 1.6048-5(d), E is not required to report the use of the painting on Part III of Form 3520 because E is a section 501(c)(3) entity that has received a determination letter from the Commissioner that recognizes that E is exempt from Federal income tax under section 501(a) as an organization described in section 501(c)(3), and the determination letter has not been revoked.