Par. 10. Section 1.6677-1 is added to read as follows:
(a) Civil penalty —(1) In general. In addition to any criminal penalty provided by law, and subject to the rules of paragraph (b) of this section (concerning reporting required under § 1.6048-3) and the rules of paragraph (a)(3) of this section (regarding the maximum penalty that may be assessed), if any notice or return required to be filed by §§ 1.6048-2 through 1.6048-4 is not timely filed, or contains incomplete or incorrect information, then with respect to each failure to comply with §§ 1.6048-2 through 1.6048-4, the person required to file such notice or return must pay a penalty equal to the greater of $10,000 or 35 percent of the gross reportable amount (within the meaning of paragraph (c) of this section).
(2) Penalty for continuing failure. Subject to the rules of paragraph (a)(3) of this section (regarding the maximum penalty that may be assessed), if any failure described in paragraph (a)(1) of this section continues for more than 90 days after the day on which the Commissioner mails notice of such failure to the person required to pay the penalty, the person must pay an additional penalty (in addition to the amount determined under paragraph (a)(1) of this section) of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the expiration of the 90-day period.
(3) Maximum penalty —(i) Limited to gross reportable amount. At such time as the gross reportable amount with respect to any failure can be determined by the Commissioner, the aggregate amount of the penalties imposed under paragraphs (a)(1) and (2) of this section will be reduced as necessary to ensure that the amount does not exceed the gross reportable amount with respect to that failure (and to the extent that the aggregate amount already collected exceeds the gross reportable amount, the Commissioner will refund the excess amount pursuant to section 6402).
(ii) Period of limitations on refund of excess amounts. The limitations period provided for claims for refund under section 6511(a) and (b) applies to the refund of any excess amount.
(b) Special rules for returns under § 1.6048-3. In the case of a Form 3520-A or a substitute Form 3520-A, including attached statements, that are required to be filed and furnished under § 1.6048-3(a)—
(1) The U.S. person who is treated as the owner of the foreign trust (or a portion of the foreign trust) is liable for the penalty imposed by paragraph (a) of this section for the failure to comply with § 1.6048-3(a), and
(2) Paragraph (a) of this section is applied by substituting “5 percent” for “35 percent.”
(c) Gross reportable amount —(1) In general. For purposes of paragraph (a) of this section, the term gross reportable amount means—
(i) The gross value of the property involved in the reportable event (determined as of the date of the event) in the case of a failure relating to § 1.6048-2,
(ii) The gross value of the portion of the trust's assets at the close of the trust's taxable year treated as owned by the U.S. person in the case of each applicable failure relating to § 1.6048-3, and
(iii) The gross amount of the distribution in the case of a failure relating to § 1.6048-4.
(2) Gross value and gross amount. The gross value or gross amount of property is determined in accordance with the valuation principles of sections 2512 and 2031 and the regulations under sections 2512 and 2031 in this part, though, in all events, without regard to any taxes, expenses, liabilities, or restrictions on the sale or use of the property.
(d) Reasonable cause exception —(1) In general. Paragraph (a) of this section does not apply to any failure to file information with respect to a foreign trust if the person required to file such information submits a reasonable cause statement to the Commissioner under penalties of perjury and demonstrates to the satisfaction of the Commissioner that the failure is due to reasonable cause and not due to willful neglect. The determination of whether a taxpayer acted with reasonable cause and not with willful neglect is made under the principles set out in § 1.6664-4 and § 301.6651-1(c) of this chapter. This determination is made on a case-by-case basis, taking into account all pertinent facts and circumstances.
(2) Examples of situations that do not satisfy the reasonable cause exception. Examples of facts that do not constitute reasonable cause for purposes of this paragraph (d) include but are not limited to the following:
(i) The fact that a foreign jurisdiction would impose a civil or criminal penalty on such person (or any other person) for disclosing the required information.
(ii) Refusal on the part of a foreign trustee to provide information for any reason, including difficulty in producing the required information or the existence of provisions in the trust instrument that prevent the disclosure of required information.
(e) Deficiency procedures do not apply. Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) does not apply in respect of the assessment or collection of any penalty imposed under this section.
(f) Married U.S. persons filing a joint income tax return —(1) In general. For purposes of this section, married U.S. persons who file one Form 3520 with respect to the same foreign trust under § 1.6048-6(d) for a tax year are treated as if they are a single U.S. person for that year.
(2) Anti-abuse rule. For purposes of this section, the Commissioner may treat married U.S. persons who file a joint income tax return under section 6013 for a tax year as a single U.S. person for that year, unless the Commissioner determines that, based on all the facts and circumstances, only one of the married individuals was subject to the information reporting requirement under §§ 1.6048-2 through 1.6048-4 (for example, because only one spouse had an interest in the property constituting the transfer to, or receipt from, a foreign trust).
(3) Joint and several liability. If married U.S. persons are treated as a single U.S. person for a tax year, such married U.S. persons have joint and several liability with respect to any penalties imposed under this section.
(g) Examples. The following examples illustrate the rules of this section. In each example, X is a U.S. person and FT is a foreign trust.
(1) Example 1: Partial reporting. X transfers property worth $100,000 to FT but reports only $40,000 of that amount on Part I of Form 3520 pursuant to § 1.6048-2. X does not demonstrate to the satisfaction of the Commissioner that X's failure to report the correct amount was due to reasonable cause and not due to willful neglect. Under paragraph (a)(1) of this section, penalties will be imposed only on the unreported $60,000.
(2) Example 2: Maximum penalty limited to gross reportable amount. X receives a distribution of $100,000 from FT in Year 1 but fails to report the distribution as required by § 1.6048-4(a). The Commissioner learns about the distribution but does not have enough information to determine the gross reportable amount. On January 2, Year 4, the Commissioner mails a notice of the reporting failure to X and assesses a penalty of $10,000 under paragraph (a)(1) of this section. X does not comply with X's reporting requirement within 90 days after the day that the Commissioner mails the notice (by April 2, Year 4), so the Commissioner begins to assess additional penalties of $10,000 under paragraph (a)(2) of this section for each 30-day period (or fraction thereof), beginning on April 2, Year 4, during which the failure continues. By the time X complies with X's reporting requirement, the aggregate penalties assessed with respect to X's failure to report the distribution total $150,000. Under paragraph (a)(3)(i) of this section, the maximum penalty that the Commissioner may assess with respect to this failure is $100,000 (the applicable gross reportable amount determined under paragraph (c)(1)(iii) of this section), and the Commissioner must abate the excess $50,000 of assessed penalties.
(3) Example 3: Maximum penalty limited to gross reportable amount below $10,000 minimum. Assume the same facts as in Example 2 above except that instead of a $100,000 distribution, X receives a distribution of $4,000 from FT. By the time X complies with X's reporting requirement, the aggregate penalties assessed with respect to X's failure to report the distribution total $20,000. Under paragraph (a)(3)(i) of this section, the maximum penalty that the Commissioner may assess with respect to this failure is $4,000 (the applicable gross reportable amount determined under paragraph (c)(1)(iii) of this section), and the Commissioner must abate the excess $16,000 of assessed penalties.
(4) Example 4: Multiple failures over multiple years. X created FT in Year 1 and is treated as the owner of FT under the grantor trust rules. The trustee of FT fails to file a Form 3520-A with respect to FT for Year 2 and Year 3 as required by § 1.6048-3(a)(1), and X fails to file a substitute Form 3520-A and a Form 3520 (as required by § 1.6048-3(a)(2)) for the same period. (In Year 4, X replaces the trustee, and the new trustee files a Form 3520-A for Year 4.) Under paragraphs (a)(1) and (b) of this section, X is subject to one penalty for Year 2 and one penalty for Year 3 for the failure to comply with § 1.6048-3(a)(1) and (a)(2) for those years.
(5) Example 5: Distribution from foreign-owned grantor trust through an intermediary. Y, a nonresident alien, is treated as the owner of FT under section 676, after the application of section 672(f). X receives a distribution from FT through an intermediary as described in § 1.6048-4(b)(2)(i). X does not include the distribution in gross income and does not report the distribution on Part III of Form 3520 as required by § 1.6048-4(a). Even if the Commissioner determines that X was not required to include the distribution in gross income, X is liable for penalties imposed by paragraph (a)(1) of this section based on the gross reportable amount determined under paragraph (c)(1)(iii) of this section because X is required to report indirect transfers of property under § 1.6048-4(b)(2)(iv).
(6) Example 6: Multiple failures in multiple years. (i) Facts. On December 31, Year 1, X creates FT and makes a gratuitous transfer of property with a value of $100,000 to FT. X is treated as the sole owner of FT under the grantor trust rules. During Year 2, X makes no transfers to FT and receives no distributions from FT. At the end of Year 2, the value of FT's assets is $110,000. During Year 3, X makes no transfers to FT, but X receives a distribution of $30,000. At the end of Year 3, the value of FT's assets is $85,000. X does not file any Forms 3520 or substitute Forms 3520-A for Year 1 through Year 3. The Trustee of FT does not file any Forms 3520-A for Year 1 through Year 3.
(ii) Analysis -(A) Year 1. For Year 1, X is subject to two penalties under paragraphs (a)(1) and (b) of this section: a $35,000 penalty (the greater of $10,000 or $35,000 (35% of $100,000)) for failure to comply with § 1.6048-2(a) and a $10,000 penalty (the greater of $10,000 or $5,000 (5% of $100,000)) for failure to comply with § 1.6048-3(a). If X does not comply with X's reporting requirements for Year 1 within 90 days after the day on which the Commissioner mails notice of the reporting failures to X, X will be subject to additional penalties under paragraph (a)(2) of this section of $10,000 per failure per 30-day period (or fraction thereof) ($20,000 in the aggregate per 30-day period (or fraction thereof)) during which the failure continues. Under paragraph (a)(3)(i) of this section, the aggregate amount of the penalty imposed under paragraphs (a)(1) and (2) of this section with respect to each failure will not exceed the gross reportable amount for that failure.
(B) Year 2. For Year 2, X is subject to one penalty under paragraphs (a)(1) and (b) of this section: a $10,000 penalty (the greater of $10,000 or $5,500 (5% of $110,000)) for failure to comply with § 1.6048-3(a). If X does not comply with X's reporting requirements for Year 2 within 90 days after the day on which the Commissioner mails notice of the reporting failures to X, X will be subject to additional penalties under paragraph (a)(2) of this section of $10,000 per failure per 30-day period (or fraction thereof) ($10,000 per 30-day period (or fraction thereof)) during which the failure continues. Under paragraph (a)(3)(i) of this section, the aggregate amount of the penalty imposed under paragraphs (a)(1) and (2) of this section with respect to each failure will not exceed the gross reportable amount for that failure.
(C) Year 3. For Year 3, X is subject to two penalties under paragraphs (a)(1) and (b) of this section: a $10,000 penalty (the greater of $10,000 or 4,250 (5% of $85,000)) for failure to comply with § 1.6048-3(a), and a penalty of $10,500 (the greater of $10,000 or $10,500 (35% of $30,000)) for failure to comply with § 1.6048-4. If X does not comply with X's reporting requirements for Year 3 within 90 days after the day on which the Commissioner mails notice of the reporting failures to X, X will be subject to additional penalties under paragraph (a)(2) of this section of $10,000 per failure per 30-day period (or fraction thereof) ($20,000 in the aggregate per 30-day period (or fraction thereof)) during which the failure continues. Under paragraph (a)(3)(i) of this section, the aggregate amount of the penalty imposed under paragraphs (a)(1) and (2) of this section with respect to each failure will not exceed the gross reportable amount for that failure.
(iii) Conclusion. X is subject to aggregate penalties of $75,500 under paragraphs (a)(1) and (b) of this section: $45,000 for Year 1, $10,000 for Year 2, and $20,500 for Year 3. X may be subject to additional penalties under paragraph (a)(2) of this section if X fails to comply with X's reporting requirements within 90 days after the day on which the Commissioner mails notice of each failure to X. Under paragraph (a)(3)(i) of this section, the aggregate amount of the penalty imposed under paragraphs (a)(1) and (2) of this section with respect to each failure will not exceed the gross reportable amount for that failure.
(7) Example 7: Interaction with § 1.6039F-1. In Year 1, X receives $500,000 from FT that X treats as a gift. Under § 1.6048-4(d) and § 1.6039F-1(b), X is required to report the amount as a distribution under § 1.6048-4 and not as a foreign gift under § 1.6039F-1(a). However, based on the advice of X's tax advisor, X reports the distribution under § 1.6039F-1(a) and not under § 1.6048-4. X's failure to report the distribution under § 1.6048-4 is subject to penalties under § 1.6677-1(a) unless X demonstrates to the satisfaction of the Commissioner that such failure is due to reasonable cause and not due to willful neglect. The fact that X reported the distribution under § 1.6039F-1(a) based on the advice of X's tax advisor is a factor that may be taken into account in determining whether X's failure to report the distribution under § 1.6048-4 was due to reasonable cause. X's reliance on X's tax advisor's advice can only constitute reasonable cause, however, if, under all the circumstances, the reliance was reasonable within the meaning of § 1.6664-4(c).
(8) Example 8: Presumption that FT has a U.S. owner. X created FT in Year 1 and transferred $100,000 to FT. X reported the transfer to FT on Part I of Form 3520 for Year 1, but did not complete the other parts of Form 3520. X did not file any Forms 3520 with respect to FT in Year 2 or subsequent years. FT has not filed any Forms 3520-A with respect to FT (and X has not filed any substitute Forms 3520-A). Pursuant to § 1.679-2(d)(2), the Commissioner sends a written notice to X requesting additional information related to the trust and its potential beneficiaries. X does not respond. Under § 1.679-2(d)(1), FT is treated as having a U.S. beneficiary. Under § 1.679-1(a), X is treated as the owner of FT. Under paragraphs (a) and (b) of this section, X is subject to penalties for Year 1 and subsequent years for failure to comply with § 1.6048-3(a).
(9) Example 9: Penalty for failure to report loan that is not treated as a section 643(i) distribution. FT is not treated as being owned by X or any other person under the grantor trust rules. X receives a loan of cash from FT and in exchange issues an obligation to FT that is a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii). Provided the obligation does not cease to be a qualified obligation, the loan will not be a section 643(i) distribution under § 1.643(i)-1(a) and therefore will not be taxable to X. However, the loan is a distribution within the meaning of § 1.6048-4(b)(3) that must be reported on Part III of Form 3520 under § 1.6048-4(a). X fails to report the loan. X is subject to penalties under § 1.6677-1(a) unless X demonstrates to the satisfaction of the Commissioner that such failure is due to reasonable cause and not due to willful neglect.
(10) Example 10: Joint and several penalties. X and Y are married U.S. persons who file a joint income tax return under section 6013. In Year 1, X and Y create FT and fund the trust with $100,000 for the benefit of their U.S. children. X and Y jointly file their income tax return for the Year 1 tax year but fail to file a Form 3520 reporting the transfer of assets to a foreign trust pursuant to § 1.6048-2. In addition, FT has not filed any Forms 3520-A with respect to FT (and X and Y have not filed any substitute Forms 3520-A) pursuant to § 1.6048-3(a). For the Year 1 tax year, X and Y are jointly and severally liable for penalties under paragraph (a) of this section pursuant to paragraph (f)(2) and (3) of this section.
(h) Applicability dates —(1) Reportable events. To the extent related to § 1.6048-2, this section applies to reportable events occurring after the [date of publication of the final regulations in the Federal Register ].
(2) U.S owners of foreign trusts. To the extent related to § 1.6048-3, this section applies to taxable years of U.S. persons beginning after the [date of publication of the final regulations in the Federal Register ].
(3) Reporting by U.S. persons receiving distributions from foreign trusts. To the extent related to § 1.6048-4, this section applies to distributions received after the [date of publication of the final regulations in the Federal Register ].