Par. 5. Section 1.679-2 is amended by: a. Adding paragraph (a)(5). b. Redesignating paragraph (b)(3) as paragraph (b)(4). c. Adding new paragraph (b)(3). c. In newly redesignated paragraph (b)(4), designating Examples 1 through 5 as paragraphs (b)(4)(i) through (v). d. Adding paragraph (b)(4)(vi). e. Adding paragraph (d). The revisions and additions read as follows:
(a) * * *
(5) Loan or uncompensated use of trust property treated as paid or accumulated for the benefit of a U.S. person —(i) In general. Except as provided in paragraph (a)(5)(iii) of this section, any direct or indirect loan of cash or marketable securities from a foreign trust or portion of a foreign trust (whether from trust corpus or income) as described in paragraph (a)(5)(ii) to, or the direct or indirect use of any other property of a foreign trust or portion of a foreign trust by, any U.S. person (whether or not a beneficiary under the terms of the trust) is treated as causing trust income or corpus to be paid or accumulated for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section. For these purposes, a loan from a foreign trust to, or the use of property of a foreign trust by, a grantor trust (as defined in § 1.643(i)-1(d)(5)) or a disregarded entity (as defined in § 1.643(i)-1(d)(3)) is treated as a loan to or use by 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.
(ii) Indirect loans. For purposes of paragraph (a)(5)(i) of this section, an indirect loan of cash or marketable securities from a foreign trust or portion of a foreign trust includes:
(A) Loans 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) Loans of cash or marketable securities made from a foreign trust to a U.S. person through an intermediary, such as an agent or nominee of the foreign trust, or from a person related (within the meaning of § 1.643(i)-1(d)(9)) to the foreign trust.
(iii) Exceptions. Paragraph (a)(5)(i) of this section does not apply if—
(A) The U.S. person who receives the loan of cash or marketable securities, or who uses trust property, is an entity described in section 501(c)(3),
(B) The loan of cash received by the U.S. person is in exchange for a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii) (but without regard to § 1.643(i)-2(b)(2)(iii)(B)( 1 ) and ( 2 )), or
(C) The U.S. person who uses trust property, other than a loan of cash or marketable securities, pays the trust the fair market value of the use of such property within a reasonable period from the date of the start of the use of the property. A determination as to the fair market value of the use of such property and as to whether a fair market value payment is made within a reasonable period will be based on all the facts and circumstances, including the type of property used and the period of use. In appropriate cases, such as rental of real property, payments may be made on a periodic basis, if doing so would be consistent with arm's-length dealings between unrelated parties.
(iv) Safe harbors. The following safe harbors apply for purposes of paragraph (a)(5)(iii)(C) of this section.
(A) Reasonable period. A payment is made within a reasonable period if the payment is made or periodic payments commence within 60 days of the start of the use of trust property.
(B) De minimis use. Use of trust property will be disregarded if the aggregate use by all U.S. persons (within the meaning of § 1.679-1(c)(2)) does not exceed 14 days during the calendar year.
(v) Interaction with section 643(i). If a foreign trust or a portion of a foreign trust is treated as having a U.S. beneficiary pursuant to the rules of this paragraph (a)(5) and a U.S. transferor is thus treated as the owner of the foreign trust or a portion of the foreign trust under section 679, section 643(i) does not apply to the trust or portion of the trust of which the U.S. transferor is treated as the owner.
(vi) Examples. The following examples illustrate the rules of paragraph (a)(5) of this section. In these examples, X, Y, and E are U.S. persons (within the meaning of § 1.679-1(c)(2)), and FT is a foreign trust. In addition, FT's trust instrument provides that no U.S. person can benefit either as to income or corpus of FT.
(A) Example 1: Loan of cash to U.S. person. In Year 1, X transfers cash and real property to FT. X is not treated as the owner of any portion of FT under sections 673 through 679. In Year 2, Y receives a loan of cash from FT that is not in exchange for a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii) and thus does not qualify for the exception under paragraph (a)(5)(iii)(B) of this section. Y is not an entity described in section 501(c)(3) and thus does not qualify for the exception under paragraph (a)(5)(iii)(A) of this section. Under paragraph (a)(5) of this section, the loan is treated as paid or accumulated for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section, and under § 1.679-1(a), X is treated as the owner of FT. Under paragraph (c)(1) of this section, FT is treated as acquiring a U.S. beneficiary in Year 2.
(B) Example 2: Use of trust property by U.S. person. The facts are the same as in paragraph (a)(5)(vi)(A) of this section ( Example 1 ) except that, instead of receiving a loan of cash in Year 2, Y occupies real property owned by FT in exchange for monthly payments of $2,000. FT could rent the property to an unrelated party at fair market value for $10,000 a month. Under paragraph (a)(5) of this section, Y's use of FT's property is treated as paid or accumulated for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section because Y has not paid fair market value for the use of the real property. Under § 1.679-1(a), X is treated as the owner of FT. Under paragraph (c)(1) of this section, FT is treated as acquiring a U.S. beneficiary in Year 2.
(C) Example 3: Use of trust property by church. In Year 1, X transfers cash and a valuable painting to FT. X is not treated as the owner of any portion of FT under sections 673 through 679. In Year 2, FT lends the painting to E, a U.S. church described in section 501(c)(3). E's use of the painting is not treated as paid or accumulated for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section because the exception in paragraph (a)(5)(iii)(A) of this section applies, and thus FT is not treated as having a U.S. beneficiary in Year 2.
(D) Example 4: Indirect loan of cash to a U.S. person. In Year 1, X transfers property to FT. In Year 2, Y 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 thus does not qualify for the exception under paragraph (a)(5)(iii)(B) of this section. FT provides a guarantee (within the meaning of § 1.679-3(e)(4)) for the loan. Under paragraph (a)(5)(ii)(A) of this section, Y is treated as receiving a loan from FT because FT guaranteed the loan from Bank to Y. Under paragraph (a)(5) of this section, the loan is treated as paid or accumulated for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section. Under § 1.679-1(a), X is treated as the owner of FT. Under paragraph (c)(1) of this section, FT is treated as acquiring a U.S. beneficiary in Year 2.
(E) Example 5: Interaction of grantor trust rules with section 643(i) and with section 6048(c) information reporting. In Year 1, X created and funded a foreign nongrantor trust, FT. During Year 1 and Year 2, FT accumulates income in the amount of $110,000. Before Year 3, neither X nor any other person is treated as owning FT under the rules of sections 673 through 679. In Year 3, Y receives a loan of $100,000 cash from FT that is not in exchange for a qualified obligation within the meaning of § 1.643(i)-2(b)(2)(iii) and thus does not qualify for the exception under paragraph (a)(5)(iii)(B) of this section. Under paragraph (a)(5) of this section, the loan to Y is treated as paid for the benefit of a U.S. person for purposes of paragraph (a)(1) of this section. Under § 1.679-1(a), X is now treated as the owner of FT. Under paragraph (a)(5)(v) of this section, section 643(i) does not apply to the loan from FT to Y. Under paragraph (c)(1) of this section, FT is treated as acquiring a U.S. beneficiary in Year 3. Pursuant to § 1.6048-4(b)(3), Y is treated as receiving a distribution from FT and must comply with the reporting requirements in § 1.6048-4 with respect to the loan.
(b) * * *
(3) Loans to, or uncompensated use of trust property by, indirect beneficiaries. For purposes of paragraphs (a)(1) and (a)(5) of this section, a loan of cash or marketable securities or the use of trust property shall be treated as paid or accumulated for the benefit of a U.S. person if—
(i) The loan is made to, or the trust property is used by, a foreign entity described in paragraph (b)(1) of this section; or
(ii) The loan is made through, or the use of trust property is made available to, an intermediary described in paragraph (b)(2) of this section, or such loan or use of trust property is made by any other means where a U.S. person may obtain an actual or constructive benefit.
(4) * * *
(vi) Example 6. Indirect benefit through an indirect loan. A, a U.S. person, transfers property to FT. The trust instrument provides that no U.S. person can benefit either as to income or corpus. However, FT maintains an account with FB, a foreign bank, and FB issues a loan to B, a U.S. person, against the account maintained by FT. Under paragraphs (a)(1), (a)(5), and (b)(3) of this section, FT is treated as having a U.S. beneficiary.
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(d) Presumption that foreign trust has U.S. beneficiary —(1) In general. If a U.S. person directly or indirectly transfers property to a foreign trust other than a trust described in § 1.679-4(a)(2) or (3), the Commissioner may treat the trust as having a U.S. beneficiary for purposes of § 1.679-1(a), unless the U.S. person—
(i) Satisfies the reporting requirements of § 1.6048-2 with respect to the transfer; and
(ii) Includes an explanatory statement attached to the U.S. person's Federal income tax return that demonstrates to the satisfaction of the Commissioner that the trust satisfies the requirements of paragraph (a)(1) of this section immediately after the transfer.
(2) Authority of Commissioner to request information. The Commissioner may request information related to the trust described in paragraph (d)(1) of this section and its potential beneficiaries to determine whether the trust satisfies the requirements of paragraph (a)(1) of this section. Unless such additional information is provided upon the Commissioner's written notice and request to the U.S. person, the trust will be deemed to have a U.S. beneficiary. The U.S. person will have 60 days (90 days if the notice is addressed to a person outside the United States) to respond to the notice and request.