Transactions With Foreign Trusts and Information Reporting on Transactions With Foreign Trusts and Large Foreign Gifts

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-124850-08]</DEPDOC> <RIN>RIN 1545-BI04</RIN> <SUBJECT>Transactions With Foreign Trusts and Information Reporting on Transactions With Foreign Trusts and Large Foreign Gifts</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking and notice of public hearing. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. This document also contains proposed amendments to the regulations relating to foreign trusts having one or more United States beneficiaries. The proposed regulations affect United States persons who engage in transactions with, or are treated as the owners of, foreign trusts, and United States persons who receive large gifts or bequests from foreign persons. This document also provides notice of a public hearing on the proposed regulations. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Comments:</E> Electronic or written public comments must be received by July 8, 2024. <E T="03">Public Hearing:</E> A public hearing on these proposed regulations has been scheduled for August 21, 2024, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by July 8, 2024. If no outlines are received by July 8, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5:00 p.m. ET on August 19, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at <E T="03">www.regulations.gov</E> (indicate IRS and REG-124850-08) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-124850-08), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, Lara A. Banjanin at (202) 317-6933 or S. Eva Wolf at (202) 317-3893 (not toll-free numbers); concerning submissions of comments, the hearing, or to be placed on the building access list to attend the hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by email at <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. In General</HD> This document contains proposed amendments to 26 CFR part 1 under sections 643(i), 679, 6039F, 6048, and 6677 of the Internal Revenue Code (Code) (the <E T="03">proposed regulations</E> ). Section 6048, as significantly modified by the Small Business Job Protection Act of 1996 ( <E T="03">1996 Act</E> ), Public Law 104-188 (110 Stat. 1755), and further amended by the Taxpayer Relief Act of 1997 ( <E T="03">1997 Act</E> ), Public Law 105-34 (111 Stat. 788), and the Hiring Incentives to Restore Employment Act ( <E T="03">HIRE Act</E> ), Public Law 111-147 (124 Stat. 71), generally requires U.S. persons to report transactions that involve foreign trusts. Section 6677, as significantly modified by the 1996 Act and further amended by the HIRE Act, imposes penalties on U.S. persons for failing to comply with section 6048. Section 6039F, which was added to the Code by the 1996 Act, and modified by the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054), requires U.S. persons to report the receipt of large gifts or bequests from foreign persons, and in the event of a failure to provide this information, section 6039F(c) imposes penalties and allows the IRS to recharacterize the purported gift or bequest as income. Section 643(i), which was added to the Code by the 1996 Act and amended by the HIRE Act, and section 679, as amended by the 1996 Act and the HIRE Act, provide additional rules intended to prevent taxpayers from avoiding U.S. income tax consequences through the use of foreign trusts. On June 2, 1997, the Treasury Department and the IRS issued Notice 97-34, 1997-1 CB 422, which provides guidance on sections 643(i), 679, 6039F, 6048 and 6677 (the <E T="03">foreign trust and gift provisions</E> ) as enacted or modified by the 1996 Act. On August 7, 2000, the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-209038-89) under section 679 in the <E T="04">Federal Register</E> (65 FR 48185). On July 20, 2001, the Treasury Department and the IRS published final regulations under section 679. TD 8955 (66 FR 37866). U.S. persons currently provide information required by the foreign trust and gift provisions on Form 3520, <E T="03">Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,</E> and Form 3520-A, <E T="03">Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)).</E> In 2015, section 2006(b)(9) and (10) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 ( <E T="03">Surface Transportation Act</E> ), Public Law 114-41 (129 Stat. 443), modified the due dates for Forms 3520 and 3520-A for taxable years beginning after December 31, 2015. On March 16, 2020, the Treasury Department and the IRS issued Revenue Procedure 2020-17, 2020-12 IRB 539, which exempts from section 6048 information reporting requirements certain U.S. individuals' transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. <HD SOURCE="HD2">II. Purpose of Foreign Trust and Gift Provisions</HD> During the mid- to late-1990s, abusive tax schemes, including offshore schemes involving foreign trusts, reemerged in the United States after last peaking in the 1980s. GAO, <E T="03">Efforts to Identify and Combat Abusive Tax Schemes Have Increased, But Challenges Remain,</E> GAO-02-733 (Washington, DC: May 22, 2002). In these schemes, foreign trusts were used to transfer large amounts of assets offshore, where it was much more difficult for the IRS to identify whether U.S. persons owned an interest in such trusts, and whether such persons were reporting and paying the required taxes on their income from such trusts. Many of the foreign trusts were established in tax haven jurisdictions with bank secrecy laws. Before the 1996 Act amended sections 6048 and 6677, there was no requirement for U.S. persons to report distributions from foreign trusts, and the penalty for failing to report transfers to a foreign trust, or an annual foreign trust information return (on Form 3520-A), was limited to five percent of the transfer or trust corpus, as applicable, not to exceed $1,000. Given that, it was difficult for the IRS to obtain information about income earned by U.S.-owned foreign trusts and distributions to U.S. beneficiaries of foreign trusts, and sections 6048 and 6677 were generally ineffective at ensuring that U.S. persons provided this information. The result was “rampant tax avoidance.” 141 Cong. Rec. S13859 (daily ed. Sept. 19, 1995) (remarks of Senator Moynihan). The foreign trust and gift provisions in the 1996 Act were designed to accommodate changes in the use of foreign trusts and to limit avoidance and evasion of U.S. tax. The most significant changes were made to sections 6048 and 6677 to enhance the IRS's ability to obtain the information necessary to enforce the tax laws that apply to U.S. persons' transactions with, and ownership of, foreign trusts. Other changes included enactment of new section 643(i) and amendments to section 679, each of which is designed to prevent tax avoidance through the use of foreign trusts. In addition, the legislation included new section 6039F, which enables the IRS to obtain information about large foreign gifts or bequests received by U.S. persons. <HD SOURCE="HD2">III. Overview</HD> <HD SOURCE="HD3">A. Section 643(i)</HD> Section 643(i), as originally enacted in 1996, generally provides that, if a foreign trust makes a loan of cash or marketable securities directly or indirectly to any grantor or beneficiary of the foreign trust who is a U.S. person (other than an entity that is exempt from tax under Chapter 1 of the Code), or to a U.S. person related (under sections 267 and 707(b)) to such a grantor or beneficiary, the amount of the loan is treated as a distribution by the trust to the grantor or beneficiary. Section 643(i) also authorizes the Secretary to issue regulations providing exceptions, under which a loan by a foreign trust would not be treated as a distribution to the grantor or beneficiary of the trust. The 1996 Act's legislative history explains that these regulations are expected to provide an exception under section 643(i) for loans with arm's-length terms, and in applying this exception, the regulations should consider whether there is a reasonable expectation that the grantor, beneficiary, or related person would repay the loan. H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess., at 334 (1996). Section V.A of Notice 97-34 provides that a loan of cas ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 354k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━