Foreign trust transactions and large gifts addressed in proposed regs.

Proposed regulations (REG-124850-08) issued Tuesday by the IRS provide guidance on information reporting of transactions with foreign trusts and the receipt of large foreign gifts. The rules are, in part, designed to prevent the use of offshore arrangements to evade taxes.

The proposed regulations, which implement Secs. 643(i), 679, 6039F, 6048, and 6677 (the foreign trust and gift provisions), also address loans from, and uses of the property of, foreign trusts. In addition, they include proposed amendments to the regulations that deal with foreign trusts with one or more U.S. beneficiaries.

The IRS said in the preamble to the proposed regulations that they address “potential uncertainty under current law, including the necessary requirements for complying with the foreign trust and gift provisions, and the relevant tax consequences and potential penalties for compliance failures.”

In addition, the preamble stated that the provisions help the IRS obtain information about the arrangements, including when a U.S. person receives a large foreign gift.

The proposed regulations affect U.S. persons who engage in transactions with, or are treated as the owners of, foreign trusts and U.S. persons who receive large gifts or bequests from foreign persons.

The proposed regulations under Secs. 643(i), 679, 6039F, 6048, and 6677 include the following:

Sec. 643(i): Loans to and uses of foreign trust property by U.S. persons

The proposed regulations under Sec. 643(i) include rules relating to loans from foreign trusts to U.S. persons and uses of foreign trust property by U.S. persons. They generally incorporate the Sec. 643(i) guidance that was provided in Notice 97-34, with certain modifications to provide procedural rules.

Sec. 679: Foreign trusts treated as having a U.S. beneficiary

The proposed regulations under Sec. 679 amend definitions of “U.S. person,” “obligation,” and “qualified obligation” to be generally consistent with definitions in the proposed regulations under Sec. 643, except that the definition of a U.S. person does not exclude tax-exempt entities.

The proposed regulations also add guidance on two provisions added to Sec. 679 by the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147. They provide guidance to determine when a loan from a foreign trust to a U.S. person or the use of foreign trust property by a U.S. person causes the foreign trust to be treated as having a U.S. beneficiary. They also implement Sec. 679(d), which generally provides that, if a U.S. person directly or indirectly transfers property to a foreign trust, the trust is presumed to have a U.S. beneficiary in certain circumstances.

Sec. 6039F: Information-reporting rules for U.S. recipients of foreign gifts

The proposed regulations under Sec. 6039F include information-reporting rules for U.S. recipients of foreign gifts by generally incorporating the Sec. 6039F guidance that was provided in Notice 97-34. The proposed regulations provide additional guidance that is needed to implement all of Sec. 6039F and to address certain abuses of which the IRS has become aware and relevant statutory developments since 1997, including the enactment of Sec. 2801 dealing with gifts and bequests from certain expatriates.

Sec. 6048: Information with respect to certain foreign trusts

The proposed regulations under Sec. 6048 include information-reporting rules with respect to a U.S. person’s transfers to, creation of, ownership of, and receipt of distributions from foreign trusts.

Sec. 6677: Civil penalties for failure to file information with respect to certain foreign trusts

The proposed regulations under Sec. 6677 relate to civil penalties that may be assessed if any notice or return required to be filed under Prop. Regs. Secs. 1.6048-2 through 1.6048-4 is not timely filed or contains incomplete or incorrect information. The proposed regulations provide for three separate civil penalties that correspond to each separate reporting requirement under Prop. Regs. Secs. 1.6048-2, 1.6048-3, and 1.6048-4.

Applicability

The regulations would apply to transactions with foreign trusts and the receipt of foreign gifts in tax years beginning after the date on which the final regulations are published in the Federal Register.

However, a taxpayer may rely on these proposed regulations for any tax year ending after May 8, 2024, and beginning on or before the date that final regulations are published in the Federal Register, provided that the taxpayer and all related persons apply the proposed regulations in their entirety and in a consistent manner for all tax years beginning with the first tax year of reliance until the applicability date of the final regulations.

AICPA Form 3520 Penalties Task Force

The AICPA Form 3520 Penalties Task Force, which has been in discussions with the IRS and submitted many comments regarding foreign trust reporting issues, is reviewing the proposed regulations and plans to comment on them.

The proposed regulations basically follow the 1997 notice (Notice 97-34), although statutory changes have been updated and new guidance issued for the substantive amendments made to Sec. 643(i) in 2010 related to loans from a foreign trust and the uncompensated use of property of certain foreign trusts, said Eileen Sherr, CPA, CGMA, director–Tax Policy and Advocacy for the AICPA.

“There was the hope that many more issues would have been addressed, especially as relates to the outsized penalties for a failure to timely or fully comply with the many information and return filing requirements,” Sherr said.

The AICPA previously has recommended improvements, including first-time abatement of penalties for those voluntarily correcting a prior omission or nonfiling and a requirement that reasonable-cause exceptions to penalties be considered by the IRS before penalty notices are issued, she said. “Broader exceptions to foreign trust compliance are also needed for nontaxable foreign pensions that are provided relief from U.S. taxation under U.S. income tax treaties,” Sherr said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.