Internal Revenue Bulletin 1997-25 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
REG–251703–96, page 5.
Proposed regulations under section 7701 of the Code
provide guidance relating to the definition of a trust as a
United States person (domestic trust) or foreign trust. A
public hearing will be held on September 16, 1997.
REG–252487–96, page 9.
Proposed regulations under section 672 of the Code
relate to the application of the grantor trust rules to
certain trusts established by foreign persons. A public
hearing will be held on August 27, 1997.
EMPLOYEE PLANS
Notice 97–35, page 32.
Weighted average interest rate update.Guidelines are
set forth for determining for June 1997, the weighted
average interest rate and the resulting permissible range
of interest rates used to calculate current liability for
purposes of the full funding limitation of section
412(c)(7) of the Code as amended by the Omnibus
Budget Reconciliation Act of 1987 and by the Uruguay
Round Agreements Act (GATT).
EXEMPT ORGANIZATIONS
Announcement 97–62, page 34.
A list is given of organizations now classified as private
foundations.
ADMINISTRATIVE
Rev. Proc. 97–30, page 20.
Election of general asset accounts.An automatic
consent procedure is provided for electing general asset
accounts for depreciable property placed in ser vice in
prior years. Rev. Proc. 97–27 modified.
Del. Order 232 (Rev. 3), page 21.
The authority to issue Taxpayer Assistance Orders (TAOs)
under IRC section 7811 is delegated to certain officials.
Del. Order 232 (Rev. 2) superseded.
Notice 97–34, page 22.
This notice provides guidance regarding the new foreign
trust and foreign gift reporting provisions contained in
the Small Business Job Protection Act of 1996.
Finding Lists begin on page 38.
Announcement of Disbarments and Suspensions begins on page 35.
Bulletin No. 1997–25
June 23, 1997
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

Mission of the Service
The purpose of the Internal Revenue Ser vice is to
collect the proper amount of tax revenue at the least
cost; ser ve the public by continually improving the
quality of our products and ser vices; and per form in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Ser vice is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Ser vice to
carr y out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
per form this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Ser vice, charged with the duty of interpreting the
law, to tr y to find the true meaning of the statutor y
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Ser vice also has the responsibility of applying
andadministeringthelawinareasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Ser vice position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never tr y to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.
2

Introduction
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Inter-
nal Revenue Ser vice and for publishing Treasur y Deci-
sions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superin-
tendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semi-
annually into Cumulative Bulletins, which are sold on a
single-copy basis.
It is the policy of the Ser vice to publish in the Bulletin all
substantive rulings necessar y to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless other wise indicated. Proce-
dures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Ser-
vice on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Ser vice field offices, identifying details and information
of a confidential nature are deleted to prevent unwar-
ranted invasions of privacy and to comply with statutor y
requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasur y Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Ser vice personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be consid-
ered, and Ser vice personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administra-
tive Rulings are issued by the Department of the
Treasur y’s Office of the Assistant Secretar y (Enforce-
ment).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.
3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 168.—Accelerated Cost
Recovery System
May a taxpayer make a general asset account
election in the current taxable year for depreciable
property placed in service in a prior taxable year?
See Rev. Proc. 97–30, page 20.
26 CFR 1.168(i)–1: General asset accounts.
May a taxpayer make a general asset account
election in the current taxable year for depreciable
property placed in service in a prior taxable year?
See Rev. Proc. 97–30, page 20.
Section 446.—General Rule for
Methods of Accounting
If a taxpayer makes a general asset account
election in the current taxable year for depreciable
property placed in service in a prior taxable year,
is this election a change in method of accounting?
See Rev. Proc. 97–30, page 20.
26 CFR 1.446–1: General rule for methods of
accounting.
If a taxpayer makes a general asset account
election in the current taxable year for depreciable
property placed in service in a prior taxable year,
is this election a change in method of accounting?
See Rev. Proc. 97–30, page 20.
Section 481.—Adjustments
Required by Changes in Method of
Accounting
If a taxpayer makes a general asset account
election in the current taxable year for depreciable
property placed in service in a prior taxable year,
does this change in method of accounting require
an adjustment under §§ 481(a)? See Rev. Proc.
97–30, page 20.
June 23, 199741997–25 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Notice of Proposed Rulemaking
and Notice of Public Hearing
Residence of Trusts and
Estates—7701
REG–251703–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations providing guidance
relating to the definition of a trust as a
United States person (domestic trust) or
foreign trust. The proposed regulations
reflect changes to the law made by the
Small Business Job Protection Act of
1996 and affect the determination of the
residency of trusts for federal tax pur-
poses. This document also provides no-
tice of a public hearing on these pro-
posed regulations.
DATES: Written comments must be re-
ceived by August 4, 1997. Requests to
speak (with outlines of oral comments
to be discussed) at the public hearing
scheduled for September 16, 1997, at 10
a.m. must be submitted by August 26,
1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–251703–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–251703–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, NW, Washington, DC. Al-
ternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. The public
hearing will be held in the Internal
Revenue Service Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC.
FORFURTHERINFORMATION
CONTACT: Concerning the regulations,
James A. Quinn or Eliana Dolgoff,
(202) 622–3060; concerning submissions
and the hearing, Evangelista Lee, (202)
622–7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 1907 of the Small Business
Job Protection Act of 1996 (the Act),
Public Law 104–188, 110 Stat. 1755
(August 20, 1996) amended sections
7701(a)(30) and (31) to provide a new
rule for determining whether a trust is
domestic or foreign (the new rule does
not apply to estates), effective for tax
years beginning after December 31,
1996, or at the election of the trustee of
a trust to tax years ending after August
20, 1996. Section 7701(a)(30)(E) pro-
vides that the termUnited States person
means any trust if (i) a court within the
United States is able to exercise primary
supervision over the administration of
the trust (court test), and (ii) one or
more United States fiduciaries have the
authority to control all substantial deci-
sions of the trust (control test). Section
7701(a)(31)(B) provides that the term
foreign trustmeans any trust other than
atrustdescribedinsection
7701(a)(30)(E).
Prior to the Act, section 7701(a)(31)
provided thatforeign estateandforeign
trustmean an estate or trust, as the case
may be, the income of which, from
sources without the United States, which
is not effectively connected with the
conduct of a trade or business within the
United States, is not includible in gross
income under subtitle A. Accordingly,
whether a trust was domestic or foreign
depended on whether the trust was more
comparable to a resident or nonresident
alien individual. Thus, it was necessary
to consider and weigh various factors
such as the location of the assets, the
country under whose laws the trust was
created, the residence of the fiduciary,
the nationality of the decedent or settlor,
the nationality of the beneficiaries, and
the location of the administration of the
trust. See Rev. Rul. 60–181 (1960–1
C.B. 257), citingB.W. Jones Trust v.
Commissioner, 46 B.T.A. 531 (1942),
aff’d, 132 F.2d 914 (4th Cir. 1943).
The Act made a number of procedural
and substantive changes to the tax treat-
ment of foreign trusts that were de-
signed to improve tax compliance and
administration. In making these overall
changes, Congress believed that it would
be appropriate to have an objective test
for determining whether a trust is for-
eign or domestic. Consequently, it en-
acted the two-part test set forth above.
Explanation of Provisions
The proposed regulations provide that
a foreign trust is taxed in the same
manner as a nonresident alien. Thus,
once a trust is determined to be a
foreign trust, the residency of the fidu-
ciary of the trust is not relevant in
determining the residence of the trust.
Additionally, section 7701(b) does not
apply to determine whether a trust is a
resident of the United States, and a
foreign trust is not present in the United
States for purposes of section 871(a)(2).
The proposed regulations require that
the terms of the trust instrument and
applicable law be applied to determine
whether the court test and the control
test are met. The residency of a trust
may change if the result of the court test
or control test changes.
The Safe Harbor
The IRS and Treasury Department
were concerned that the lack of author-
ity construing trust law in many states
would make it difficult for taxpayers to
determine whether a trust is domestic or
foreign under the court and control tests.
Specifically, it may be difficult to deter-
mine whether the court of a particular
state would assert primary supervision
over the administration of a trust if that
trust had never appeared before a court.
Therefore, the proposed regulations pro-
vide a safe harbor based upon the
principle that when the administration of
a trust is conducted entirely within a
particular locality, the local courts will
exercise primary supervision over the
trust. Restatement (2d) of Conflicts of
Laws § 267. The safe harbor provides
that a trust is a domestic trust if,
pursuant to the terms of a trust instru-
ment, the trust has only United States
fiduciaries, such fiduciaries are adminis-
tering the trust exclusively in the United
States, and the trust is not subject to an
automatic migration provision. The IRS
and Treasury Department request com-
ments on whether this special rule is
sufficient to address the lack of a well-
developed body of local law.
The Court Test
The proposed regulations define the
relevant terms for purposes of the court
test. The term court includes any fed-
eral, state, or local court.
The termthe United Statesincludes
only the States and the District of
Columbia. Accordingly, a court within a
1997–25 I.R.B.
5June 23, 1997

territory or possession of the United
States or within a foreign country is not
a court within the United States and a
trust subject to the primary supervision
of such a court fails to meet the court
test. The IRS and Treasury Department
request comments on the conclusion that
the termthe United Statesis used in its
geographical sense and therefore ex-
cludes territories and possessions.
The termis able to exercisemeans
that if petitioned, a court has or would
have the authority under applicable law
to render orders or judgments resolving
issues concerning administration of the
trust.
The termprimary supervisionmeans
that a court has or would have the
authority to determine substantially all
issues regarding the administration of
the trust. Simply having jurisdiction
over the trustee, a beneficiary, or trust
property is not primary supervision.
The termadministrationof the trust
means the carrying out of the duties
imposed on a fiduciary by the terms of
the trust instrument and applicable law.
In order to provide certainty to tax-
payers, the proposed regulations provide
some bright-line rules for satisfying the
court test. A trust meets the court test if
an authorized fiduciary registers the
trust in a court within the United States
under a state statute that has provisions
substantially similar to Article VII,Trust
Administration, of the Uniform Probate
Code.
In the case of a testamentary trust
established under a will probated within
the United States, if all fiduciaries of the
trust have been qualified as trustees of
the trust by a court within the United
States, the trust meets the court test.
In the case of an inter vivos trust, if
the fiduciaries or beneficiaries take steps
with a court within the United States
(such as the filing of a written request
with the court) that cause the adminis-
tration of the trust to be subject to the
primary supervision of the court, the
trust meets the court test.
The proposed regulations clarify that
if both a United States court and a
foreign court are able to exercise pri-
mary supervision over the administration
of the trust, the trust will be considered
to meet the court test.
The proposed regulations contain
rules addressing automatic migration
clauses, also known as ‘‘flee clauses.’’
The proposed regulations provide that
the court test is not met if a United
States court’s attempt to assert jurisdic-
tion or otherwise supervise the adminis-
tration of the trust directly or indirectly
would cause the trust to migrate from
the United States.
The Control Test
The control test requires that one or
more United States fiduciaries have the
authority to control all substantial deci-
sions of the trust. Under the proposed
regulations, the term fiduciary refers to
anypersondescribedinsection
7701(a)(6) and § 301.7701–6(b). For
purposes of the control test, any other
person that has the power to control
substantial decisions of the trust, for
example a trust protector, will also be
treated as a fiduciary. The proposed
regulations treat such persons as fiducia-
ries because they are exercising powers
traditionally held by fiduciaries or be-
cause they can effectively exercise con-
trol over the fiduciaries.
Substantial decisions are those deci-
sions that persons are authorized or
required to make under the terms of the
trust instrument and applicable law and
that are not ministerial. Included in the
proposed regulations is a nonexclusive
list of substantial decisions. Substantial
decisions do not include decisions exer-
cisable by a grantor that is not a
fiduciary of the trust, or decisions exer-
cisable by a beneficiary that affect only
the beneficiary’s interest in the trust.
In accordance with the legislative his-
tory, the proposed regulations provide
that United States fiduciaries have the
authority to control all substantial deci-
sions of the trust when they have the
power by vote or otherwise to make all
of the substantial decisions of the trust
and no foreign fiduciary has the power
to veto the substantial decisions of the
United States fiduciaries.
The proposed regulations contain
rules addressing automatic migration
clauses, also known as ‘‘flee clauses.’’
The proposed regulations provide that
the control test is not met if an attempt
by any governmental agency or creditor
to collect information from or assert a
claim against the trust would cause one
or more substantial decisions of the trust
to no longer be controlled by United
States fiduciaries.
The proposed regulations are pro-
posed to apply to trusts for taxable years
beginning after December 31, 1996, and
to a trust whose trustee has elected to
apply sections 7701(a)(30) and (31) to
the trust for taxable years ending after
August20,1996,undersection
1907(a)(3)(B) of the Act. Notice 96–65
(1996–52 I.R.B. 28) grants trusts that
meet the conditions specified in that
notice additional time to comply with
the new domestic trust criteria contained
in the Act and allows such trusts to
continue to file as domestic trusts during
the period specified in that notice. No-
tice 96–65 also addresses the time and
manner for making the election provided
by the Act to apply the new domestic
trust criteria retroactively for taxable
years of the trust ending after August
20, 1996. Notice 96–65 remains in ef-
fect and should be consulted for these
purposes.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulation does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted
timely to the IRS. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for September 16, 1997, at 10 a.m. in
the Internal Revenue Service Audito-
rium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington
DC. Because of access restrictions, visi-
tors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing
starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by August 4, 1997,
and submit an outline of the topics to be
discussed and the time to be devoted to
June 23, 1997
61997–25 I.R.B.

each topic (preferably a signed original
and eight (8) copies) by August 26,
1997.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are James A. Quinn and Eliana
Dolgoff of the Office of Assistant Chief
Counsel (Passthroughs and Special In-
dustries). However, other personnel from
the IRS and Treasury Department par-
ticipated in their development.
*****
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR part 301 is
proposed to be amended as follows:
PART
301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
§ 301.7701–5 [Amended]
Par. 2. The last sentence of section
301.7701–5 is removed.
Par. 3. Section 301.7701–7 is added
to read as follows:
§ 301.7701–7 Trusts—domestic and for-
eign.
(a)In general. (1) A trust is a United
States person if—
(i) A court within the United States is
able to exercise primary supervision
over the administration of the trust
(court test); and
(ii) One or more United States fidu-
ciaries have the authority to control all
substantial decisions of the trust (control
test).
(2) A trust is a United States person
for purposes of the Internal Revenue
Code at any time that the trust meets
both the court test and the control test.
For purposes of the regulations in this
chapter, the termdomestic trustmeans a
trust that is a United States person. The
termforeign trustmeans any trust other
than a domestic trust.
(3) Except as otherwise provided in
part I, subchapter J, chapter 1 of the
Code, the taxable income of a foreign
trust is computed in the same manner as
the taxable income of a nonresident
alien. Thus, section 7701(b) does not
apply to determine whether a foreign
trust is a resident alien. In addition, a
foreign trust is not considered to be
present in the United States for purposes
of section 871(a)(2).
(b)Applicable law. The terms of the
trust instrument and applicable law must
be applied to determine whether the
court test and the control test are met.
(c)In general—(1)Safe harbor. A
trust is a domestic trust if the trust has
only United States fiduciaries, as de-
fined in paragraph (e) of this section,
the trust is administered exclusively in
the United States pursuant to the terms
of a trust instrument, and the trust is not
subject to an automatic migration provi-
sion described in paragraph (d)(2)(v) or
(e)(3) of this section.
(2)Example. The following example
illustrates the rule of paragraph (c)(1) of
this section:
Example. Aexecutes a trust instrument for the
equal benefit ofA’s two children,BandC. The
trust instrument provides thatDC, a StateY
corporation, is the only trustee of the trust.
Pursuant to the terms of the trust instrument, the
trust is administered in StateY, a state within the
United States. The trust is not subject to an
automatic migration provision described in para-
graph (d)(2)(v) or (e)(3) of this section. No person
other thanDChas any power over the trust. The
trust satisfies the safe harbor of paragraph (c)(1)
and is a domestic trust.
(d)The court test—(1)Definitions.
The following definitions apply for pur-
poses of the court test:
(i)Court. The termcourtincludes
any federal, state, or local court.
(ii)The United States.The termthe
United Statesis used in this section in a
geographical sense. Thus, for purposes
of the court test, the United States
includes only the States and the District
of Columbia. See section 7701(a)(9).
Accordingly, a court within a territory or
possession of the United States or
within a foreign country is not a court
within the United States.
(iii)Is able to exercise. The termis
able to exercisemeans that a court has
or would have the authority under appli-
cable law to render orders or judgments
resolving issues concerning administra-
tion of the trust.
(iv)Primary supervision. The term
primary supervisionmeans that a court
has or would have the authority to
determine substantially all issues regard-
ing the administration of the entire trust.
A court may have primary supervision
even if another court has jurisdiction
over a trustee, a beneficiary, or trust
property.
(v)Administration. The termadminis-
trationof the trust means the carrying
out of the duties imposed on a fiduciary
by the terms of the trust instrument and
applicable law, including maintaining
the books and records of the trust, filing
tax returns, defending the trust from
suits by creditors, and determining the
amount and timing of distributions.
(2)Situations that meet the court
test—(i)Uniform Probate Code.A trust
meets the court test if a trust is regis-
tered by an authorized fiduciary in a
court within the United States under a
state statute that has provisions substan-
tially similar to Article VII,Trust Ad-
ministration, of the Uniform Probate
Code, 8 Uniform Laws Annotated 1
(West Supp. 1997), available from the
National Conference of Commissioners
on Uniform State Laws, 676 North St.
Clair Street, Suite 1700, Chicago, Illi-
nois 60611.
(ii)Testamentary trust.In the case of
a trust created pursuant to the terms of a
will probated within the United States
(other than an ancillary probate), if all
fiduciaries of the trust have been quali-
fied as trustees of the trust by a court
within the United States, the trust meets
the court test.
(iii)Inter vivos trust.In the case of a
trust other than a testamentary trust, if
the fiduciaries and/or beneficiaries take
steps with a court within the United
States that cause the administration of
the trust to be subject to the primary
supervision of the court, the trust meets
the court test.
(iv)A United States and a foreign
court are able to exercise primary su-
pervision over the administration of the
trust.If both a United States court and a
foreign court are able to exercise pri-
mary supervision over the administration
of the trust, the trust meets the court
test.
(v)Automatic migration provisions.
Notwithstanding any other provision in
this section, a court within the United
States is not considered to have primary
supervision over the administration of
the trust if the trust instrument provides
that a United States court’s attempt to
assert jurisdiction or otherwise supervise
1997–25 I.R.B.
7June 23, 1997

the administration of the trust directly or
indirectly would cause the trust to mi-
grate from the United States.
(3)Examples.The following ex-
amples illustrate the rules of this para-
graph (d):
Example 1. A, a United States citizen, executes
a trust instrument for the equal benefit ofA’s two
United States children. The trust instrument pro-
vides thatDC, a domestic corporation, is to act as
trustee of the trust and that the trust is to be
administered in CountryX, a foreign country. The
trust instrument provides that the law of StateY, a
state within the United States, is to govern the
trust. Under the law of CountryX, a court within
CountryXis able to exercise primary supervision
over the administration of the trust but, as required
by the trust instrument, applies the law of StateY
to the trust. No court within the United States is
able to exercise primary supervision over the
administration of the trust. The trust fails to satisfy
the court test and therefore is a foreign trust.
Example 2.TrustTowns a single asset, an
interest in land located in StateY, a state within
the United States. Under the law of StateY, a trust
owning solely real property within the state is
subject to the primary supervision over the admin-
istration of the trust by a court within StateY. The
trust satisfies the court test.
Example 3. A, a United States citizen, executes
a trust instrument for his own benefit and the
benefit ofB, his United States spouse. The trust
instrument provides that the trust is to be adminis-
tered in StateY, a state within the United States,
byDC, a StateYcorporation. The trust instrument
further provides that in the event that a creditor
sues the trustee in a United States court, the trust
will migrate from StateYto CountryZ, a foreign
jurisdiction, so that no United States court will
have jurisdiction over the trust. A court within the
United States is not able to exercise primary
supervision over the administration of the trust
because the United States court’s jurisdiction over
the administration of the trust is automatically
terminated in the event the court attempts to assert
jurisdiction. Therefore, the trust fails to satisfy the
court test from the time of its creation and is a
foreign trust.
(e)Control test—(1)Definitions—(i)
United States fiduciary.The termfidu-
ciaryincludes any person described in
section 7701(a)(6) and § 301.7701–6(b).
In addition, for purposes of this section,
any other person who has the power to
control one or more substantial deci-
sions of the trust (and therefore has a
power ordinarily held by a fiduciary)
will be treated as a fiduciary. A person
may be treated as a fiduciary even if the
trust instrument provides for the person
to be relieved of personal liability for
violation of duties. A United States
fiduciary is a fiduciary that is a United
States person within the meaning of
section 7701(a)(30). For example, a fi-
duciary which is a United States corpo-
ration owned by a nonresident alien is a
United States fiduciary.
(ii)Substantial decisions.(A) The
termsubstantial decisionsmeans those
decisions (other than those described in
paragraph (e)(1)(ii)(B) of this section)
that persons are authorized or required
to make under the terms of the trust
instrument and applicable law and that
are not ministerial. Substantial decisions
include, but are not limited to—
(1) Whether and when to distribute
income or corpus;
(2) The amount of any distributions;
(3) The selection of a beneficiary;
(4) The power to make investment
decisions;
(5) Whether a receipt is allocable to
income or principal;
(6) Whether to terminate the trust;
(7) Whether to compromise, arbitrate,
or abandon claims of the trust;
(8) Whether to sue on behalf of the
trust or to defend suits against the trust;
and
(9) Whether to remove, add, or re-
place a trustee.
(B) Substantial decisions do not in-
clude decisions exercisable by a grantor,
unless the grantor is acting as a fidu-
ciary under section 7701(a)(6) and
§ 301.7701–6(b). In addition, substan-
tial decisions do not include decisions
exercisable by a beneficiary, unless the
beneficiary is acting as a fiduciary under
section 7701(a)(6) and § 301.7701–6(b),
that affect solely the portion of the trust
in which the beneficiary has an interest.
Decisions that are ministerial include
decisions regarding details such as the
bookkeeping, the collection of rents, and
the execution of investment decisions
made by the fiduciaries.
(iii)Control. Control means having
the power, by vote or otherwise, to
make all of the substantial decisions of
the trust, with no other person having
the power to veto the substantial deci-
sions. However, the ability of a grantor
(other than a grantor acting as a fidu-
ciary under section 7701(a)(6) and
§ 301.7701–6(b)) to veto another per-
son’s substantial decision does not cause
such person to fail to control that sub-
stantial decision. In addition, the ability
of a beneficiary (other than a benefi-
ciary acting as a fiduciary under section
7701(a)(6) and § 301.7701–6(b)) to veto
another person’s substantial decision that
affects solely the portion of the trust in
which the beneficiary has an interest
does not cause such person to fail to
control that substantial decision.
(2)Replacement of a fiduciary.In the
event of an inadvertent change in the
fiduciaries that would cause a change in
the residency of a trust, the trust is
allowed six months from the date of the
change in the fiduciaries to adjust either
the fiduciaries or the residence of the
fiduciaries so as to avoid a change in
the residence of the trust. Inadvertent
changes in the fiduciaries include the
death of a fiduciary or the abrupt resig-
nation of a fiduciary. If the adjustment
is made within six months, the trust is
treated as retaining its pre-change resi-
dence during the six-month period. If
the adjustment is not made within six
months, the trust residence changes as
of the date of the inadvertent change.
(3)Automatic migration provisions.
Notwithstanding any other provision in
this section, United States fiduciaries are
not considered to control all substantial
decisions of the trust if an attempt by
any governmental agency or creditor to
collect information from or assert a
claim against the trust would cause one
or more substantial decisions of the trust
to no longer be controlled by United
States fiduciaries.
(4)Examples.The following ex-
amples illustrate the rules of this para-
graph (e):
Example 1. Ais a nonresident alien individual.
Ais the grantor and beneficiary of an individual
retirement account (IRA) and has the exclusive
power to make decisions regarding withdrawals
from the IRA and to direct its investments.Ais
not a fiduciary as defined in paragraph (e)(1)(i) of
this section. The IRA has a single United States
trustee and no foreign trustees. The United States
trustee has the power to control all decisions of
the trust other than withdrawal and investment
decisions. In this case, decisions regarding with-
drawals and the trust’s investments are not sub-
stantial decisions because these decisions are
solely exercisable by the grantor. Therefore, the
control test is satisfied because the United States
fiduciary controls all substantial decisions.
Example 2. Ais a nonresident alien individual.
Ais the grantor of a trust and has the power to
revoke the trust, in whole or in part and revest
assets inA. Ais the owner of the trust under
section 676. A is not a fiduciary as defined in
paragraph (e)(1)(i) of this section. The trust has
two trustees,B, a United States person andC, a
nonresident alien.C’s only power is the power to
make distributions from the trust andCcan
exercise this power without authorization fromB.
In this case, decisions exercisable byAto have
trust assets distributed toAare not substantial
decisions because these decisions are exercisable
by the grantor. However, distribution decisions
exercisable byCare substantial decisions. There-
fore, the trust is a foreign trust becauseBdoes not
control all substantial decisions of the trust.
Example 3.Trust has three fiduciaries,A,B, and
C. AandBare United States citizens andCis a
nonresident alien. The trust instrument directs that
Cis to make all of the trust’s investment deci-
sions, but thatAandBmay vetoC’s investment
decisions.AandBcannot act to make the
investment decisions on their own. The control test
is not satisfied because the United States fiducia-
ries,AandB, do not have the power to make all
of the substantial decisions of the trust.
Example 4.Trust has two fiduciaries,AandB,
both of whom are United States citizens. The trust
instrument provides thatC, a foreign corporation,
June 23, 199781997–25 I.R.B.

will serve as an advisor and recommend invest-
ments toAandB. AandBmay accept or reject
C’s recommendations and can make investments
thatChas not recommended.AandBcontrol all
other decisions of the trust.AandBdelegate toC
the authority to execute the investment decisions
approved byAandB. The control test is satisfied
because the United States fiduciaries control all
substantial decisions of the trust.
Example 5.Trust has three fiduciaries,A,B, and
C. AandBare United States citizens andCis a
nonresident alien. The trust instrument provides
that no substantial decisions of the trust can be
made unless there is unanimity among the fiducia-
ries. The control test is not satisfied because the
United States fiduciaries do not control all the
substantial decisions of the trust. No substantial
decisions can be made withoutC’s agreement.
Example 6.(i) A trust that satisfies the court test
has three fiduciaries,A,B, andC.AandBare
United States citizens andCis a nonresident alien.
Decisions are made by majority vote of the
fiduciaries. The trust instrument provides that
upon the death or resignation of any of the
fiduciaries,D, a nonresident alien, is the successor
fiduciary.Adies andDbecomes a fiduciary of the
trust. Two months afterAdies,E, a United States
person, replacesDas a fiduciary of the trust.
During the period afterA’s death and beforeE
begins to serve, the trust satisfies the control test
and remains a domestic trust.
(ii) Assume the same facts as in paragraph (i) of
thisExample 6except that at the end of the
six-month period afterA’s death,Dhas not been
replaced and remains a fiduciary of the trust. The
trust became a foreign trust on the dateAdied.
Example 7.Trust has three beneficiaries,A,B
andC, all of whom are nonresident aliens. Each
beneficiary has the right to receive all of the
income from his or her share of the trust for life.
Each beneficiary also has a limited power of
appointment over his or her respective share of the
trust. The trust has only one fiduciary,D, a United
States citizen. The trust meets the control test
because the United States fiduciary controls all
substantial decisions of the trust notwithstanding
the beneficiaries’ powers of appointment over their
respective interests.
(f)Effective date.This section is ap-
plicable to trusts for taxable years be-
ginning after December 31, 1996, and to
trusts whose trustee has elected to apply
sections 7701(a)(30) and (31) to the
trust for taxable years ending after Au-
gust20,1996,undersection
1907(a)(3)(B) of the Small Business Job
Protection Act of 1996, Public Law
104–188, 110 Stat. 1755 (26 U.S.C.
7701 note).
Michael P. Dolan,
Acting Commissioner of Internal
Revenue.
(Filed by the Office of the Federal Register on
June 4, 1997, 8:45 a.m., and published in the issue
of the Federal Register for June 5, 1997, 62 F.R.
30796)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Inbound Grantor Trusts With
Foreign Grantors
REG–252487–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations implementing sec-
tion 672(f) of the Internal Revenue
Code, as amended by the Small Busi-
ness Job Protection Act of 1996, which
relates to the application of the grantor
trust rules to certain trusts established
by foreign persons. The proposed regu-
lations affect primarily United States
persons who are beneficiaries of trusts
established by foreign persons. This
document also provides notice of a
public hearing on these proposed regula-
tions.
DATES: Written comments must be re-
ceived by August 4, 1997. Requests to
speak (with outlines of oral comments)
to be discussed at the public hearing
scheduled for August 27, 1997, at 10
a.m. must be submitted by August 6,
1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–252487–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–252487–96), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, NW, Washington, DC. Al-
ternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. The public
hearing will be held in room 3313,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW, Washington, DC.
FORFURTHERINFORMATION
CONTACT: Concerning § 1.671–2(e),
James Quinn (202) 622–3060; concern-
ing the remainder of these regulations,
M. Grace Fleeman (202) 622–3850;
concerning submissions and the hearing,
Michael Slaughter (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION
Background
Section 1904 of the Small Business
Job Protection Act of 1996 (the Act),
Public Law 104–188, 110 Stat. 1755
(August 20, 1996), amended section
672(f) and certain other sections of the
Internal Revenue Code (Code). The
amendments affect the application of
sections 671 through 679 of the Code
(the grantor trust rules) to certain trusts
created by foreign persons.
1. Prior law
Under prior law, a grantor of a trust
generally was treated as the owner of
any portion of the trust over which he
retained any of the powers or interests
described in sections 673 through 677
without regard to whether he was a
domestic or foreign person. A special
rule contained in prior section 672(f)
generally provided that, if a U.S. benefi-
ciary of a trust created by a foreign
person transferred property to the for-
eign person by gift, the U.S. beneficiary
was treated as the grantor of the trust to
the extent of the transfer.
Under the prior rules, if a foreign
person created a trust with one or more
U.S. beneficiaries that was treated as a
grantor trust with the foreign person as
the grantor, a distribution of income
from the trust to a U.S. beneficiary was
treated as a gift and was not subject to
U.S. income tax in the hands of the
beneficiary. See Rev. Rul. 69–70
(1969–1 C.B. 182). If the income of the
trust was not taxable to the foreign
grantor under section 871 and also not
taxable to either the grantor or the trust
by either the grantor’s country of resi-
dence or another foreign country, the
income of the trust was, thus, not sub-
ject to tax by any jurisdiction.
A special rule contained in section
665(c) provided generally that interme-
diaries or nominees interposed between
certain foreign trusts and their U.S.
beneficiaries could be disregarded. How-
ever, that rule applied only to trusts
created by U.S. persons.
2. Overview of changes
The changes made by section 1904 of
the Act are designed to ensure that U.S.
persons who benefit from offshore trusts
created by foreign persons (inbound
trusts) pay an appropriate amount of
U.S. tax. Generally, the grantor trust
rules now cause a person to be treated
as the owner of a trust only to the
1997–25 I.R.B.
9June 23, 1997

extent such application results, directly
or indirectly, in an amount being cur-
rently taken into account in computing
the income of a U.S. citizen or resident
or a domestic corporation. Exceptions
are provided for certain revocable trusts,
for trusts from which the only amounts
distributable during the lifetime of the
grantor are to the grantor or the grant-
or’s spouse, and for certain compensa-
tory trusts. There also are grandfather
rules for certain trusts that were in
existence on September 19, 1995.
As a result of the changes, many
inbound trusts that were grantor trusts
under prior law are now nongrantor
trusts. Distributions of trust income to
the U.S. beneficiaries of such trusts are
now taxable to U.S. beneficiaries and
may be subject to an interest charge on
accumulation distributions.
Section 1904 of the Act also includes
some special rules. Section 643(h),
which replaces former section 665(c),
treats any amount paid to a U.S. person
that is derived directly or indirectly
from a foreign trust of which the payor
is not the grantor as if the amount is
paid by the foreign trust directly to the
U.S. person. Section 672(f)(4) allows
the IRS to recharacterize a purported
gift or bequest from a partnership or
foreign corporation when necessary to
prevent the avoidance of the purpose of
section 672(f). Section 672(f)(5), which
is an expansion of prior section 672(f),
generally provides that if a U.S. benefi-
ciary of a trust created by a foreign
person transfers property to the foreign
person, the U.S. beneficiary is treated as
the grantor of the trust to the extent of
the transfer.
Explanation of Provisions
1. § 1.643(h)–1: Distributions by cer-
tain foreign trusts through intermediar-
ies
The proposed regulations describe the
circumstances under which an amount
of property that is derived, directly or
indirectly, by a U.S. person from a
foreign trust through an intermediary
will be deemed to have been paid
directly by the foreign trust to the U.S.
person. This rule does not apply if the
intermediary is the grantor of the por-
tion of the trust from which the amount
is distributed. The amount will be
deemed to have been paid directly by
the foreign trust if any one of the
following conditions is satisfied: (1) the
intermediary is related (as defined in the
regulations) to either the U.S. person or
the foreign trust and the intermediary
transfers to the U.S. person either prop-
erty that the intermediary received from
the trust or proceeds from the property
that the intermediary received from the
trust; (2) the intermediary would not
have transferred the property to the U.S.
person (or would not have transferred
the property on substantially the same
terms) but for the fact the intermediary
received property from the foreign trust;
or (3) the intermediary received the
property from the foreign trust pursuant
to a plan one of the principal purposes
of which was the avoidance of U.S. tax.
The proposed regulations describe the
effect of disregarding the intermediary.
If the intermediary is an agent of either
the foreign trust or the U.S. person
under generally applicable agency prin-
ciples (under the standards set forth in
Commissioner v. Bollinger, 485 U.S.
340 (1988)), the amount is treated as
paid by the foreign trust to the U.S.
person in the year it would be so treated
under the general principles. Thus, if the
intermediary is an agent of the foreign
trust, the amount is treated as paid to
the U.S. person in the year it is paid by
the intermediary to the U.S. person. If,
however, the intermediary is an agent of
the U.S. person, the amount is treated as
paid to the U.S. person in the year it is
paid by the foreign trust to the interme-
diary.
If the intermediary is not an agent of
either the foreign trust or the U.S.
person under generally applicable
agency principles, the intermediary gen-
erally will be treated as an agent of the
foreign trust, and the amount will be
treated as paid by the foreign trust to
the U.S. person in the year the amount
is paid by the intermediary to the U.S.
person. However, the district director
may determine, based on all the relevant
facts and circumstances, that the inter-
mediary should be treated as the agent
of the U.S. person.
The regulations provide a de minimis
rule for distributions that do not exceed
in the aggregate $10,000.
2. § 1.671–2(e): Definition of grantor
The proposed regulations provide a
definition of grantor that applies for
purposes of the grantor trust rules gener-
ally. A grantor is any individual, corpo-
ration, or other person to the extent such
person (i) creates a trust or (ii) directly
or indirectly makes a gratuitous transfer
to a trust. For purposes of the proposed
regulations, a gratuitous transfer is any
transfer other than a transfer for fair
market value, or a corporate or partner-
ship distribution. Treasury and the IRS
request comments regarding the appro-
priate scope of gratuitous transfers.
A grantor includes a person who
acquires an interest in a trust in a
nongratuitous transfer from a person
who is a grantor of the trust. A grantor
also includes an investor who acquires
an interest in a fixed investment trust
from a person who had acquired his
interest through a direct investment in
the trust. Treasury and the IRS request
comments on the appropriate scope of
these rules as they affect fixed invest-
ment trusts.
If a person creates or funds any
portion of a trust primarily as an accom-
modation for another person, the other
person will be treated as a grantor with
respect to such portion of the trust. See,
e.g.,Stern v. Commissioner, 77 T.C. 614
(1981), rev’d on other grounds, 747 F.2d
555 (9th Cir. 1984).
These regulations are not intended to
change the result of existing law with
respect to trusts used for business pur-
poses. See § 301.7701–4(e) (environ-
mental remediation trusts); Rev. Rul.
87–127, 1987–2 C.B. 156 (pre-need fu-
neral trusts); Rev. Proc. 92–64, 1992–2
C.B. 422 (rabbi trusts). Treasury and the
IRS request comments on the applica-
tion of these new rules to trusts used for
business purposes.
A grantor of a trust may or may not
be treated as an owner of the trust under
sections 671 through 677 and 679. A
person other than a grantor of a trust
may be treated as an owner of the trust
under section 678.
3. § 1.672(f)–1: Foreign persons not
treated as owners
The proposed regulations prescribe a
two-step analysis for implementing the
general rule of section 672(f). First, the
grantor trust rules other than section
672(f) (the basic grantor trust rules) are
applied to determine the worldwide
amount and the U.S. amount. Then, the
trust is treated as partially or wholly
owned by a foreign person based on an
annual year-end comparison of the
worldwide amount and the U.S. amount.
The worldwide amount is defined as
the net amount of income, gains, deduc-
tions, and losses that would be taken
into account for the current year under
the basic grantor trust rules in comput-
ing the worldwide taxable income of
any person, whether or not such person
June 23, 1997
101997–25 I.R.B.

is a U.S. taxpayer (as defined in the
regulation). The worldwide amount is
determined in accordance with U.S.
principles of income taxation, and in-
cludes amounts that would be attribut-
able to foreign persons, without regard
to whether such amounts are subject to
U.S. income taxation.
The U.S. amount is defined as the net
amount of income, gains, deductions,
and losses that would be taken into
account for the current year under the
basic grantor trust rules (directly or
through one or more entities) in comput-
ing the taxable income of a U.S. tax-
payer. The U.S. amount includes
amounts such as interest on state or
local bonds that are not includible in
gross income.
A U.S. taxpayer is defined as any
person who is a U.S. citizen, a resident
alien individual, a domestic corporation,
a U.S. person who is treated as the
owner of a trust under section 679, or a
domestic trust to the extent such trust
actually pays U.S. tax with respect to
the income, gains, deductions, and
losses.
If the worldwide amount and the U.S.
amount are the same, the basic grantor
trust rules continue to apply without the
limitation of section 672(f). If the
worldwide amount is greater than the
U.S. amount, section 672(f) prevents the
basic grantor trust rules from treating a
person as the owner of that portion of
the trust attributable to the excess of the
worldwide amount over the U.S.
amount.
4. § 1.672(f)–2: Trusts created by cer-
tain foreign corporations
Section 672(f)(3) provides in part
that, except as otherwise provided in
regulations, a controlled foreign corpora-
tion (CFC) shall be treated as a domes-
tic corporation for purposes of section
672(f)(1). Under the proposed regula-
tions, a CFC that creates and funds a
trust will be treated as a domestic
corporation to the extent that, if the
basic grantor trust rules were applied,
income earned by the trust for the
taxable year would be subpart F income
to the CFC that would be currently
taken into account in computing the
gross income of a U.S. citizen or resi-
dent or a domestic corporation. How-
ever, the CFC will not be treated as a
domestic corporation to the extent the
income of the trust would not be subpart
F income or to the extent it would be
subpart F income but would not be
taken into account in computing the
gross income of a U.S. citizen or resi-
dent or a domestic corporation (e.g., the
CFC had no overall earnings and prof-
its).
The proposed regulations include
similar rules for trusts created by pas-
sive foreign investment companies
(PFICs) or foreign personal holding
companies.
Section 672(f)(3) also provides that
the general rule of section 672(f)(1)
shall not apply for purposes of section
1296. The proposed regulations imple-
ment this rule by providing that, for
purposes of determining whether a for-
eign corporation is a PFIC, the grantor
trust rules shall be applied as if section
672(f) had not come into effect. Conse-
quently, a foreign corporation cannot
avoid PFIC status by transferring pas-
sive assets to a trust that would be
treated as a nongrantor trust if section
672(f) were applied.
5. § 1.672(f)–3: Exceptions to general
rule
A. Certain revocable trusts
The proposed regulations provide that
the general rule of § 1.672(f)–1 does
not apply to any portion of a trust if the
power to revest in the grantor title to
such portion is exercisable solely by the
grantor without the approval or consent
of any other person. If the grantor can
exercise the power only with the ap-
proval of a related or subordinate party
who is subservient to the grantor, such
power will be treated as exercisable
solely by the grantor.
The exception will not apply unless
the power to revest is exercisable for a
period or periods aggregating 183 days
or more during the taxable year of the
trust. This rule is intended to provide a
bright line rule for the benefit of both
taxpayers and IRS examiners that ad-
dresses potentially abusive situations in
which a power to revest is so limited
that it is not likely to be exercised. The
183 days need not be consecutive; thus,
a power to revest that is exercisable
each year from January 1 through May
31 and again from September 1 through
December 31 would be eligible for the
exception.
Consistent with the statute, the pro-
posed regulations provide a grandfather
rule for a trust that was treated as
owned by the grantor under section 676
on September 19, 1995. As long as such
a trust would continue to be so treated
under the basic grantor trust rules, the
trust will be exempt from the general
rule of section 672(f), except with re-
spect to any portion of the trust attribut-
able to transfers to the trust after Sep-
tember 19, 1995. Under the proposed
regulations, separate accounting is re-
quired for amounts transferred to the
trust after September 19, 1995, together
with all income and gains thereof, as
well as losses and distributions there-
from.
B. Certain other trusts
The proposed regulations provide that
the general rule does not apply to any
trust (or portion of a trust) if the only
amounts distributable (whether income
or corpus) from such trust (or portion of
a trust) during the lifetime of the grantor
are amounts distributable to the grantor
or the grantor’s spouse. For this pur-
pose,paymentsofreasonable
nongratuitous amounts, such as reason-
able administrative expenses, are not
considered to be amounts distributable
from the trust.
The proposed regulations clarify that
amounts distributable in discharge of a
legal obligation of the grantor or the
grantor’s spouse will generally be
treated as amounts distributable to the
grantor or the grantor’s spouse. Thus, it
is expected that a reinsurance trust that
would have been a grantor trust under
prior law generally will continue to be a
grantor trust. (No inference is intended
as to whether a reinsurance trust consti-
tutesatrustunderregulation
§ 301.7701–4.) However, a legal obliga-
tion will not include an obligation to a
person who is related (as defined in the
regulations) to the grantor or the grant-
or’s spouse, unless the obligation was
entered into for adequate and full con-
sideration in money or money’s worth.
Trusts from which distributions are tax-
able as compensation for services ren-
dered generally will be covered by the
exception for compensatory trusts, de-
scribed below.
Amounts distributable to support a
family member will be treated as
amounts distributable to the grantor or
the grantor’s spouse only if certain
requirements are satisfied. Although dif-
ferent jurisdictions have different re-
quirements for support obligations, ad-
ministrative simplicity is served by
providing one uniform rule on this
point. Under the proposed regulations,
the family member must be an indi-
vidual who would be treated as a depen-
dent of the grantor or the grantor’s
1997–25 I.R.B.
11June 23, 1997

spouse under sections 152(a)(1) through
(8), without regard to the requirement
that half of the individual’s support be
received from the grantor or the grant-
or’s spouse. In addition, the family
member must be either permanently and
totally disabled (within the meaning of
section 22(e)(3)) or, in the case of a son,
daughter, stepson, or stepdaughter, less
than 24 years old.
Consistent with the statute, the pro-
posed regulations provide a grandfather
rule for a trust that was treated as
owned by the grantor under section 677
(other than subsection (a)(3) thereof) on
September 19, 1995. As long as such a
trust would continue to be so treated
under the basic grantor trust rules, the
trust will be exempt from the general
rule, except with respect to any portion
of the trust attributable to transfers to
the trust after September 19, 1995. Un-
der the proposed regulations, separate
accounting is required for amounts
transferred to the trust after September
19, 1995, together with all income and
gains thereof, as well as losses and
distributions therefrom.
C. Compensatory trusts
The proposed regulations implement
section 672(f)(2)(B), which provides
that, except as provided in regulations,
the general rule shall not apply to any
portion of a trust from which distribu-
tions are taxable as compensation for
services rendered. Tracking the language
of the statute, the proposed regulations
list categories of trusts that constitute
compensatory trusts, without regard to
whether they could be treated as grantor
trusts under the basic grantor trust rules.
This list is intended to be an exclusive
list. However, the proposed regulations
also provide that additional categories of
compensatory trusts may be designated
later in guidance published in the Inter-
nal Revenue Bulletin.
The following categories of trusts are
classified as compensatory trusts: (i)
qualified trusts described in section
401(a), (ii) trusts described in section
457(g), (iii) nonexempt employees’
trusts described in section 402(b), (iv)
individual retirement account (IRA)
trusts that are either simplified employee
pensions described in section 408(k) or
simple retirement accounts described in
section 408(p), (v) IRA trusts to which
the only contributions are rollover con-
tributions listed in section 408(a)(1), (vi)
certain so–called rabbi trusts (see Rev.
Proc. 92–64 (1992–2 C.B. 422)), and
(vii) trusts that are welfare benefit funds
described in section 419(e) (without re-
gard to whether they provide taxable
benefits).
The IRS and Treasury contemplate
that the nonexempt employees’ trusts
listed in category (iii) above will be
treated as grantor trusts only to the
extent provided in proposed regulations
§ 1.671–1(g) and § 1.671–1(h), which
were published in theFederal Register
(61 FR 50778) on September 27, 1996.
IRAs that are excluded from the list
of compensatory trusts because they are
funded by individuals, rather than em-
ployers, are expected to be covered by
one or both of the exceptions for revo-
cable trusts or for trusts from which the
only amounts distributable during the
lifetime of the grantor are to the grantor
or the grantor’s spouse.
6. § 1.672(f)–4: Recharacterization of
purported gifts
The proposed regulations implement
the purported gift rule of section
672(f)(4), which was enacted as a
backstop to section 672(f). See Staff of
the Joint Committee on Taxation, 104th
Cong., 2nd Sess., General Explanation
of the Tax Legislation Enacted in the
104th Congress, at 271 (1996). The
purported gift rule prevents taxpayers
from avoiding the general rule of sec-
tion 672(f) by using a partnership or a
foreign corporation as a substitute for a
trust.
As a general rule, if a U.S. donee
receives a purported gift or bequest
directly or indirectly from a partnership,
the purported gift or bequest must be
included in the U.S. donee’s income as
ordinary income. If a U.S. donee re-
ceives a purported gift or bequest di-
rectly or indirectly from a foreign cor-
poration, the purported gift or bequest
generally must be included in the U.S.
donee’s gross income as a distribution
from the foreign corporation. In the
latter case, the U.S. donee will not be
treated as having basis in the foreign
corporation, and the U.S. donee will be
treated as having a holding period in the
foreign corporation equal to the average
holding period (using a weighted aver-
age) of the actual interest holders.
However, the gift or bequest will not
be recharacterized if the donee can
establish that a U.S. citizen or resident
alien who directly or indirectly holds an
interest in the partnership or foreign
corporation treated the purported gift as
a distribution from the partnership or
foreign corporation and a subsequent
gift to the donee. There also is an
exception for charitable contributions to
donees described in section 170(c).
The proposed regulations provide
rules for gratuitous transfers to U.S.
donees from trusts created by partner-
ships or foreign corporations. As a re-
sult, a partnership or foreign corporation
cannot avoid the purported gift rule by
creating a nongrantor trust that makes
an immediate nontaxable distribution of
trust corpus to a U.S. donee. Under the
proposed regulations, if the partnership
or foreign corporation is not treated
under the grantor trust rules as the
owner of the portion of the trust from
which property is distributed to a U.S.
donee in a gratuitous transfer, the distri-
bution will be characterized as a distri-
bution from the partnership or foreign
corporation if such characterization re-
sults in a higher U.S. tax liability.
Notwithstanding any other provision,
the proposed regulations provide that the
district director may recharacterize a
transfer that is subject to the rules of
section 672(f)(4) to prevent the avoid-
ance of U.S. tax or clearly to reflect
income. For example, the district direc-
tor may determine, based upon the facts
and circumstances, that a distribution
from a partnership or foreign corpora-
tion is more properly treated as a distri-
bution from a trust.
The proposed regulations provide a de
minimis rule for purported gifts or be-
quests that do not exceed in the aggre-
gate $10,000.
7. § 1.672(f)–5: Special rules
A. Transfers by certain beneficiaries to
foreign settlor
The proposed regulations provide that
if, but for section 672(f)(5), a foreign
person would be treated as the owner of
any portion of a trust, any U.S. benefi-
ciary of the trust will be treated as the
owner of a portion of the trust to the
extent the U.S. beneficiary directly or
indirectly made transfers of property to
such foreign person in excess of trans-
fers to the U.S. beneficiary from the
foreign person. (Such a transfer may
also constitute an indirect transfer from
a U.S. person to a foreign trust for
purposes of section 679.) The U.S. ben-
eficiary need not have been a U.S.
person at the time of the transfer.
The proposed regulations do not
specify a time period within which a
transfer must have been made to trigger
this rule. However, they do provide that
June 23, 1997
121997–25 I.R.B.

the rule will not apply to the extent the
U.S. beneficiary can demonstrate that
the transfer was wholly unrelated to any
transaction involving the trust. In addi-
tion, consistent with the statute, the
proposed regulations provide that a
transfer of property does not include
either a nongratuitous transfer or a gift
that would be excluded from taxable
gifts under section 2503(b).
B. Different taxable years
The proposed regulations provide that
if a person has a different taxable year
from the taxable year of the trust, an
amount is currently taken into account
in computing the income of such person
for purposes of the general rule if the
amount is taken into account for the
taxable year of such person that includes
the last day of the taxable year of the
trust.
C. Entity characterization
The proposed regulations provide that
entities generally will be characterized
under U.S. income tax principles. See
regulations §§ 301.7701–1 through
301.7701–4. However, an entity having
a single owner could avoid the pur-
ported gift rule if it could elect to be
disregarded as a separate entity, because
the purported gift or bequest would then
be received from the owner of the
entity, rather than from the entity itself.
Therefore, the proposed regulations pro-
vide that, for purposes of section
672(f)(4), a wholly owned business en-
tity must be treated as a corporation,
separate from its single owner.
8. § 301.7701–2(c)(2)(iii): Special rule
for business entities that make purported
gifts
As explained above, an entity having
a single owner could avoid the pur-
ported gift rule if it elected to be
disregarded as a separate entity under
the existing entity classification regula-
tions. Therefore, the proposed regula-
tions add a new sentence to the existing
regulations to provide that, for purposes
of section 672(f)(4), a wholly owned
business entity must be treated as a
corporation, separate from its owner.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, these regulations will be sub-
mitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted
timely to the IRS. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for August 27, 1997, at 10 a.m., in room
3313, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington
DC. Because of access restrictions, visi-
tors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing
starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by August 4, 1997,
and submit an outline of the topics to be
discussed and the time to be devoted to
each topic (preferably a signed original
and eight (8) copies) by August 6, 1997.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is M. Grace Fleeman of the Office
of Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury Department par-
ticipated in their development.
*****
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.643(h)–1 also issued under
26 U.S.C. 643(a)(7).
Section 1.671–2(e) also issued under
26 U.S.C. 643(a)(7) and 672(f)(6).
Section 1.672(f)–1 also issued under
26 U.S.C. 643(a)(7) and 672(f)(6).
Section 1.672(f)–2 also issued under
26 U.S.C. 643(a)(7), 672(f)(3) and (6).
Section 1.672(f)–3 also issued under
26 U.S.C. 643(a)(7), 672(f)(2) and (6).
Section 1.672(f)–4 also issued under
26 U.S.C. 643(a)(7), 672(f)(4) and (6).
Section 1.672(f)–5 also issued under
26 U.S.C. 643(a)(7) and 672(f)(6). * * *
Par. 2. Section 1.643(h)–1 is added to
read as follows: § 1.643(h)–1 Distribu-
tions by certain foreign trusts through
intermediaries.
(a)In general. For purposes of sec-
tions 641 through 683, any amount of
property that is derived, directly or
indirectly, by a United States person
from a foreign trust through another
person (an intermediary) shall be
deemed to have been paid directly by
the foreign trust to the United States
person if any one of the following
conditions is satisfied—
(1) Theintermediaryisrelated
(within the meaning of paragraph (e) of
this section) to either the United States
person or the foreign trust and the
intermediary transfers to the United
States person either property that the
intermediary received from the foreign
trust or proceeds from the property that
the intermediary received from the for-
eign trust;
(2) The intermediary would not have
transferred the property to the United
States person (or would not have trans-
ferred the property to the United States
person on substantially the same terms)
but for the fact that the intermediary
received property from the foreign trust;
or
(3) The intermediary received the
property from the foreign trust pursuant
to a plan one of the principal purposes
of which was the avoidance of U.S. tax.
(b)Exception for grantor as interme-
diary. Paragraph (a) of this section shall
not apply if the intermediary is the
grantor of the portion of the trust from
which the amount is derived. For the
definition of grantor, see § 1.671–2(e).
(c)Effect of disregarding intermedi-
ary. If an amount is treated as paid
1997–25 I.R.B.
13June 23, 1997

directly by the foreign trust to a United
States person pursuant to this section,
one of the following rules shall apply:
(1)Intermediary is agent under gen-
eral principles. If the intermediary is an
agent of the foreign trust or the United
States person under generally applicable
agency principles, the payment shall be
treated as paid by the foreign trust to
the United States person in the year it
would be so treated under such prin-
ciples. Thus, if the intermediary is an
agent of the foreign trust, the payment
shall be treated as paid to the United
States person in the year the amount is
paid by the intermediary to the United
States person. If, however, the interme-
diary is an agent of the United States
person, the payment shall be treated as
paid to the United States person in the
year the amount is paid by the foreign
trust to the intermediary.
(2)Intermediary is not agent under
general principles—(i)Agent of foreign
trust. Except as provided in paragraph
(c)(2)(ii) of this section, if the interme-
diary is not an agent of the foreign trust
or the United States person under gener-
ally applicable agency principles—
(A) The intermediary shall be treated
as an agent of the foreign trust; and
(B) The payment shall be treated as
paid by the foreign trust to the United
States person in the year the amount is
paid by the intermediary to the United
States person.
(ii)Agent of United States person.
The district director may determine,
based on all the relevant facts and
circumstances, that the intermediary
should be treated as the agent of the
United States person. If the intermediary
is treated as the agent of the United
States person pursuant to this paragraph
(c)(2)(ii), the payment shall be treated as
paid to the United States person in the
year the intermediary receives the pay-
ment from the foreign trust.
(d)De minimis exception. This sec-
tion shall not apply if, during the tax-
able year of the United States person,
the aggregate amount that is transferred
to such person from all foreign trusts
through one or more intermediaries does
not exceed $10,000.
(e)Related parties. For purposes of
this section, an intermediary shall be
treated as related to a United States
person or foreign trust if the intermedi-
ary and the United States person or
foreign trust are related within the
meaning of section 643(i)(2)(B), with
the following modifications:
(1) For purposes of applying section
267 (other than section 267(f)) and
section 707(b)(1), ‘‘at least 10 percent’’
shall be substituted for ‘‘more than 50
percent’’ each place it appears;
(2) Theprinciplesofsection
267(b)(10), substituting ‘‘at least 10 per-
cent’’ for ‘‘more than 50 percent,’’ shall
apply to determine whether two corpora-
tions are related; and
(3) The principles applicable to trusts
shall apply to determine whether an
estate is related to another person.
(f)Examples. The following ex-
amples illustrate the rules of this sec-
tion. In each example, FT is an irrevo-
cable foreign trust that is not treated as
owned by any other person. The ex-
amples follow:
Example 1. Related intermediary. I, a nonresi-
dent alien who is not the grantor of FT, receives a
distribution of stock from FT in the year 2001. In
the year 2002, I sells the stock to an unrelated
party for its fair market value of 100X and gives
the 100X to his daughter, B, who is a U.S.
resident. I is not an agent of either FT or B under
generally applicable agency principles. Under
paragraphs (a)(1) and (c)(2)(i) of this section, FT
is deemed to have distributed 100X directly to B
in the year 2002.
Example 2. ‘‘But for’’ condition. I, a foreign
bank that is unrelated to any of the parties in these
transactions, received a deposit of 500X from FT
in the year 2001. In the year 2002, I transfers
400X to B, a United States person, in a transfer
that it would not have made but for the fact that I
had received 500X from FT. I is not an agent of
either FT or B under generally applicable agency
principles. Under paragraphs (a)(2) and (c)(2)(i) of
this section, FT is deemed to have distributed
400X directly to B in the year 2002.
Example 3. Tax avoidance purpose. FT was
created in 1980 by A, a nonresident alien. In the
year 2001, FT’s trustee, T, determines that 1000X
of accumulated income should be distributed to
A’s U.S. granddaughter, B. Pursuant to a plan with
a principal purpose of avoiding the interest charge
that would be imposed by section 668, T causes
FT to distribute 1000X to I, an unrelated foreign
person. I subsequently transfers 1000X to B in the
year 2001. Under paragraph (a)(3) of this section,
B is deemed to have received an accumulation
distribution from FT in the year 2001.
Example 4. Amount not derived from foreign
trust. W and her husband, H, are both nonresident
aliens. W’s son, S, is a U.S. resident. W receives
annual income of 5000X from her own invest-
ments. Several years ago, H created and funded
FT using his separate property. At the beginning of
the year 2001, W receives a distribution of 100X
from FT. There is no plan with a principal purpose
of avoiding U.S. tax. At the end of the year 2001,
W gives 100X of her investment income to S.
None of the conditions in paragraph (a) of this
section is satisfied. The transfer to S is treated as a
nontaxable gift from W and not as an amount
derived directly or indirectly from FT.
(g)Effective date. The rules of this
section are applicable for transfers made
by foreign trusts on or after August 20,
1996.
Par. 3. In § 1.671–2, paragraph (e) is
revised to read as follows:
§ 1.671–2 Applicable principles.
*****
(e)(1) For purposes of subchapter J of
the Internal Revenue Code, a grantor
includes any person to the extent such
person either creates a trust, or directly
or indirectly makes a gratuitous transfer
(within the meaning of paragraph
(e)(4)(i) of this section) of property to a
trust.
(2) A grantor includes a person who
acquires an interest in a trust from a
grantor of the trust if either—
(i) The transfer is nongratuitous
(within the meaning of paragraph
(e)(4)(ii) of this section); or
(ii) The transfer is of an interest in a
fixed investment trust.
(3) If one person creates or funds a
trust (or portion of a trust) primarily as
an accommodation for another person,
the other person shall be treated as a
grantor of the trust (or portion of the
trust).
(4)(i) A gratuitous transfer is any
transfer other than a transfer for fair
market value, or a corporate or partner-
ship distribution. A transfer of property
to a trust may be considered a gratuitous
transfer without regard to whether the
transfer is a gift for gift tax purposes
(see chapter 12 of subtitle B of the
Internal Revenue Code).
(A) For purposes of this paragraph
(e), a transfer for fair market value
includes only transfers in consideration
for property received from the trust,
services rendered by the trust, or the
right to use property of the trust. A
transfer is for fair market value only to
the extent that the value of the property
received, services rendered, or the right
to use property is equal to at least the
fair market value of the property trans-
ferred. For example, rents, royalties, and
compensation paid to a trust are trans-
fers for fair market value only if the
payments reflect an arm’s length price
for the use of the property of, or
services rendered by, the trust. For pur-
poses of this determination, if a person
contributes property to a trust (or to
another entity that subsequently transfers
the property (or proceeds therefrom) to
a trust) in exchange for any type of
interest in the trust (or other entity),
such interest in the trust (or other entity)
shall be disregarded in determining
whether fair market value has been
received. In addition, a person shall not
be treated as making a transfer for fair
June 23, 1997
141997–25 I.R.B.

market value merely because the
transferor recognizes gain on the trans-
action. For example, if a taxpayer elects
to treat a transfer of appreciated prop-
erty to a foreign trust as a deemed sale
under section 1057, such a transfer will
not be treated as a transfer for fair
market value because the transferor did
not receive actual fair market value
consideration pursuant to the deemed
sale.
(B) For purposes of this paragraph
(e), a transfer to a trust is a corporate
distribution, and therefore not a gratu-
itous transfer, only if it is a distribution
described in section 301, 302, 305, 355
or 356. Similarly, for purposes of this
paragraph (e), a transfer to a trust is a
partnership distribution, and therefore
not a gratuitous transfer, only if it is
described in section 731. A distribution
from one trust to another trust that is a
beneficiary of the first trust is a gratu-
itous transfer.
(C) Notwithstanding any other provi-
sion of this paragraph (e), the district
director may determine, based upon the
facts and circumstances, that a direct or
indirect transfer to a trust is more
properly characterized as a gratuitous
transfer if the transfer was structured
with a principal purpose of avoiding
U.S. tax. See, e.g., sections 643(a)(7)
and 679(d).
(ii) For purposes of this paragraph
(e), any transfer other than a gratuitous
transfer is a nongratuitous transfer.
(5) The following examples illustrate
the rules of this paragraph (e):
Example 1. A creates and funds a trust, T, for
the benefit of her children. Under paragraph (e)(1)
of the section, A is a grantor of T.
Example 2. A makes an investment in a fixed
investment trust, T, that is classified as a trust
under § 301.7701-4(c)(1) of this chapter. B subse-
quently acquires A’s entire interest in T for fair
market value. Under paragraph (e)(2) of this
section, B is a grantor of T with respect to such
interest.
Example 3. A, an attorney, creates a trust, T, for
the benefit of his client, B, and B’s children. The
trust instrument names A as the grantor. A funds T
with a nominal contribution out of his own funds.
A views the contribution as an investment in the
generation of fees for future legal services. Under
paragraph (e)(3) of this section, B is a grantor of
T.
Example 4. A, a U.S. citizen, creates and funds
a trust, T, for the benefit of B. B holds an
unrestricted power to withdraw any amount con-
tributed to the trust for a period of 60 days after
the contribution is made. B is treated as an owner
of T under section 678 as a result of the
withdrawal power. However, B is not a grantor of
T under paragraph (e)(1) of this section as a result
of the withdrawal power, because B neither cre-
ated T nor made a gratuitous transfer to T.
Example 5. A contributes cash to a trust, T,
through a broker, in exchange for units in T. The
value of the units in T is disregarded in determin-
ing whether A has received fair market value
under paragraph (e)(4)(i)(A) of this section. There-
fore, A has made a gratuitous transfer to T, and,
under paragraph (e)(1) of this section, A is a
grantor of T.
Example 6. A borrows cash from T, an unre-
lated trust. Arm’s-length interest payments by A to
T will not be treated as gratuitous transfers under
paragraph (e)(4)(i)(A) of this section. Therefore,
under paragraph (e)(1) of this section, A is not a
grantor of T with respect to the interest payments.
Example 7. A creates and funds a domestic
trust, DT. After A’s death, DT distributes cash to a
foreign trust, FT, that is a beneficiary of DT.
Under paragraph (e)(4)(i)(B) of this section, the
trust distribution by DT is a gratuitous transfer.
Therefore, under paragraph (e)(1) of this section,
DT is a grantor of FT with respect to such
transfer.
Example 8. A creates and funds a trust, T. T
owns stock of C, a publicly traded company, that
pays a dividend to its shareholders, including T.
The dividend paid by C is a nongratuitous transfer
under paragraph (e)(4)(i)(B) of this section. There-
fore, C is not a grantor under paragraph (e)(1) of
this section with respect to the dividend.
Example 9. A, a nonresident alien, creates a
trust, T, for the benefit of her spouse, B, who is a
U.S. citizen. T is not treated as owned by any
other person. A sells property worth $1,000,000 to
T in exchange for $100,000 in cash. Under
paragraph (e)(4)(i)(A) of this section, the $900,000
excess is a gratuitous transfer by A. Therefore, A
is a grantor of T under paragraph (e)(1) of this
section with respect to such transfer.
(6) The rules of this paragraph (e) are
applicable as of August 20, 1996.
Par.4. Sections1.672(f)–1,
1.672(f)–2, 1.672(f)–3, 1.672(f)–4, and
1.672(f)–5 are added to read as follows:
§ 1.672(f)–1 Foreignpersonsnot
treated as owners.
(a)General rule. Section 672(f)(1)
provides that sections 671 through 679
(the grantor trust rules) shall cause a
person to be treated as the owner of any
portion of a trust only to the extent such
application results in an amount (if any)
being currently taken into account (di-
rectly or through one or more entities)
in computing the income of a citizen or
resident of the United States or a do-
mestic corporation. Section 672(f)(1)
may apply only to a trust that would be
treated as owned, in whole or in part, by
a foreign person under the grantor trust
rules without regard to section 672(f).
For rules describing the application of
this section, see paragraph (b) of this
section. For definitions regarding the
rules of this section, see paragraph (c)
of this section. For examples illustrating
the application of this section, see para-
graph (d) of this section. For the effec-
tive date of the rules of this section, see
paragraph (e) of this section.
(b)Application of general rule—(1)
Initial determination. To determine
whether a trust is treated as owned by a
foreign person, the taxpayer should first
apply the grantor trust rules without
regard to section 672(f) (the basic
grantor trust rules) to determine the
worldwide amount (as defined in para-
graph (c)(1) of this section) and the U.S.
amount (as defined in paragraph (c)(2)
of this section).
(2)Result. The trust is treated as
owned by a foreign person based on an
annual comparison at the end of the
trust’s taxable year of the worldwide
amount and the U.S. amount. If there is
a worldwide amount and such amount is
greater than the U.S. amount, under
section 672(f) the foreign person shall
not be treated as the owner of the
portion of the trust attributable to the
excess of the worldwide amount over
the U.S. amount. Otherwise, the basic
grantor trust rules shall apply without
the limitation of section 672(f). For
examples, see paragraph (d) of this
section.
(c)Definitions—(1)Worldwide
amount. The worldwide amount is the
net amount of income, gains, deduc-
tions, and losses that would be taken
into account for the current year under
the basic grantor trust rules in comput-
ing the worldwide taxable income of
any person, whether or not such person
is a U.S. taxpayer (as defined in para-
graph (c)(3) of this section). The world-
wide amount is computed in accordance
with U.S. principles of income taxation
and includes amounts that would be
attributable to foreign persons, without
regard to whether such amounts are
subject to U.S. income tax.
(2)U.S. amount. The U.S. amount is
the net amount of income, gains, deduc-
tions, and losses that would be taken
into account for the current year under
the basic grantor trust rules (directly or
through one or more entities) in comput-
ing the taxable income of a U.S. tax-
payer (as defined in paragraph (c)(3)of
this section). The U.S. amount includes
amounts that would be attributable to
the U.S. taxpayer even if the amount
would not be includible in gross income
(e.g., tax-exempt interest described in
section 103(a)).
(3)U.S. taxpayer. A U.S. taxpayer is
any person who is a U.S. citizen, a
resident alien individual, a domestic cor-
poration, a U.S. person who is treated as
the owner of a trust under section 679,
or a domestic trust to the extent such
trust actually pays U.S. tax with respect
to its income, gains, deductions, and
losses.
1997–25 I.R.B.
15June 23, 1997

(d)Examples. The following ex-
amples illustrate the rules of this sec-
tion:
Example 1. U.S. amount equals worldwide
amount. A, a citizen of the United States, creates
and funds an irrevocable foreign trust, FT, for the
benefit of his U.S. son, B. Under the basic grantor
trust rules (see section 679), A would be treated as
the owner of FT. For the taxable year ending
December 31, 1999, FT has ordinary income of
100X, long-term capital gain of 200X, deductions
of 20X, and short-term capital losses of 15X.
Under paragraph (c)(1) of this section, the world-
wide amount is 265X (100X + 200X – 20X -
15X). Under paragraph (c)(2) of this section, the
U.S. amount also is 265X. Consequently, under
paragraph (b)(2) of this section, because the
worldwide amount is equal to the U.S. amount,
the basic grantor trust rules apply without the
limitation of section 672(f) to treat A as the owner
of FT.
Example 2. No U.S. amount. A, a nonresident
alien, funds an irrevocable domestic trust, DT, for
the benefit of his U.S. son, B. A has a reversion-
ary interest within the meaning of section 673. If
the basic grantor trust rules were applied, A would
be treated as the owner of DT, and any distribu-
tions to B would be considered nontaxable gifts
from A to B. Under paragraph (c)(2) of this
section, there is no U.S. amount, because no
amount is taken into account for the current year
under the basic grantor trust rules in computing
the taxable income of a U.S. taxpayer. Under
paragraph (c)(1) of this section, the worldwide
amount is equal to DT’s net income. Under
paragraph (b)(2) of this section, A is not treated as
the owner of any portion of DT. Consequently, DT
is a separate taxable entity, and distributions from
DT to B must be taken into account in computing
B’s income.
Example 3. U.S. amount less than worldwide
amount. FP is a foreign partnership for U.S.
income tax purposes. FP has two partners: C, a
nonresident alien, and D, a U.S. citizen. The
partnership agreement provides that all income,
gains, losses, deductions, and credits are allocated
50 percent to each partner. FP contributed cash to
an irrevocable foreign trust, FT, primarily for the
benefit of E, D’s U.S. brother. FP can control the
beneficial enjoyment of the trust assets within the
meaning of section 674. If the basic grantor trust
rules were applied, FT would be treated as the
owner of FP. Because D’s 50 percent distributive
share of FP’s income would be currently taken
into account in computing the income of a U.S.
citizen, the U.S. amount computed under para-
graph (c)(2) of this section is equal to one half of
the worldwide amount computed under paragraph
(c)(1) of this section. Therefore, under paragraph
(b)(2) of this section, FP is not treated as the
owner of the portion of FT attributable to C’s
interest in FP. Such portion of FT will be treated
as a separate taxable entity, and distributions by
FT to E with respect to that portion of the trust
will be considered distributions to E under section
662 and may be subject to the section 668 interest
charge on accumulation distributions. (In addition,
distributions from FP to E may be subject to
recharacterization as purported gifts under
§ 1.672(f)–4.)
Example 4. No worldwide amount. USC is a
U.S. corporation with a wholly owned foreign
subsidiary, FC. USC funds an irrevocable foreign
trust, FT, that cannot benefit any U.S. person.
USC retains no power or interest that would cause
it to be treated as the owner of FT under the basic
grantor trust rules. However, FC is given a power
of appointment such that FC would be treated as
the owner of FT under section 678. FT acquires a
note issued by FC. FT has no items of income,
deduction, losses, or credit other than income from
the note. Under U.S. income tax principles, if the
basic grantor trust rules were applied, FC would
be treated as the owner of FT. Thus, FC would be
treated as both the debtor and the creditor with
respect to the note, and the note would be
disregarded. Under paragraph (c)(1) of this sec-
tion, there is no worldwide amount. Under para-
graph (c)(2) of this section, there is no U.S.
amount. Consequently, under paragraph (b)(2) of
this section, the basic grantor trust rules apply
without the limitation of section 672(f) to treat FC
as the owner of FT.
Example 5. Deemed contribution on effective
date. Assume the same facts as inExample 2. DT
was created in 1990. On August 20, 1996, DT
held accumulated income. Prior to August 20,
1996, A was treated as the owner of DT. A is
deemed to have contributed the assets that were
held in DT on August 20, 1996 to a new trust on
that date.
(e)Effective date. The rules of this
section are applicable as of August 20,
1996.
§ 1.672(f)–2 Trusts created by certain
foreign corporations.
(a)Controlled foreign corporations. A
controlled foreign corporation (as de-
fined in section 957) that creates and
funds a trust shall be treated as a
domestic corporation for purposes of
§§ 1.672(f)–1 through 1.672(f)–5 to the
extent that, if the grantor trust rules
without regard to section 672(f) (the
basic grantor trust rules) were applied,
income earned by the trust for the
taxable year would be currently taken
into account pursuant to section 951 in
computing the gross income of a citizen
or resident of the United States or a
domestic corporation.
(b)Passive foreign investment com-
panies—(1)In general. A passive for-
eign investment company (as defined in
section 1296) that creates and funds a
trust shall be treated as a domestic
corporationforpurposesof
§§ 1.672(f)–1 through 1.672(f)–5 to the
extent that, if the basic grantor trust
rules were applied, income earned by
the trust for the taxable year would be
currently taken into account pursuant to
section 1293 in computing the gross
income of a citizen or resident of the
United States or a domestic corporation.
(2)Application of section 1296. For
purposes of determining whether a for-
eign corporation is a passive foreign
investment company as defined in sec-
tion 1296, the grantor trust rules shall be
applied as if section 672(f) had not
come into effect.
(c)Foreign personal holding compa-
nies. A foreign personal holding com-
pany (as defined in section 552) that
creates and funds a trust shall be treated
as a domestic corporation for purposes
of §§ 1.672(f)–1 through 1.672(f)–5 to
the extent that, if the basic grantor trust
rules were applied, income earned by
the trust for the taxable year would be
currently taken into account pursuant to
section 551 in computing the gross
income of a citizen or resident of the
United States or a domestic corporation.
(d)Examples. The following ex-
amples illustrate the rules of this sec-
tion. In each example, FT is an irrevo-
cable foreign trust, and CFC is a
controlled foreign corporation. The ex-
amples follow:
Example 1. Controlled foreign corporation
without ultimate U.S. ownership. Two nonresident
aliens, A and B, create a domestic partnership, DP.
DP’s only asset is all the stock of CFC. CFC
creates and funds FT to benefit A’s U.S. daughter,
C. CFC retains an administrative power over the
trust as described in section 675. Thus, if the basic
grantor trust rules were applied, CFC would be
treated as the owner of FT, and distributions from
FT to C would not be taxed as distributions under
section 662. However, under paragraph (a) of this
section, CFC is not treated as a domestic corpora-
tion for purposes of § 1.672(f)–1. Although CFC
is a controlled foreign corporation (because CFC
is owned by DP, a domestic person), no income
earned by CFC will be included in the income of
a U.S. taxpayer. Consequently, there is no U.S.
amountunder§ 1.672(f)–1(c)(2).Under
§ 1.672(f)–1(b)(2), the basic grantor trust rules do
not apply to treat CFC as the owner of FT.
Transfers from FT to C are considered to be
distributions to C under section 662 and may be
subject to the section 668 interest charge on
accumulation distributions. (In addition, distribu-
tions to C from DP, CFC, or FT may be subject to
recharacterization as purported gifts under
§ 1.672(f)–4.)
Example 2. Trust income is all subpart F
income. CFC is wholly owned by USC, a domes-
tic corporation. CFC creates and funds FT for the
benefit of USC. CFC can control the beneficial
enjoyment of the trust assets within the meaning
of section 674. All of FT’s income is of the type
that is subpart F income (as defined in section
952). FT does not distribute any income. Without
regard to income earned by FT, CFC has a
significant amount of earnings and profits. If the
basic grantor trust rules were applied, CFC would
be treated as the owner of FT, and all items of
income of FT would be currently taken into
account in computing the income of USC, a
domestic corporation. Consequently, under para-
graph (a) of this section, CFC is treated as a
domestic corporation for purposes of § 1.672(f)–1.
Under § 1.672(f)–1(b)(2), the basic grantor trust
rules apply without the limitation of section 672(f)
to treat CFC as the owner of FT. Distributions
from FT to USC are treated as distributions from
CFC to USC.
Example 3. Portion of trust income is subpart F
income. Assume the same facts as inExample 2,
except that FT also owns all of the stock of S, a
corporation that is incorporated in the same coun-
try as CFC and that uses a substantial part of its
assets in a trade or business in such country. Thus,
dividends from S are not subpart F income. In the
taxable year ending December 31, 1999, FT’s only
June 23, 1997161997–25 I.R.B.

income is subpart F income of 200X and divi-
dends from S of 50X. FT has no deductions or
losses for 199X. Under paragraph (a) of this
section, CFC is treated as a domestic corporation
for purposes of computing the U.S. amount under
§ 1.672(f)–1(c)(2) only to the extent FT’s income
is of the type that is subpart F income. Conse-
quently, the U.S. amount is 200X. Under
§ 1.672(f)–1(c)(1), the worldwide amount is
250X. Under § 1.672(f)–1(b)(2), CFC is not
treated as the owner of the portion of FT attribut-
able to the excess of the worldwide amount over
the U.S. amount. Such portion of FT will be
treated as a separate taxable entity. Distributions to
USP with respect to such portion of FT will be
included in USP’s income under section 662 and
may be subject to the section 668 interest charge
on accumulation distributions.
Example 4. Reduction in portion of trust treated
as nongrantor trust. Assume the same facts as in
Example 3. For each of the years 2001 through
2010, FT receives dividend income of 2X from S,
none of which is distributed. In the year 2011, at a
time when FT’s basis in the stock of S is 80X, S
sells its business and invests the proceeds in assets
that generate subpart F income. CFC will now be
treated as the owner of the portion of FT that had
previously been treated as a separate taxable
entity. FT will be deemed to have distributed 80X
(the stock of S) to CFC. CFC will be required to
include 20X of undistributed net income (2X a
year for 10 years) in its income.
(d)Effective date. The rules of this
section are applicable as of August 20,
1996.
§ 1.672(f)–3 Exceptions to general rule.
(a)Certain revocable trusts—(1)In
general. The general rule of § 1.672(f)–
1(a) shall not apply to any portion of a
trust if the power to revest absolutely in
the grantor title to such portion is
exercisable solely by the grantor without
the approval or consent of any other
person. If the grantor can exercise such
power only with the approval of a
related or subordinate party who is
subservient to the grantor, such power
will be treated as exercisable solely by
the grantor. The grantor will be treated
as having a power to revest only if the
grantor has such power for a period or
periods aggregating 183 days or more
during the taxable year of the trust. See
section 643(a)(7). For the definition of
grantor, see § 1.671–2(e). For the defi-
nition ofrelated or subordinate party,
see § 1.672(c)–1. For purposes of this
paragraph (a), a related or subordinate
party is subservient to the grantor unless
the presumption in the last sentence of
§ 1.672(c)–1 is rebutted by a preponder-
ance of the evidence.
(2)Grandfather rule—(i)In general.
The general rule of § 1.672(f)–1 shall
not apply to a trust that was treated as
owned by the grantor under section 676
on September 19, 1995, as long as the
trust would continue to be so treated
under the basic grantor trust rules. How-
ever, such a trust will be subject to the
general rule of § 1.672(f)–1 with re-
spect to any portion of the trust attribut-
able to transfers to the trust after Sep-
tember 19, 1995.
(ii)Separate accounting for transfers
after September 19, 1995. In the case of
a revocable trust that contains both
amounts held in the trust on September
19, 1995, and amounts that were trans-
ferred to the trust after September 19,
1995, paragraph (a)(2)(i) of this section
shall apply only if the amounts that
were held in the trust on September 19,
1995, together with all income, gains,
and losses derived therefrom (less all
post-September 19, 1995, distributions
therefrom) are separately accounted for
from the amounts that were transferred
to the trust after September 19, 1995,
together with all income, gains, and
losses derived therefrom (less all distri-
butions therefrom). If there is no sepa-
rate accounting, the general rule of
§ 1.672(f)–1 shall apply to the trust. If
there is separate accounting, the general
rule of § 1.672(f)–1 shall not apply to
the portion of the trust that is attribut-
able to amounts that were held in the
trust on September 19, 1995.
(3)Examples. The following ex-
amples illustrate the rules of this para-
graph (a):
Example 1. Owner is grantor. After September
19, 1995, FP1, a foreign person, creates and funds
a revocable trust, T, for the benefit of FP1’s
children, who are U.S. residents. The trustee is a
foreign bank, FB, that is owned and controlled by
FP1 and FP2, who is FP1’s brother. The power to
revoke T and revest absolutely in FP1 title to the
trust property is exercisable by FP1, but only with
the approval or consent of FB. There are no facts
that would suggest that FB is not subservient to
FP1. Therefore, under paragraph (a)(1) of this
section, T is not subject to the general rule of
§ 1.672(f)–1. FP1 is treated as the owner of T.
Example 2. Owner not grantor. Assume the
same facts as inExample 1, except that FP1 dies.
After FP1’s death, FP2 has the power to withdraw
the assets of T, but only with the approval of FB.
There are no facts that would suggest that FB is
not subservient to FP2. However, under paragraph
(a)(1) of this section, T is now subject to the
general rule of § 1.672(f)–1, because FP2 is not a
grantor of T. FP2 is not treated as the owner of T.
Example 3. Trustee not related or subordinate
party. Assume the same facts as inExample 1,
except that neither FP1 nor any member of his
family has any substantial ownership interest or
other connection with FB. FP1 can remove and
replace FB at any time for any reason. Although
FP1 can replace FB if FB refuses to approve or
consent to FP1’s decision to revest the trust
property in himself, FB is not a related or
subordinate party. Therefore, under paragraph
(a)(1) of this section, T is subject to the general
rule of § 1.672(f)–1. FP1 will not be treated as
the owner of T.
Example 4. Unrelated trustee will consent to
revocation. FP, a foreign person, creates and funds
an irrevocable trust, T. The trustee is a foreign
bank, FB, that is not a related or subordinate party
within the meaning of § 1.672(c)–1. FB has the
discretion to distribute trust income or corpus to
any person, including FP. Even if FB would in
fact distribute all the trust property to FP if
requested to do so by FP, under paragraph (a)(1)
of this section, T is subject to the general rule of
§ 1.672(f)–1, because FP does not have the power
to revoke T. FP will not be treated as the owner of
T.
Example 5. Husband treated as holding power
held by wife. H and his wife, W, both nonresident
aliens, create and fund a trust, T, using community
property. The power to revoke T and revest
absolutely in H and W title to the trust property is
exercisable either by W acting alone or by H with
the consent of W. W has advised H that she will
not consent to any decision by H to revoke T.
Although W is a related or subordinate party to H
within the meaning of § 1.672(c)–1, the presump-
tion that W is subservient to H is rebutted by a
preponderance of the evidence. However, pursuant
to section 672(e), H is treated as holding the
power to revest that is held by W. Therefore,
under paragraph (a)(1) of this section, T is not
subject to the general rule of § 1.672(f)–1. H and
W are treated as the owners of T.
Example 6. U.S. grantor of trust revocable by
foreign person. A, a nonresident alien, creates a
revocable foreign trust, FT, and funds FT with
$5,000 cash. The only possible beneficiary of FT
is a foreign person. B, a U.S. citizen, contributes
$1,000,000 of appreciated property to FT. B
retains no powers that would cause B to be treated
as an owner of any portion of FT under the
grantor trust rules. Although A has the power to
revest absolutely in itself title to the appreciated
property, A is not a grantor of FT with respect to
the appreciated property. See § 1.671–2(e). There-
fore, under paragraph (a)(1) of this section, the
portion of FT that is attributable to the appreciated
property is subject to the general rule of
§ 1.672(f)–1. A is not treated as the owner of such
portion.
(b)Certain other trusts—(1)In gen-
eral. The general rule of § 1.672(f)–1(a)
shall not apply to any trust (or portion
of a trust) during the lifetime of the
grantor if the only amounts distributable
(whether income or corpus) from such
trust (or portion of a trust) during the
lifetime of the grantor are amounts
distributable to the grantor or the spouse
of the grantor. This paragraph (b) shall
not apply to that portion of a trust from
which, at any time after October 20,
1996, any amounts are distributable to
any person other than the grantor or the
spouse of the grantor. For purposes of
thisparagraph(b),paymentsof
nongratuitous amounts (within the
meaning of § 1.671–2(e)(4)(ii)) will not
be considered amounts distributable. For
the definition ofgrantor, see § 1.671–
2(e).
(2)Amounts distributable in dis-
charge of legal obligation—(i)In gen-
eral. Subject to the provisions of para-
graph (b)(2)(ii) of this section, amounts
1997–25 I.R.B.
17June 23, 1997

that are distributable from a portion of a
trust in discharge of a legal obligation
of the grantor or the spouse of the
grantor shall be treated as amounts
distributable to the grantor or the spouse
of the grantor for purposes of paragraph
(b)(1) of this section. For this purpose,
an obligation is considered a legal obli-
gation if it is enforceable under the local
law of the jurisdiction in which the
grantor (or the spouse of the grantor)
resides.
(ii)Legal obligation to related per-
son. For purposes of paragraph (b)(2)(i)
of this section, the termlegal obligation
does not include an obligation to a
related person except to the extent the
obligation was contracted bona fide and
for adequate and full consideration in
moneyormoney’sworth(see
§ 20.2043–1 of this chapter). For this
purpose, a related person is a person
described in § 1.643(h)–1(e).
(3)Amounts distributable in dis-
charge of support obligation. Amounts
that are distributable from a portion of a
trust in discharge of the grantor’s or the
grantor’s spouse’s obligation to support
a family member shall be treated as
amounts distributable to the grantor or
the spouse of the grantor only if the
family member is an individual who
would be treated as a dependent of the
grantor or the grantor’s spouse under
sections 152(a)(1) through (8), without
regard to the requirement that half of
the individual’s support be received
from the grantor or the grantor’s spouse,
and the family member is either—
(i) Permanently and totally disabled
(within the meaning of section 22(e)(3));
or
(ii) In the case of a son, daughter,
stepson, or stepdaughter, less than 24
years old.
(4)Grandfather rule—(i)In general.
The general rule of § 1.672(f)–1 shall
not apply to a trust that was treated as
owned by the grantor under section 677
(other than section 677(a)(3)) on Sep-
tember 19, 1995, as long as the trust
would continue to be so treated under
the basic grantor trust rules. However,
such a trust will be subject to the
general rule of § 1.672(f)–1 with re-
spect to any portion of the trust attribut-
able to transfers to the trust after Sep-
tember 19, 1995.
(ii)Separate accounting for transfers
after September 19, 1995. In the case of
a trust that contains both amounts held
in the trust on September 19, 1995, and
amounts that were transferred to the
trust after September 19, 1995, para-
graph (b)(4)(i) of this section shall apply
only if the amounts that were held in
the trust on September 19, 1995, to-
gether with all income, gains, and losses
derivedtherefrom(lessallpost-
September 19, 1995, distributions there-
from) are separately accounted for from
the amounts that were transferred to the
trust after September 19, 1995, together
with all income, gains, and losses de-
rived therefrom (less all distributions
therefrom). If there is no separate ac-
counting,thegeneralruleof
§ 1.672(f)–1 shall apply to the trust. If
there is separate accounting, the general
rule of § 1.672(f)–1 shall not apply to
the portion of the trust that is attribut-
able to amounts that were held in the
trust on September 19, 1995.
(5)Examples. The following ex-
amples illustrate the rules of this para-
graph (b):
Example 1. Amounts distributable only to
grantor or grantor’s spouse. H and his wife, W,
are both nonresident aliens. H and W have a child,
C, who is a U.S. resident. H creates and funds an
irrevocable trust, FT, using only his separate
property. The only amounts distributable (whether
income or corpus) from FT as long as either H or
W are alive are amounts distributable to H or W.
Upon the death of both H and W, C may receive
distributions from FT. Under paragraph (b)(1) of
this section, FT is not subject to the general rule
of § 1.672(f)–1 during H’s lifetime. H is treated
as the owner of FT.
Example 2. Amounts temporarily distributable
to person other than grantor or grantor’s spouse.
Assume the same facts as inExample 1, except
that C is a 30-year old law student at the time FT
is created, FT is created after October 20, 1996,
and the trust instrument provides that as long as C
is in law school amounts may be distributed from
FT to pay C’s expenses. Thereafter, the only
amounts distributable from FT as long as either H
or W are alive will be amounts distributable to H
or W. C’s expenses are not treated as legal
obligations of H or W under paragraph (b)(2)(ii)
of this section or as support obligations under
paragraph (b)(3) of this section. Therefore, under
paragraph (b)(1) of this section, FT is subject to
the general rule of § 1.672(f)–1(a). H is not
treated as the owner of FT. After C graduates from
law school, the general rule of § 1.672(f)–1 still
will be applicable, and H still will not be treated
as the owner of FT.
Example 3. Grantor predeceases spouse.As-
sume the same facts as inExample 1. H prede-
ceases W. Under paragraph (b)(1) of this section,
FT will become subject to the general rule of
§ 1.672(f)–1 upon H’s death, because W is not a
grantor. Accordingly, FT will be treated as a
separate taxable entity upon H’s death.
Example 4. Effect of divorce. H creates and
funds a trust, FT, from which the only amounts
distributable are amounts distributable to himself
and A. At the time FT is created, A is H’s wife.
However, the trust document refers to A only by
her name. H and A divorce. Under paragraph
(b)(1) of this section, FT will be subject to the
general rule of § 1.672(f)–1 after the divorce,
because amounts will still be distributable to A,
and A will no longer be the spouse of the grantor.
After the divorce, FT will be treated as a separate
taxable entity.
Example 5. Fixed investment trust. FC, a for-
eign corporation, invests in a domestic fixed
investment trust, DT, that is classified as a trust
under § 301.7701–4(c)(1) of this chapter. The
only amounts that are distributable from the
portion of DT that is owned by FC are amounts
distributable to FC. Under paragraph (b)(1) of this
section, such portion of DT is exempt from the
general rule of § 1.672(f)–1. FC is treated as the
owner of its portion of DT.
Example 6. Reinsurance trust. A domestic in-
surance company, DI, reinsures a portion of its
business with a foreign insurance company, FI. FI
creates and funds an irrevocable domestic trust,
DT, in the United States as security for its
obligations under the reinsurance agreement. The
trust funds are held by a U.S. bank and may be
used only to pay claims arising out of the
reinsurance policies. On the termination of DT,
any assets remaining will revert to FI. The only
amounts that are distributable from DT are distrib-
utable in discharge of FI’s legal obligation. There-
fore, under paragraph (b)(1) of this section, DT is
exempt from the general rule of § 1.672(f)–1. FI
is treated as the owner of DT.
Example 7. Asset securitization trust. A foreign
corporation, FC, borrows money from a bank, B,
to finance the purchase of an airplane. FC creates
a foreign trust, FT, to hold the airplane as security
for the loan from B. The only amounts that are
distributable from FT are amounts distributable to
B in the event that FC defaults on its loan from B.
Thus, the only amounts distributable from FT are
in discharge of FC’s legal obligation to B. When
FC repays the loan, the trust assets will revert to
FC. Under paragraph (b)(1) of this section, FT is
exempt from the general rule of § 1.672(f)–1. FC
is treated as the owner of FT.
(c)Compensatory trusts—(1)In gen-
eral. Except as provided in paragraph
(c)(4) of this section, § 1.672(f)–1 does
not apply to any portion of a trust
distributions from which are taxable as
compensation for services rendered. A
trust described in this paragraph (c)(1) is
referred to in this section as a compen-
satory trust.
(2)Trusts classified as compensatory
trusts. The following types of trusts are
the only types of trusts that shall be
classified as compensatory trusts within
the meaning of paragraph (c)(1) of this
section—
(i) A qualified trust described in sec-
tion 401(a) (but see § 1.641(a)–0(a));
(ii) A trust described in section
457(g);
(iii) A nonexempt employees’ trust
describedinsection402(b)(see
§ 1.671–1(g) and (h));
(iv) A trust that is an individual re-
tirement account described in section
408(k) or 408(p);
(v) A trust that is an individual retire-
ment account the only contributions to
which are rollover contributions listed in
section 408(a)(1);
June 23, 1997
181997–25 I.R.B.

(vi) Atrustthatwouldbea
nonexempt employees’ trust described in
section 402(b) but for the fact that the
trust’s assets are not set aside from the
claims of creditors of the actual or
deemed transferor within the meaning of
§ 1.83–3(e); and
(vii) A trust that is a welfare benefit
fund described in section 419(e).
(3)Other individual retirement ac-
counts. For rules that apply to individual
retirement accounts (within the meaning
of section 408(a)) that are not compen-
satory trusts within the meaning of
paragraph (c)(1) of this section, see
paragraphs (a) and (b) of this section.
(4)Exceptions. The Commissioner
may, in revenue rulings, notices, or
other guidance published in the Internal
Revenue Bulletin (see § 601.601(d)(2)-
(ii)(b)), designate categories of compen-
satory trusts to which the general rule of
paragraph (c)(1) of this section does not
apply.
(d)Effective date.Except as provided
in paragraph (b)(1) of this section, the
rules of this section are applicable as of
August 20, 1996.
§ 1.672(f)–4 Recharacterization of pur-
ported gifts.
(a)In general—(1)Purported gifts
from partnerships. Except as provided in
paragraphs (b) and (f) of this section,
and without regard to the existence of
any trust, if a United States person (U.S.
donee) directly or indirectly receives a
purported gift or bequest (as defined in
paragraph (d) of this section) from a
partnership, the purported gift or bequest
must be included in the U.S. donee’s
gross income as ordinary income.
(2)Purported gifts from foreign cor-
porations. Except as provided in para-
graphs (b) and (f) of this section, and
without regard to the existence of any
trust, if a U.S. donee directly or indi-
rectly receives a purported gift or be-
quest (as defined in paragraph (d) of
this section) from a foreign corporation,
the purported gift or bequest must be
included in the U.S. donee’s gross in-
come as if it were a distribution from
the foreign corporation. For purposes of
section 1012, the U.S. donee will not be
treated as having basis in the foreign
corporation. However, for purposes of
section 1223, the U.S. donee will be
treated as having a holding period in the
foreign corporation on the date of the
deemeddistributionequaltothe
weighted average of the holding periods
of the actual interest holders.
(b)Exceptions—(1)U.S. partner or
shareholder treats transfer as distribu-
tion and gift. Paragraph (a) of this
section shall not apply if the U.S. donee
can establish that a U.S. citizen or
resident alien who directly or indirectly
holds an interest in the partnership or
foreign corporation treated the purported
gift as a distribution to the U.S. partner
or shareholder and a subsequent gift to
the U.S. donee.
(2)Charitable contributions. Para-
graph (a) of this section shall not apply
to U.S. donees that are described in
section 170(c).
(c)Certain distributions from trusts
created by partnerships or foreign cor-
porations.If a partnership or foreign
corporation is treated as the owner,
under sections 671 through 679, of a
portion of a trust from which property is
distributed to a U.S. donee in a gratu-
itous transfer, the U.S. donee must treat
the amount as a distribution from the
partnership or foreign corporation. If a
partnership or foreign corporation is not
treated as the owner, under sections 671
through 679, of the portion of a trust
from which property is distributed to a
U.S. donee in a gratuitous transfer, the
U.S. donee shall be taxable in the
manner provided in paragraph (a) of this
section only if the U.S. tax computed
under that section exceeds the U.S. tax
that would be due if the U.S. donee
treats the amount as a distribution from
the trust.
(d)Definition of purported gift or
bequest. For purposes of this section, a
purported gift or bequest is any transfer
by a partnership or foreign corporation
(other than a transfer for fair market
value) to a person who is not a partner
in the partnership or shareholder of the
foreign corporation.
(e)Effect on U.S. partner or share-
holder. This section applies only to
computations of the U.S. donee’s gross
income. This section does not affect the
U.S. tax treatment of a U.S. partner in
the partnership or a U.S. shareholder of
the foreign corporation.
(f)Recharacterization by district di-
rector. Notwithstanding any other provi-
sion in this section, if a U.S. donee
receives a transfer that is subject to the
rules of this section, the district director
may recharacterize such transfer to pre-
vent the avoidance of U.S. tax or clearly
to reflect income. For example, the
district director may determine, based
upon the facts and circumstances, that a
distribution from a partnership or for-
eign corporation is more properly char-
acterized as a distribution from a trust.
(g)De minimis exception. This sec-
tion shall not apply if, during the tax-
able year of a U.S. donee, the aggregate
amount of purported gifts or bequests
that is transferred to such U.S. donee
directly or indirectly from a partnership
or foreign corporation does not exceed
$10,000. The aggregate amount must
include gifts or bequests from persons
that the U.S. donee knows or has reason
to know are related to the partnership or
foreign corporation (within the meaning
of section 643(i)).
(h)Examples. The following ex-
amples illustrate the rules of this sec-
tion:
Example 1.FC is a foreign corporation that is
wholly owned by A, a nonresident alien. FC
distributes property directly to A’s U.S. daughter,
B, purportedly as a gift. Under paragraph (a)(2) of
this section, B must treat the distribution as a
dividend from FC. (However, if B can establish
that the distribution exceeded FC’s earnings and
profits, B must treat such excess as an amount
received in excess of basis under section
301(c)(3).) If FC is a passive foreign investment
company, B must treat the amount as a distribu-
tion under section 1291. B will be treated as
having the same holding period as A.
Example 2.FC is a foreign corporation that is
wholly owned by A, a nonresident alien. FC
creates and funds a revocable foreign trust, FT,
from which a gratuitous transfer is made immedi-
ately to A’s U.S. daughter, B. Thus, the transfer is
out of trust corpus. FC is not treated as the owner
of FT under sections 671 through 679. Under
paragraph (c) of this section, B must treat the
transfer as a dividend from FC, rather than a
distribution from FT, if such treatment results in a
higher U.S. tax liability.
(i)Effective date. The rules of this
section are applicable for any transfer
by a partnership or foreign corporation
on or after August 20, 1996.
§ 1.672(f)–5 Special rules.
(a)Transfers by certain beneficiaries
to foreign settlor—(1)In general. If, but
for section 672(f)(5), a foreign person
would be treated as the owner of any
portion of a trust, any U.S. beneficiary
of such trust shall be treated as the
owner of a portion of the trust to the
extent the U.S. beneficiary directly or
indirectly made transfers of property to
such foreign person (without regard to
whether the U.S. beneficiary was a U.S.
beneficiary at the time of any transfer)
in excess of transfers to the U.S. benefi-
ciary from the foreign person. The rule
of this paragraph will not apply to the
extent the U.S. beneficiary can demon-
strate to the satisfaction of the district
director that the transfer by the U.S.
beneficiary to the foreign person was
wholly unrelated to any transaction in-
1997–25 I.R.B.
19June 23, 1997

volving the trust. For purposes of this
paragraph, a transfer of property does
not include a nongratuitous transfer. See
§ 671–2(e)(4)(ii). In addition, a gift
shall not be taken into account to the
extent such gift would not be character-
ized as a taxable gift under section
2503(b). For a definition ofU.S. benefi-
ciary, see section 679.
(2)Examples. The following ex-
amples illustrate the rules of this sec-
tion:
Example 1.A, a nonresident alien, contributes
property to FC, a foreign corporation that is
wholly owned by A. FC creates a foreign trust,
FT, for the benefit of A and his children. FT is
revocable by FC without the approval or consent
of any other person. FC funds FT with the
property received from A. A and his family move
to the United States. Under paragraph (a)(1) of
this section, A is treated as the owner of FT.
Example 2.B, a U.S. citizen, makes a gratu-
itous transfer of $1 million to his uncle, C, a
nonresident alien. C creates a foreign trust, FT, for
the benefit of B and his children. FT is revocable
by C without the approval or consent of any other
person. C funds FT with the property received
from B. Under paragraph (a)(1) of this section, B
is treated as the owner of FT. (B also would be
treated as the owner of FT as a result of section
679.)
(b)Different taxable years. If a per-
son has a different taxable year (as
defined in section 7701(a)(23)) from the
taxable year of the trust, an amount is
currently taken into account in comput-
ing the income of such person for
purposes of § 1.672(f)–1 if the amount
is taken into account for the taxable
year of such person that includes the
last day of the taxable year of the trust.
(c)Entity characterization. Entities
generally shall be characterized under
U.S.incometaxprinciples.See
§§ 301.7701–1 through 301.7701–4 of
this chapter. However, for purposes of
§ 1.672(f)–4, a transferor that is a
wholly owned business entity shall be
treated as a corporation, separate from
its single owner. See § 301.7701–
2(c)(2)(iii) of this chapter.
(d)Effective date. The rules of this
section are generally applicable as of
August 20, 1996. However, the rules in
paragraph (c) of this section shall not be
applicable until [date of publication as a
final regulation in theFederal Regis-
ter].
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 5. The authority citation for part
301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7701–2(c)(2)(iii) also is-
suedunder26U.S.C.643(a)(7),
672(f)(4) and (6).
Par.6. Section301.7701–2is
amended by adding paragraph (c)(2)(iii)
to read as follows:
§ 301.7701–2 Business entities; defini-
tions.
*****
(c) * * *
(2) * * *
(iii)Special rule for foreign business
entities that make purported gifts. For
the purposes of applying the rules of
section 672(f)(4), a wholly owned busi-
ness entity shall be treated as a corpora-
tion, separate from its single owner.
*****
Michael P. Dolan,
Acting Commissioner of Internal
Revenue.
(Filed by the Office of the Federal Register on
June 4, 1997, 8:45 a.m., and published in the issue
of the Federal Register for June 5, 1997, 62 F.R.
30785)
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 168, 446, 481; 1.168(i)–1, 1.446–
1.)
Rev. Proc. 97–30
SECTION 1. PURPOSE
This revenue procedure allows a tax-
payer to make a general asset account
election under § 168(i)(4) of the Inter-
nal Revenue Code for certain property
that was placed in service in taxable
years ending before October 11, 1994.
The election set forth in this revenue
procedure is available only for a taxable
year ending in 1996 or 1997 (the year
of change).
SECTION 2. BACKGROUND
.01 Section 168(i)(4) provides that,
under regulations, a taxpayer may main-
tain one or more general asset accounts
for any property to which § 168 applies.
The rules for general asset accounts are
provided in § 1.168(i)–1 of the Income
Tax Regulations, which allows a tax-
payer to make an election to group
assets into one or more general asset
accounts. The assets in any particular
account are depreciated as a single asset.
Each general asset account generally
includes only assets that are placed in
service by the taxpayer in the same
taxable year and that have the same
depreciation method, recovery period,
convention, and asset class.
Section 1.168(i)–1 applies to property
subject to § 168 that is placed in ser-
vice in taxable years ending on or after
October 11, 1994. For property subject
to § 168 that was placed in service after
December 31, 1986, in taxable years
ending before October 11, 1994,
§ 1.168(i)–1(l) provides that the Internal
Revenue Service will allow any reason-
able method that is consistently applied
to the taxpayer’s general asset accounts.
.02 Except as otherwise expressly
provided, a taxpayer must obtain the
consent of the Commissioner of Internal
Revenue to change a method of ac-
counting for federal income tax pur-
poses. Section 446(e) and § 1.446–
1(e)(2)(i). To obtain this consent, the
taxpayer must file a Form 3115, Appli-
cation for Change in Accounting
Method, during the taxable year in
which the taxpayer desires to make the
proposedchange.Section1.446–
1T(e)(3)(i).
.03 The Commissioner is authorized
to prescribe administrative procedures
setting forth the limitations, terms, and
conditions necessary to obtain consent
for effecting a change in method of
accounting and to prevent amounts from
being duplicated or omitted, including
the taxable year or years in which the
§ 481(a) adjustment is to be taken into
account. Section 1.446–1(e)(3)(ii).
SECTION 3. GENERAL ASSET
ACCOUNT ELECTION
.01 Subject to section 3.02 of this
revenue procedure, a taxpayer may elect
to apply the general asset account rules
in § 1.168(i)–1 for any item of prop-
erty: (1) depreciated by the taxpayer
under § 168; (2) placed in service by
the taxpayer after December 31, 1986,
in any taxable year ending before Octo-
ber 11, 1994; (3) for which the taxpayer
has not previously made a general asset
account election; and (4) held by the
taxpayer as of the beginning of the year
of change.
.02 This election may be made only if
the taxpayer has records that establish:
(1) the taxable year in which the prop-
erty was placed in service by the tax-
payer; (2) the applicable depreciation
method, recovery period, and convention
under § 168 for the property; (3) the
unadjusted depreciable basis (as defined
in § 1.168(i)–1(b)(1)) of the property as
of the beginning of the year of change;
and (4) the depreciation allowed or
June 23, 1997
201997–25 I.R.B.

allowable, whichever is greater, for the
property as of the end of the taxable
year immediately preceding the year of
change.
SECTION 4. EFFECT OF ELECTION
.01In general. If a taxpayer makes a
general asset account election under this
revenue procedure, the taxpayer con-
sents to, and agrees to apply, all of the
provisions of § 1.168(i)–1 to the prop-
erty subject to the election, beginning
with the year of change. Thus, pursuant
to § 1.168(i)–1(k)(1), the election gen-
erally is irrevocable and will be binding
on the taxpayer for computing taxable
income for the year of change and for
all subsequent taxable years. The elec-
tion has no effect on the depreciation
method, recovery period, and convention
of the property.
.02Establishment of general asset
accounts.Any property subject to a
general asset account election under this
revenue procedure must be grouped into
one or more general asset accounts in
accordance with the rules in § 1.168(i)–
1(c) and separate from any account
formed in any taxable year prior to the
year of change. In addition, each general
asset account must include a beginning
balance for both the unadjusted depre-
ciable basis and the depreciation reserve
of the general asset account. The begin-
ning balance for the unadjusted depre-
ciable basis of the general asset account
is equal to the sum of the unadjusted
depreciable bases as of the beginning of
the year of change for all property
included in the general asset account.
The beginning balance of the deprecia-
tion reserve of the general asset account
is equal to the sum of the depreciation
allowed or allowable, whichever is
greater, as of the end of the taxable year
immediately preceding the year of
change for all property included in the
general asset account.
SECTION 5. CHANGE IN METHOD
OF ACCOUNTING
.01Consent.A general asset account
election for any item of property that is
made pursuant to this revenue procedure
is a change in method of accounting.
Under § 1.446–1(e)(2)(i), the consent of
the Commissioner is hereby granted to
make this method change by any tax-
payer for any item of property for which
a general asset account election is made
pursuant to this revenue procedure. This
consent is granted for the taxpayer’s
year of change. The consent is condi-
tioned, however, on the taxpayer’s com-
plying with this revenue procedure. If
the taxpayer does not comply with this
revenue procedure, the taxpayer will be
deemed to have initiated a change in
method of accounting without obtaining
the consent of the Commissioner re-
quired under § 446(e).
.02No § 481(a) adjustment.Because
the adjusted basis of the property is not
changed by the general asset account
election, the method change is made on
a cut-off basis and, thus, no adjustment
under § 481(a) is required or permitted.
.03Mannerofmakingmethod
change.
(1)Complete and file a current
Form 3115.The general asset account
election under this revenue procedure is
made on the taxpayer’s timely filed
original federal income tax return (in-
cluding extensions) for the year of
change or on an amended return for the
year of change filed no later than De-
cember 20, 1997. The election is made
by attaching a completed, current Form
3115 to the taxpayer’s original or
amended return for the year of change.
The requirement to file a Form 3115
during the taxable year in which the
taxpayer desires to make the proposed
change is waived in accordance with
§ 1.446–1(e)(3)(ii).
(2)No user fee.No user fee is
required for a Form 3115 filed under
this revenue procedure. Any user fee
that is submitted with any Form 3115
requesting permission to make a general
asset account election under this revenue
procedure will be returned to the tax-
payer.
.04No protection from examination
changes.A general asset account elec-
tion under this revenue procedure does
not change the taxpayer’s present
method of computing depreciation al-
lowances for the property subject to the
election and, consequently, examination
protection is not provided. Therefore,
for any taxable year before the year of
change, a taxpayer that receives consent
to make a general asset account election
under this revenue procedure does not
thereby obtain protection from examina-
tion changes for the property included in
the general asset account.
SECTION 6. EFFECTIVE DATE
An election may be made pursuant to
this revenue procedure for a taxpayer’s
taxable year ending in 1996 or 1997.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 97–27, 1997–21 I.R.B. 10,
is modified.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kathleen Reed of the Of-
ficeofAssistantChiefCounsel
(Passthroughs and Special Industries).
For further information regarding this
revenue procedure, contact Mark Pitzer
at (202) 622–3110 (not a toll-free call).
Issuance of Taxpayer Assistance
Orders (TAOs)
Delegation Order 232 (Rev. 3)
Effective: April 16, 1997.
Authority:To issue Taxpayer Assis-
tance Orders (TAOs), other than TAOs
involving a principal residence, under
IRC § 7811, as amended by § 102 of
Public Law 104–168 (Taxpayer Bill of
Rights 2).
Delegated to:Assistant Commissioner
(International); Regional Commission-
ers; District Directors and Assistant Di-
rectors; Service Center Directors and
Assistant Directors; Regional, Service
Center, District, and International Tax-
payer Advocates.
Redelegation:This authority may be
redelegated to an Associate Taxpayer
Advocate.
Authority:To issue Taxpayer Assis-
tance Orders (TAOs), under IRC
§ 7811, to release a principal residence
of a taxpayer levied upon or to cease
any action regarding a principal resi-
dence.
Delegated to:Regional Commission-
ers, Assistant Commissioner (Interna-
tional), and the Regional and Interna-
tional Taxpayer Advocates.
Redelegation:This authority may not
be redelegated.
The authority to modify or rescind a
TAO is limited by IRC § 7811(c), as
amended by § 102(b) of Public Law
104–168, to only the Commissioner,
Deputy Commissioner, and Taxpayer
Advocate.
1997–25 I.R.B.
21June 23, 1997

Source of Authority:Treasury Order
150–10.
This order supersedes Del. Order 232
(Rev. 2).
Dated April 16, 1997.
Lee R. Monks
Taxpayer Advocate.
Information Reporting on
Transactions With Foreign Trusts
and on Large Foreign Gifts
Notice 97–34
This notice provides guidance regard-
ing the new foreign trust and foreign
gift reporting provisions contained in the
Small Business Job Protection Act of
1996 (the ‘‘Act’’). The Act expands
information reporting requirements un-
der section 6048 of the Internal Revenue
Code (the ‘‘Code’’) for U.S. persons
who make transfers to foreign trusts and
for U.S. owners of foreign trusts. In
addition, the Act adds new reporting
requirements for U.S. beneficiaries of
foreign trusts, extensively revises the
civil penalties for failure to file informa-
tion with respect to foreign trusts, and
adds civil penalties for failure to report
certain transfers to foreign entities. See
sections 6048(c), 6677, and 1494(c).
The Act also adds section 6039F to the
Code, creating reporting requirements
for U.S. persons who receive large gifts
from foreign persons.
Notice 96–60, 1996–49 I.R.B. 7, pro-
vided that taxpayers would not be re-
quired to file information statements
under section 6048(a) or be subject to
associated penalties under section 6677
until further guidance was issued. Sec-
tion VIII of this notice sets forth this
further guidance.
This notice has eight sections. Section
I explains the expected revisions to
Forms 3520 and 3520–A. Section II
provides certain definitions of terms
used in this notice. Section III provides
guidance on reporting of transfers to
foreign trusts. Section IV explains the
reporting responsibilities of U.S. owners
of foreign trusts, including the informa-
tion returns to be filed by these foreign
trusts and the procedures for foreign
trusts to appoint U.S. agents. Section V
provides guidance regarding the new
reporting requirements for U.S. benefi-
ciaries of foreign trusts. Section VI
explains the new reporting rules for U.S.
persons who receive large gifts from
foreign persons. Section VII provides
guidance on the new penalties for fail-
ure to comply with these reporting re-
quirements. Finally, Section VIII pro-
vides special transition rules.
Treasury and the Service expect to
issue regulations incorporating the guid-
ance set forth in this notice. Until such
regulations are issued, taxpayers must
comply with the guidance set forth in
this notice.
Section I. Revisions to Forms 3520
and 3520–A
Prior to the Act, a U.S. person who
transferred property to a foreign trust
was required to report the transfer on
Form 3520, ‘‘Creation of or Transfers to
Certain Foreign Trusts,’’ within 90 days
of the transfer. In addition, U.S. owners
of foreign trusts were required to file
annually Form 3520–A, ‘‘Annual Return
of Foreign Trust with U.S. Beneficia-
ries.’’ No reporting was required of U.S.
beneficiaries of foreign trusts or of U.S.
persons who received gifts from foreign
persons.
In order to facilitate taxpayer compli-
ance and reduce duplicative reporting
requirements, the Service is developing
a revised Form 3520 (‘‘Annual Return
to Report Transactions With Foreign
Trusts and Receipt of Certain Foreign
Gifts’’) that generally will allow U.S.
persons to use a single form to comply
with all of the new reporting require-
ments of the Act pertaining to transac-
tions with foreign trusts and the receipt
of foreign gifts. In addition, Form
3520–A will be revised so that foreign
trusts will be able to use that form to
meet the new information reporting re-
quirements of section 6048(b). U.S.
owners of foreign trusts will no longer
be required to file Form 3520–A.
Section II. Definitions
For purposes of this notice, the terms
‘‘grantor,’’ ‘‘beneficiary,’’ and ‘‘obliga-
tion’’ are defined as follows.
A ‘‘grantor’’ includes any person who
creates a trust as well as any person
who directly or indirectly makes a gra-
tuitous transfer of money or other prop-
erty to a trust. A grantor includes a
person who acquires an interest in a
trust in a nongratuitous transfer from a
person who is a grantor of the trust. A
grantor also includes an investor who
acquires an interest in a fixed invest-
ment trust from a grantor of the trust. If
one person creates or funds any portion
of a trust primarily as an accommoda-
tion for another person, the other person
will be treated as the grantor with
respect to such portion of the trust.
Gratuitous transfers are described below
in Section III.
A ‘‘beneficiary’’ includes any person
that could possibly benefit (directly or
indirectly) from the trust at any time
(including any person who could benefit
if the trust were amended), whether or
not the person is named in the trust
instrument as a beneficiary and whether
or not the person can receive a distribu-
tion from the trust in the current year.
Sections 679(c), 643(a)(7).See also
H.R. Rep. No. 658, 94th Cong., 1st
Sess. 210 (1975), 1976–3 (vol. 2) C.B.
902. However, for purposes of sections
643(i), 679(a)(3)(C) and 1494, a person
will not be considered a beneficiary if,
based on all relevant facts and circum-
stances, it could not be reasonably an-
ticipated that the person could possibly
benefit from the trust. For example, for
this purpose a publicly-traded corpora-
tion would generally not be treated as a
beneficiary of a family’s trust even if
the trustee is given complete discretion
to distribute trust income to anyone.
However, friends and business associ-
ates of the family would be considered
beneficiaries of such a trust because it
could be reasonably anticipated that the
trust could possibly benefit such per-
sons.
An ‘‘obligation’’ includes any bond,
note, debenture, certificate, bill receiv-
able, account receivable, note receivable,
open account, or other evidence of in-
debtedness, and, to the extent not previ-
ously described, any annuity contract.
Section III. Transfers to Foreign
Trusts
This section of the notice provides
guidance for the reporting of transfers to
foreign trusts. As more fully described
below, gratuitous transfers are reportable
under section 6048(a). For this purpose,
a gratuitous transfer is any transfer other
than: (a) a transfer for fair market value,
or (b) a corporate or partnership distri-
bution. In addition, as more fully de-
scribed below, nongratuitous transfers
(all transfers other than gratuitous trans-
fers) to a foreign trust are reportable
1
There are currently two provisions of the Internal
Revenue Code designated as section 6039F. The
second provision was added by the Health Insur-
ance Portability and Accountability Act of 1996
(HIPAA). Treasury intends to seek a technical
correction to HIPAA to redesignate section 6039F
as added by HIPAA as section 6039G. All subse-
quent references to section 6039F in this Notice
relate to section 6039F as contained in the Small
Business Job Protection Act of 1996.
June 23, 1997221997–25 I.R.B.

under section 1494 if: (a) the U.S.
transferor does not immediately recog-
nize all of the gain on the transfer (or
recognizes gain solely by reason of an
election under section 1057), or (b) the
U.S. transferor is related to the trust. If
a transfer is gratuitous in part and
nongratuitous in part, the gratuitous por-
tion of the transfer must be reported
undersection6048andthe
nongratuitous portion of the transfer
must be reported under section 1494.
A. Background
Section 6048(a) generally provides
that any U.S. person who directly or
indirectly transfers money or other prop-
erty to a foreign trust (including a
transfer by reason of death) must report
such transfer at the time and in the
manner prescribed by the Secretary. Sec-
tion 6048(a)(2). Transfers to foreign
trusts described in sections 402(b),
404(a)(4), or 404A, or trusts determined
by the Secretary to be described in
section 501(c)(3) are not reportable un-
dertheserequirements.Section
6048(a)(3)(B)(ii). Transfers involving
fair market value sales are also not
reportable. Section 6048(a)(3)(B)(i). The
Secretary may exempt other types of
transfers from being reported if the
United States does not have a significant
interest in obtaining the required infor-
mation. Section 6048(d)(4). A person
who fails to comply with the reporting
requirements of section 6048(a) with
respect to a transfer occurring after
August 20, 1996, will be subject to a 35
percent penalty on the gross value of the
property transferred. Section 6677(a).
One of the purposes of the reporting
requirements in section 6048(a) is to
ensure that U.S. transferors comply with
section 679. Section 679 generally treats
a U.S. person as the owner of a foreign
trust if the U.S. person transfers prop-
erty to the foreign trust and the trust
could benefit a U.S. person. However, a
U.S. person will not be treated as the
owner of the trust under section 679 if,
in exchange for the property transferred
to the trust, the U.S. person receives
property whose value is at least equal to
the fair market value of the property
transferred. Section 679(a)(2)(B).
Certain transfers of property by U.S.
persons to foreign trusts may be de-
scribed in section 1491 as well as
section 6048(a). Section 1491 generally
provides that a U.S. person who trans-
fers property to a foreign trust is subject
to a 35 percent excise tax on any
unrecognized gain in the transferred
property. Section 1494 generally pro-
vides that transfers described in section
1491 to certain foreign entities (includ-
ing foreign trusts) must be reported.
Notice 97–18, 1997–10 I.R.B. 35, pro-
vided that in the case of transfers to
foreign trusts, reporting obligations un-
der section 1494 may be satisfied if the
U.S. transferor complies with its report-
ing obligations under section 6048(a)
and the U.S. transferor does not owe
excise tax under section 1491.
B. Section 6048(a) Information Re-
porting
Except as otherwise provided in Sec-
tion III.E., a U.S. person must report
under section 6048(a) any gratuitous
transfer to a foreign trust. Although
nongratuitous transfers generally are not
reportable under section 6048(a), any
transfer in exchange for an obligation
that is treated as a qualified obligation
(as defined in section III.C.2) must also
be reported under section 6048(a). In the
event of a reportable transfer occurring
by reason of death, the executor, as
defined in section 2203, is responsible
for reporting the transfer.
A gratuitous transfer is any transfer
other than (i) a transfer for fair market
value, or (ii) a corporate or partnership
distribution. A transfer of property to a
trust may be considered a gratuitous
transfer without regard to whether the
transfer is a gift for gift tax purposes
(see Chapter 12 of Subtitle B of the
Code). A gratuitous transfer to a foreign
trust must be reported on Form 3520.
For purposes of this notice, a transfer
for fair market value includes only
transfers in consideration for property
received from the trust, services ren-
dered by the trust, or the right to use
property of the trust. A transfer is for
fair market value only to the extent that
the value of the property received, ser-
vices rendered, or the right to use the
property is equal to the fair market
value of the property transferred. For
example, rents, royalties, and compensa-
tion paid to a trust are transfers for fair
market value only if the payments re-
flect an arm’s length price for the use of
the property of, or services rendered by,
the trust.
For purposes of this determination, if
a U.S. person contributes property to a
trust in exchange for any type of interest
in the trust, such interest in the trust will
be disregarded in determining whether
fair market value has been received. In
addition, a U.S. person will not be
treated as making a transfer for fair
market value merely because the
transferor recognizes gain on the trans-
action. For example, if a taxpayer elects
to treat a transfer of appreciated prop-
erty to a foreign trust as a deemed sale
under section 1057, such a transfer will
not be treated as a transfer for fair
market value because the transferor did
not receive actual fair market value
consideration pursuant to the deemed
sale. For special rules regarding obliga-
tions issued by related foreign trusts, see
Section III.C. below.
For purposes of this notice, a transfer
to a foreign trust is a corporate distribu-
tion, and therefore not a gratuitous
transfer, only if it is a distribution
described in sections 301, 302, 305,
355, or 356. Similarly, for purposes of
this notice, a transfer to a foreign trust
is a partnership distribution, and there-
fore not a gratuitous transfer, only if it
is described in section 731. A distribu-
tion from one trust to another trust that
is a beneficiary of the first trust is a
gratuitous transfer. Moreover, a domestic
trust that becomes a foreign trust is
deemed to have made a gratuitous trans-
fer of all its assets immediately before
becoming a foreign trust.Seesection
1491.
Notwithstanding any other guidance
provided by this notice, a gratuitous
transfer also includes any direct or indi-
rect transfer that is structured with a
principal purpose of avoiding the appli-
cation of sections 679 or 6048.See
sections 643(a)(7), 679(d), and 6048(a).
C. Trust Obligations
1. Background
Congress was concerned that certain
taxpayers may have attempted to avoid
the application of sections 679 and
6048(a) by transferring property to a
foreign trust in exchange for obligations
issued by the trust. H.R. Rep. No. 542,
104th Cong., 2d Sess., pt. 2 at 25
(1996). Thus, the Act provides that if a
U.S. person transfers money or other
property to a related foreign trust, any
obligation issued by the trust (or any
obligation of a person related to the
trust) will not be taken into account in
determining if the U.S. person received
fair market value, except to the extent
providedbyregulations.Sections
679(a)(3)(A)(i), 6048(a)(3)(B)(i). For
2
As explained in Notice 97–18, Treasury and the
Service are studying whether distributions by
domestic corporations and partnerships should be
reportable under section 1494. This notice does
not affect the reporting of such corporate or
partnership distributions.
1997–25 I.R.B.23June 23, 1997

purposes of determining whether an ob-
ligation is disregarded, a person is re-
lated to a trust if, without regard to the
transfer, the person is a grantor of the
trust, a beneficiary of the trust, or a
person who is related (within the mean-
ing of section 643(i)(2)(B)) to any
grantor or beneficiary of the trust. Sec-
tion 679(a)(3)(C).
Congress nevertheless intended that
Treasury and the Service would exercise
regulatory authority to allow certain
trust obligations to be taken into account
in determining whether such a transferor
has received fair market value. In exer-
cising this regulatory authority, Congress
expected that Treasury and the Service
would give consideration to whether
there is a reasonable expectation that an
obligation of the trust would be repaid.
H.R. Conf. Rep. No. 737, 104th Cong.,
2d Sess. 335 (1996).
2. Qualified Obligations
Where a U.S. person transfers money
or other property to a related foreign
trust in exchange for an obligation from
that trust (or an obligation of a person
related to such trust), regulations will
provide that the obligation will be taken
into account for purposes of section 679
indeterminingwhethertheU.S.
transferor received fair market value
from the foreign trust only if the obliga-
tion is a ‘‘qualified obligation.’’
An obligation is a qualified obligation
only if:
(i) The obligation is reduced to writ-
ing by an express written agreement;
(ii) The term of the obligation does
not exceed five years (for purposes of
determining the term of an obligation,
the obligation’s maturity date is the last
possible date that the obligation can be
outstanding under the terms of the obli-
gation);
(iii) All payments on the obligation
are denominated in U.S. dollars;
(iv) The yield to maturity of the
obligation is not less than 100 percent
of the applicable Federal rate and not
greater than 130 percent of the appli-
cable Federal rate (the applicable Fed-
eral rate for an obligation is the appli-
cable Federal rate in effect under section
1274(d) for the day on which the obli-
gation is issued, as published in the
Internal Revenue Bulletin);
(v) The U.S. transferor extends the
period for assessment of any income or
transfer tax attributable to the transfer
and any consequential income tax
changes for each year that the obligation
is outstanding, to a date not earlier than
three years after the maturity date of the
obligation (this extension is not neces-
sary if the maturity date of the obliga-
tion does not extend beyond the end of
the U.S. person’s taxable year and is
paid within such period); when properly
executed and filed, such an agreement
will be deemed to be consented to by
the Service Center Director or the Assis-
tant Commissioner (International) for
purposes of § 301.6501(c)–1(d); and
(vi) The U.S. transferor reports the
status of the obligation, including princi-
pal and interest payments, on Form
3520 for each year that the obligation is
outstanding.
If, while the original obligation is
outstanding, the U.S. transferor or a
person related to the trust directly or
indirectly obtains another obligation is-
sued by the trust, or if the U.S.
transferor directly or indirectly obtains
another obligation issued by a person
related to the trust, the original obliga-
tion will be deemed to have the maturity
date of any such subsequent obligation
in determining whether the term of the
original obligation exceeds the specified
5-year term. In addition, a series of
obligations issued and repaid by the
trust (or a person related to the trust)
will be treated as a single obligation if
the transactions giving rise to the obli-
gations are structured with a principal
purpose to avoid the application of this
provision.
If an obligation treated as a qualified
obligation subsequently fails to be a
qualified obligation (e.g., a renegotiation
of the terms of the obligation causes the
term of the obligation to exceed five
years), the U.S. transferor will be treated
as making a gratuitous transfer to the
trust in an amount equal to the original
obligation’s adjusted issue price (within
the meaning of § 1.1275–1(b)) plus any
accrued but unpaid qualified stated in-
terest (within the meaning of § 1.1273–
1(c)) as of the date of the subsequent
event that causes the obligation to no
longer be a qualified obligation. If the
maturity date is extended beyond five
years by reason of the issuance of a
subsequent obligation by the trust (or
person related to the trust), the amount
of the gratuitous transfer will not exceed
the issue price of the subsequent obliga-
tion. The subsequent obligation will be
separately tested to determine if it is a
qualified obligation.
Generally, as discussed above, a gra-
tuitous transfer resulting from a failed
qualified obligation will be deemed to
occur on the date of the subsequent
event that causes the obligation to no
longer be a qualified obligation. How-
ever, based on all facts and circum-
stances, the district director may deem a
gratuitous transfer to have occurred on
any date on or after the issue date of the
original obligation. For example, if at
the time the original obligation was
issued the transferor knew or had reason
to know that the obligation would not
be repaid, the district director could
deem the transfer to have occurred on
the issue date of the original obligation.
A demand loan does not have a speci-
fied term and, therefore, cannot be a
‘‘qualified obligation.’’ In addition, an
annuity contract cannot be a ‘‘qualified
obligation.’’
The rules for qualified obligations
apply to an obligation of a related
foreign trust (or of a person related to
the trust) issued after February 6, 1995,
whether or not in accordance with a
preexisting arrangement or understand-
ing. For purposes of these rules, if an
obligation issued on or before February
6, 1995, is modified after that date, and
the modification is a significant modifi-
cation within the meaning of § 1.1001–
3, the obligation is treated as if it were
issued on the date of the modification.
However, the penalty contained in re-
vised section 6677 will only apply to
the failure to report transfers in ex-
change for obligations issued after Au-
gust 20, 1996.
D. Section 1494 Information Re-
porting
Notwithstanding that nongratuitous
transfers of property generally are not
reportable under section 6048(a), fair
market value transfers must nevertheless
be reported on Form 3520 pursuant to
section 1494 if:
(i) The U.S. transferor (other than a
person described in Part II.A.1.i.
through iii. of Notice 97–18, 1997–10
I.R.B. 35) makes a nongratuitous trans-
fer of appreciated property to a foreign
trust and does not immediately recog-
nize all of the gain on the property
transferred (or recognizes gain only by
reason of an election described in sec-
tion 1057); or
(ii) The U.S. transferor is related to
the trust. A transferor is considered
related to the trust if the transferor is the
grantor of the trust, a beneficiary of the
trust, or a person related to a grantor or
beneficiary (applying the principles of
section 643(i)(2)(B), as modified by
SectionII.A.2.ofNotice97–18,
1997–10 I.R.B. 35).
June 23, 1997
241997–25 I.R.B.

If such a nongratuitous transfer to a
foreign trust is reportable under section
1494, the transfer must be reported on
Form 3520 in a manner comparable to
the manner for reporting transactions
with other foreign entities on Form 926
(‘‘Return by a U.S. Transferor of Prop-
erty to a Foreign Corporation, Foreign
Estate or Trust, or Foreign Partner-
ship’’).SeeNotice 97–18, Section III.C.
Thus, if a U.S. person transfers appreci-
ated property to a foreign trust and does
not immediately recognize the entire
amount of gain on the transfer (or
recognizes gain only by reason of an
election described in section 1057), the
transferor must separately identify the
property transferred. However, if the
transferor recognizes the gain (if any)
on the property transferred, but the
transferor is related to the foreign trust,
the transferor may aggregate the
amounts transferred to the trust during
the year, using the categories set forth in
Section III.C. of Notice 97–18.
The transferor will not be required to
file a separate Form 926 in addition to
Form 3520 unless the transferor owes
excise tax under section 1491 with re-
spect to a transfer. Elections under sec-
tion 1057 to avoid the section 1491
excise tax can be made on Form 3520.
E. Deferred Compensation and
Charitable Trusts
Without regard to whether a transfer
to a foreign trust is gratuitous or
nongratuitous, transfers to foreign trusts
described in sections 402(b), 404(a)(4),
404A, or 501(c)(3) are exempt from
reporting under section 6048(a). Section
6048(a)(3)(B)(ii). For purposes of this
provision, a trust will be considered
described in section 501(c)(3) only if it
has a determination letter from the Ser-
vice that has not been revoked recogniz-
ing its status as exempt from income
taxation under section 501(a).
Section 6048(d)(4) authorizes the Sec-
retary to suspend requirements of sec-
tion 6048 as appropriate. Based on this
authority, no reporting will be required
under section 6048(a) on transfers to
Canadian Registered Retirement Savings
Plans (RRSPs) if the trust would qualify
for treaty benefits at the time of the
transfer under the Convention Between
the United States of America and
Canada with Respect to Taxes on In-
come and on Capital. Any U.S. person
relying on a tax treaty with Canada to
avoid information reporting must, how-
ever, disclose this position under section
6114.
Furthermore, the Secretary has deter-
mined that, if a foreign trust is described
in sections 402(b), 404(a)(4), 404A or
501(c)(3), or is an RRSP, and a transfer
to such trust would be exempt from
reporting under section 6048(a) pursuant
to this notice, no reporting is required
with respect to any transfer to that trust
under section 1494. Thus, no penalty
will apply under sections 6677 or
1494(c) with respect to the failure to
report any transfer to such a trust.
Comments are solicited concerning
whether other categories of transfers to
foreign trusts should be exempt from
reporting under sections 6048(a) and
1494.
F. Examples
The following examples illustrate the
rules in this Section II. In these ex-
amples, A is a U.S. citizen, DC is a
domestic corporation, DT is a domestic
trust that is not treated as owned by any
other person, and FT is a foreign trust.
Example 1. Contribution to FT.A contributes
cash to FT, through a broker, in exchange for
units in FT. The value of the units in FT is
disregarded in determining whether A has re-
ceived fair market value. Therefore, the contri-
bution by A is a gratuitous transfer and A must
report the contribution to FT under section
6048(a).
Example 2. Interest payment to FT.A borrows
cash from FT, an unrelated foreign trust. Arm’s-
length interest payments by A will not be
treated as gratuitous transfers. Thus, A is not
required to report the payments under section
6048(a). In addition, A is not required to report
the payments under section 1494, since A is not
related to the trust.
Example 3. Trust distribution to FT.A created
and funded DT. After A’s death, DT distributes
cash to FT, which is a beneficiary of DT. The
trust distribution by DT is a gratuitous transfer.
DT must report the distribution under section
6048(a).
Example 4. Dividend payment to FT.A creates
and funds FT. FT owns stock of DC, a publicly
traded company, which pays a dividend to FT.
The dividend paid by DC is not a gratuitous
transfer. Thus, DC is not required to report the
dividend to FT under section 6048(a).
Example 5. Right to withdraw.F, a foreign
individual, creates FT and contributes $10,000
to FT. In addition, A transfers $10,000,000 to
FT. A retains no power over FT. F has the right
to withdraw all of FT’s property. A must report
the transfer of $10,000,000 to FT under section
6048(a).
Example 6. Anti-abuse rule.FT is created by a
foreign person to benefit B, A’s child, who is a
U.S. citizen. FT is not treated as owned by any
other person. On December 1, 1998, A creates a
limited partnership and contributes property
worth $1,000,000 to the limited partnership. On
March 1, 1999, with a principal purpose to
avoid the application of section 679, A sells a
25 percent interest in the limited partnership to
the trust in exchange for $185,000 (A takes the
position that $185,000 reflects the fair market
value of the 25 percent interest because of a
discount for the minority interest.) Even if the
fair market value of the minority interest in the
limited partnership was only $185,000 at the
time of the transfer, the $65,000 minority dis-
count will be treated as a gratuitous transfer as
of March 1, 1999, for purposes of section 679
and 6048 because the transaction was designed
to avoid section 679. Therefore, A must report
the $65,000 minority discount under section
6048(a) in 1999. A must also report the
$185,000 under section 1494 in 1999, since A is
related to the foreign trust.
Example 7. Nonqualified obligation.A, the
father of a U.S. beneficiary of FT, sells property
worth $1,000,000 to FT in exchange for an
obligation issued by FT. The obligation is not a
‘‘qualified obligation.’’ Thus, A’s sale to FT will
be treated as a gratuitous transfer and A must
report the transfer under section 6048(a). A will
also be treated as owning for purposes of
section 679 the portion of the trust attributable
to the property worth $1,000,000 that he trans-
ferred to the trust.
Example 8. Qualified obligation.A, a benefi-
ciary of FT, sells property on January 1, 1998,
worth $1,000,000 to FT in exchange for an
obligation issued by FT due on January 1, 2001,
with a stated interest rate equal to 100 percent
of the applicable Federal rate. FT is not treated
as owned by any other person. To ensure that
the obligation is a qualified obligation, A must
report the transfer for purposes of section
6048(a), properly extend the statute of limita-
tions for each year in which the obligation is
outstanding, and report annually on the status of
the obligation. Provided A complies with these
requirements, the obligation is a qualified obli-
gation and A has not made a gratuitous transfer
to the trust in 1998 for purposes of section
6048.
Example 9. Subsequent transfer while qualified
obligation is outstanding.Assume the same
facts asExample 8, except that A’s father, C,
who is not a U.S. person, also loaned FT
$900,000 on December 1, 2000, when the
adjusted issue price on FT’s original obligation
to A is $800,000, plus accrued but unpaid
interest of $10,000. FT’s obligation to C has a
maturity date of December 1, 2004, more than
five years after the issue date of A’s original
obligation. Because A is related to C, A’s
original obligation is treated as having a matu-
rity date of December 1, 2004. Thus, A will be
treated as having made a gratuitous transfer to
FT of $810,000 as of December 1, 2000. A
must report this transfer on Form 3520 for the
year 2000. However, if as of the date of A’s
original transfer A knew or had reason to know
that the obligation would not be repaid, the
district director could determine that A made a
gratuitous transfer to FT of $1,000,000 as of
January 1, 1998.
Example 10. Nongratuitous bank loan to FT.A
funds FT with a contribution of $1,000,000. A’s
grandchildren, who are U.S. citizens, are the
only possible beneficiaries of FT. A is treated as
the owner of FT under section 679. FT borrows
money from an unrelated U.S. bank at arm’s
length terms to purchase U.S. real property.
U.S. bank has made a nongratuitous transfer to
FT, and is not required to report the transfer for
purposes of section 6048(a).
Example 11. Non-arm’s length sale to related
FT.FT is created by a foreign person to benefit
B, A’s spouse, who is a U.S. citizen. FT is not
treated as owned by any other person. A sells
property worth $1,000,000 to FT in exchange
for $100,000 in cash. The $900,000 excess is a
1997–25 I.R.B.25June 23, 1997

gratuitous transfer by A. A must report this
excess under section 6048(a). A must also report
the $100,000 under section 1494, since A is
related to FT.
Example 12. Nongratuitous transfer to related
FT.FT is created by a foreign person to benefit
B, A’s spouse, who is a U.S. citizen. FT is not
treated as owned by any other person. The
office building in which A conducts his U.S.
business is owned by FT. A makes fair market
value rental payments to FT. A’s rental pay-
ments are not gratuitous transfers. Thus, A is
not required to report the rental payments under
section 6048(a). However, A must report the
aggregate amount of the rental payments on an
annual basis under section 1494 since A is
related to FT.
Example 13. Transfer that is gratuitous in part
and nongratuitous in part.Assume the same
facts asExample 12, except that A’s rental
payments to FT are in excess of fair market
value. The portion of each of A’s rental pay-
ments that is in excess of fair market value is a
gratuitous transfer. Thus, A must report the
excess portion of each payment under section
6048(a). In addition, A must report the fair
market value portion of the payments under
section 1494.
Section IV. U.S. Owners of Foreign
Trusts.
Each U.S. person treated as an owner
of a foreign trust under sections 671
through 679 is responsible for ensuring
that the foreign trust files an annual
return setting forth a full and complete
accounting of all trust activities, trust
operations and other relevant informa-
tion. Section 6048(b)(1). In addition, the
U.S. owner is responsible for ensuring
that the trust annually furnishes such
information as the Secretary prescribes
to U.S. owners and U.S. beneficiaries of
the trust. Section 6048(b)(1)(B). If the
trust does not furnish this information,
the U.S. owner is subject to a penalty
equal to 5 percent of the gross value of
the portion of the trust’s assets treated
as owned by that person. Section
6677(b) and (c)(2). The penalty applies
to taxable years of U.S. owners begin-
ning after December 31, 1995.
A. Annual Return
The Service plans to revise Form
3520–A to allow that form to be used
by foreign trusts to satisfy their annual
information reporting requirements. Un-
til the revised Form 3520–A is available,
the U.S. owner must ensure that a
trustee who is authorized to sign Form
3520–A: (1) files the unrevised Form
3520–A,(2)writes‘‘FOREIGN
GRANTOR TRUST’’ at the top of the
form, (3) completes the identifying in-
formation on the form as if the foreign
trust were the U.S. owner required to
file the form, (4) signs the form, (5)
attaches a Foreign Grantor Trust Infor-
mation Statement to the form, (6) sends
a Foreign Grantor Trust Owner State-
ment (see part 4 of the Foreign Grantor
Trust Information Statement) to each
U.S. owner of a portion of the trust, and
(7) sends a copy of a Foreign Grantor
Trust Beneficiary Statement (see part 5
of the Foreign Grantor Trust Information
Statement) to each U.S. beneficiary who
received a distribution from the trust
during the taxable year. Except as pro-
vided in Section VIII, Form 3520–A
must be filed and the required state-
ments furnished to the U.S. grantors and
U.S. beneficiaries by the fifteenth day of
the third month after the end of the
trust’s taxable year (or later, if pursuant
to an extension of time to file). See
Section VIII for special filing deadlines
for filing Form 3520–A for 1996.
The Foreign Grantor Trust Informa-
tion Statement should be submitted in
substantially the following format:
FOREIGN GRANTOR TRUST
INFORMATION STATEMENT
1. Foreign Trust Background Informa-
tion
A. Name, address and employer iden-
tification number (‘‘EIN’’) of trust
B. Name, address and taxpayer iden-
tification number (‘‘TIN’’) of the
U.S. agent (if any)
C. Name, address and TIN (if any) of
the trustee who signed Form
3520–A
D. Method of accounting used by the
trust (cash or accrual)
E. The taxable year of the foreign
trust to which the statement ap-
plies
2. Foreign Trust Balance Sheet. The
foreign trust balance sheet should
contain both beginning and end of
year balances. Amounts may be ag-
gregated within each category listed
below and should be stated at their
approximate fair market value. A
good faith estimate of fair market
value is satisfactory.
A. Assets
1. Cash
2. Accounts receivable
3. Inventory
4. Government obligations
5. Other marketable securities
6. Other non-marketable securities
7. Depreciable (depletable) assets
8. Real property
9. Other assets (attach summary
schedule)
10. Total assets
B. Liabilities
1. Accounts payable
2. Contributions, gifts, grants, etc.
payable
3. Mortgages and notes payable
4. Other liabilities (attach sum-
mary schedule)
5. Total liabilities
C. Retained Earnings
1. Contributions
2. Accumulated trust income
3. Other (state nature)
4. Total net worth
3. Foreign Trust Income Statement. Use
U.S. tax principles to determine the
trust’s income.
A. Income
1. Interest
2. Dividends
3. Rents, royalties, distributive
share of partnership income, etc.
4. Capital gains
a. Net short-term capital gain
b. Net long-term capital gain
5. Other (state nature)
6. Total income
B. Deductions
1. Interest
2. Foreign taxes
3. State and local taxes
4. Trustee and advisor fees
5. Amortization and depreciation
6. Other (state nature)
7. Total deductions
C. Net Income or loss (A.6. less B.7.)
D. Distributionstobeneficiaries
(separately state for each U.S.
beneficiary)
E. Tax credits (attach summary
schedule)
4. The Foreign Grantor Trust Owner
Statement
A. Foreign Trust Background Infor-
mation
1. Name, address and EIN of trust
2. Name, address and TIN of U.S.
agent (if any)
3. Name, address and TIN (if any)
of the trustee who signed Form
3520–A
4. Method of accounting used by
the trust (cash or accrual)
5. The taxable year of the foreign
trust to which the statement ap-
plies
6. Name, address and TIN of the
U.S. owner
7. A good faith estimate of the
U.S. owner’s gross reportable
amount (the fair market value of
the trust’s assets treated as
owned by the U.S. person)
June 23, 1997
261997–25 I.R.B.

B. Statement of Net Income Attribut-
able to the Owner. Use U.S. tax
principles to determine the own-
er’s income.
1. Income attributable to the owner
a. Interest
b. Dividends
c. Rents, royalties, distributive
share of partnership income,
etc.
d. Capital gains
1. Net short-term capital gain
2. Net long-term capital gain
e. Other (state nature)
f. Total income
2. Deductions attributable to the
owner
a. Interest
b. Foreign taxes
c. State and local taxes
d. Trustee and advisor fees
e. Amortization and depreciation
f. Other (state nature)
g. Total deductions
3. Net Income or loss attributable
to the owner (B.1.f. less B.2.g.)
4. Tax credits attributable to the
owner (attach summary sched-
ule)
5. The Foreign Grantor Trust Benefi-
ciary Statement
A. Foreign Trust Background Infor-
mation
1. Name, address and EIN of trust
2. Name, address and TIN of U.S.
agent (if any)
3. Name, address and TIN (if any)
of the trustee who signed Form
3520–A
4. The taxable year of the foreign
trust to which the statement ap-
plies
B. U.S. Beneficiary Information
1. Name, address and TIN of U.S.
Beneficiary
2. A description of the property
(including cash) distributed or
treated as distributed to the U.S.
person during the taxable year,
and the fair market value of the
property distributed.
C. Owner Information.
1. An explanation of the facts and
law (including the section of the
Internal Revenue Code) that es-
tablishes that the foreign trust
(or the portion of the foreign
trust from which the beneficiary
received a distribution) is treated
for U.S. tax purposes as owned
by another person.
2. A statement identifying whether
the owner of the foreign trust
(or the portion of the foreign
trust from which the beneficiary
received a distribution) is an
individual, trust, corporation or
partnership, and whether that
person is a U.S. or foreign per-
son. If the owner is a U.S.
person, a foreign partnership, a
foreign corporation, or a foreign
trust, attach the name, address
and TIN (if any) of the owner.
B. Appointment of U.S. Agent.
If a foreign trust with a U.S. owner
does not have a U.S. agent, the Secre-
tary may determine the amounts re-
quired to be taken into account with
respect to the foreign trust by the U.S.
owner. Section 6048(b)(2). In order to
avoid this result, a U.S. owner of a
foreign trust should ensure that the
foreign trust appoints a U.S. person to
act as the foreign trust’s limited agent
for purposes of applying sections 7602,
7603, and 7604 with respect to a request
by the Secretary to examine records or
produce testimony, or a summons by the
Secretary for such records or testimony.
Any U.S. citizen, resident alien, or do-
mestic corporation (including a U.S.
grantor or U.S. beneficiary of a foreign
trust) may act as the U.S. agent of the
trust.
In order to authorize a U.S. person to
act as an agent under section 6048(b),
the trust and the agent must enter into a
binding agreement substantially in the
form that follows:
AUTHORIZATION OF AGENT
[Name of foreign trust] hereby ex-
pressly authorizes [name of U.S.
agent] to act as its agent solely for
purposes of sections 7602, 7603, and
7604 of the Internal Revenue Code
with respect to any request to exam-
ine records or produce testimony re-
lated to the proper treatment of
amounts required to be taken into
account under the rules of section
6048(b)(1)(A) or to any summons for
such records or testimony. I certify
that I have the authority to execute
this authorization of agent to act on
behalf of [name of foreign trust].
Signature of(title)(date)
trustee (or other
authorized person)
Type or print your name below
TIN (if any)
Address
[Name of agent] accepts this appoint-
ment to act as agent for [name of
foreign trust] for the above purpose. I
certify that I have the authority to
execute this authorization of agent to
act on behalf of [name of foreign
trust] and agree to accept service of
process for the above purposes
Signature of agent(title)(date)
Type or print your name below
TIN (if any)
Address
The authorization of agent agreement
must be executed by the foreign trust
and the U.S. agent prior to the due date
of the U.S. owner’s Form 3520 for the
taxable year that he or she is considered
the owner of the trust. The authorization
must remain in effect for as long as the
statute of limitations remains open for
the U.S. owner’s relevant taxable year.
If the agent resigns, liquidates or its
responsibility as an agent of the trust is
terminated, the U.S. owner of the for-
eign trust must ensure that the foreign
trust notifies the Commissioner within
90 days, by filing an amended Form
3520–A with the Philadelphia Service
Center. This notification must contain
the name, address and TIN of the new
U.S. agent (if any).
A foreign trust will not be treated as
having a U.S. agent unless the foreign
trust identifies the name, address and
taxpayer identification number of the
U.S. agent on Form 3520–A. Even if the
foreign trust identifies a U.S. agent on
Form 3520–A, however, the foreign
trust may be treated as providing incor-
rect information and, therefore, the U.S.
owner may be subject to the penalty
described in section 6677(a) and (b) if
either the U.S. agent or the foreign trust
does not comply with its obligations
under the agreement (e.g., the foreign
trust fails to produce records requested
by the Service in reliance on the bank
secrecy laws of the country where the
trust’s bank accounts are located).
1997–25 I.R.B.
27June 23, 1997

Section V. U.S. Beneficiaries of
Foreign Trusts
Generally, a U.S. person who receives
a distribution, directly or indirectly,
from a foreign trust after August 20,
1996, is required to report on Form
3520 the name of the trust, the aggre-
gate amount of distributions received
from the trust during the taxable year,
and such other information as the Secre-
tary may prescribe. Section 6048(c).
Reporting is required under section
6048(c) only if the U.S. person knows
or has reason to know that the trust is a
foreign trust. A U.S. beneficiary who
fails to report a distribution received
after August 20, 1996, will be subject to
a 35 percent penalty on the gross
amount of the distribution. Section
6677(a).
Except as otherwise provided below, a
distribution from a foreign trust includes
any gratuitous transfer of money or
property from a foreign trust, whether or
not the trust is owned by another per-
son. A distribution from a foreign trust
includes the receipt of trust corpus and
the receipt of a gift or bequest described
in section 663(a). In addition, a distribu-
tion is reportable if it is either actually
or constructively received. For example,
if a U.S. beneficiary uses a credit card,
and charges on that credit card are paid
or otherwise satisfied by a foreign trust
or guaranteed or secured by the assets
of a foreign trust, the amount charged
on that credit card will be treated as a
distribution to the U.S. beneficiary that
must be reported under section 6048(c)
for the year in which the charge occurs.
If a beneficiary writes a check on the
foreign trust’s bank or brokerage ac-
count or otherwise incurs a debt charged
to the foreign trust, the amount incurred
will be treated as a distribution to the
U.S. beneficiary that must be reported
under section 6048(c). Also, if a benefi-
ciary receives a payment from a foreign
trust in exchange for property trans-
ferred to the trust or services rendered
to the trust, and the fair market value of
the payment received exceeds the fair
market value of the property transferred
or services rendered, such excess will be
treated as a distribution to the U.S.
beneficiary that must be reported under
section 6048(c). For example, if a U.S.
beneficiary receives a payment from a
foreign trust purportedly in exchange for
the beneficiary’s performance of ser-
vices as a trustee of the trust, and the
payment exceeds the fair market value
of the services actually performed by
the beneficiary, the excess will be
treated as a distribution to the benefi-
ciary.
The Secretary may suspend or modify
any requirement of this section. Section
6048(d)(4). Reporting is not required
under section 6048(c) with respect to
distributions from trusts that are taxable
as compensation for services rendered,
withinthemeaningofsection
672(f)(2)(B) and the regulations thereun-
der, so long as the recipient of a
distribution from such a trust reports the
distribution as compensation income on
its applicable federal income tax return.
Section 6048(d)(4). Reporting is also not
required under section 6048(c) with re-
spect to distributions from foreign trusts
received by domestic organizations de-
scribed in section 501(c)(3), provided
the organization has a determination
letter from the Service that has not been
revoked recognizing its status as exempt
from income taxation under section
501(a).
A. Loans to U.S. Grantors and U.S.
Beneficiaries
Section 643(i) provides that, except as
provided in regulations, if a foreign trust
directly or indirectly makes a loan of
cash or marketable securities to a U.S.
grantor or U.S. beneficiary of the trust,
the amount of the loan will be treated as
a distribution to that grantor or benefi-
ciary. If such a loan is made to a U.S.
person who is related to a U.S. grantor
or U.S. beneficiary (within the meaning
of section 643(i)(2)(B)), the amount of
the loan will be treated as a distribution
to the related grantor or beneficiary. The
amount of a loan is its issue price, as
determinedunder§ 1.446–2(d)(1),
§ 1.1273–2 or § 1.1274–2 (whichever
is applicable).
For purposes of section 643(i), a loan
of cash will be considered to include an
extension of credit to a person related to
the trust upon the purchase of property
from the trust. Sections 643(i) and
643(a)(7); Rev. Rul. 85–13, 1985–1 C.B.
184, 185. If a trust makes a loan to a
grantor that causes the grantor to be
treated as the owner of a portion of the
trust under section 675(3), the loan will
not be treated as a distribution under
section 643(i), and will not be reportable
under section 6048(c).
Congress intended that Treasury and
the Service would exercise regulatory
authority to create an exception to this
treatment for certain loans. In exercising
this regulatory authority, Congress ex-
pected that Treasury and the Service
would give consideration to 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. 334
(1996).
This notice announces that regulations
will treat such a loan as a distribution
unless the loan is in consideration for a
‘‘qualified obligation’’ from the grantor,
beneficiary or a related person. An obli-
gation is a qualified obligation only if:
(i) The obligation is reduced to writ-
ing by an express written agreement;
(ii) The term of the obligation does
not exceed five years (for purposes of
determining the term of an obligation,
the obligation’s maturity date is the last
possible date that the obligation can be
outstanding under the terms of the obli-
gation);
(iii) All payments on the obligation
are denominated in U.S. dollars;
(iv) The yield to maturity of the
obligation is not less than 100 percent
of the applicable Federal rate and not
greater than 130 percent of the appli-
cable Federal rate (the applicable Fed-
eral rate for an obligation is the appli-
cable Federal rate in effect under section
1274(d) for the day on which the obli-
gation is issued, as published in the
Internal Revenue Bulletin);
(v) The U.S. person extends the pe-
riod for assessment of any income tax
attributable to the loan and any conse-
quential income tax changes for each
year that the obligation is outstanding,
to a date not earlier than three years
after the maturity date of the obligation
issued in consideration for the loan (this
extension is not necessary if the matu-
rity date of the obligation does not
extend beyond the end of the U.S.
person’s taxable year and is paid within
such period); when properly executed
and filed, such an agreement will be
deemed to be consented to by the
Service Center Director or the Assistant
Commissioner (International) for pur-
poses of § 301.6501(c)–1(d); and
(vi) The U.S. person reports the sta-
tus of the obligation, including principal
and interest payments, on Form 3520 for
each year that the obligation is outstand-
ing.
If, while the original obligation is
outstanding, the U.S. grantor or U.S.
beneficiary (or a person related to the
U.S. grantor or U.S. beneficiary) di-
rectly or indirectly issues another obli-
gation to the trust the original obligation
will be deemed to have the maturity
date of any such subsequent obligation
June 23, 1997
281997–25 I.R.B.

in determining whether the term of the
original obligation exceeds the specified
5-year term. In addition, a series of
obligations issued and repaid by the
U.S. grantor or U.S. beneficiary (or a
person related to the U.S. grantor or
U.S. beneficiary) will be treated as a
single obligation of the U.S. grantor or
U.S. beneficiary if the transactions giv-
ing rise to the obligations are structured
with a principal purpose to avoid the
application of this provision.
If an obligation treated as a qualified
obligation subsequently fails to be a
qualified obligation (e.g., a renegotiation
of the terms of the obligation causes the
term of the obligation to exceed five
years), the U.S. grantor or U.S. benefi-
ciary (or related person) will be treated
as receiving a distribution from the trust
in an amount equal to the original
obligation’s adjusted issue price (within
the meaning of § 1.1275–1(b)) plus any
accrued but unpaid qualified stated in-
terest (within the meaning of § 1.1273–
1(c)) as of the date of the subsequent
event that causes the obligation to no
longer be a qualified obligation. If the
maturity date is extended beyond five
years by reason of the issuance of a
subsequent obligation by the U.S.
grantor or U.S. beneficiary (or related
person), the amount of the distribution
will not exceed the issue price of the
subsequent obligation. The subsequent
obligation will be separately tested to
determine if it is a qualified obligation.
Generally, as discussed above, a dis-
tribution resulting from a failed quali-
fied obligation will be deemed to occur
on the date of the subsequent event that
causes the obligation to no longer be a
qualified obligation. However, based on
all facts and circumstances, the district
director may deem the distribution to
have occurred on any date on or after
the issue date of the original obligation.
For example, if at the time the original
obligation was issued the transferor
knew or had reason to know that the
obligation would not be repaid, the
district director could deem the distribu-
tion to have occurred on the issue date
of the original obligation. A demand
loan does not have a specified term and,
therefore, cannot be a ‘‘qualified obliga-
tion.’’ In addition, an annuity contract
cannot be a ‘‘qualified obligation.’’
Section 643(i) applies to any loan of
cash or marketable securities issued by a
foreign trust after September 19, 1995,
whether or not in accordance with a
preexisting arrangement or understand-
ing. For purposes of section 643(i), if an
obligation issued on or before Septem-
ber 19, 1995, is modified after that date,
and the modification is a significant
modification within the meaning of
§ 1.1001–3, the obligation is treated as
if it were issued on the date of the
modification. However, the penalty con-
tained in revised section 6677 will only
apply to the failure to report loan in
consideration for an obligation issued
after August 20, 1996.
B. Beneficiary Statements.
Section 6048(c)(2) provides that any
distribution from a foreign trust, whether
from income or corpus, to a U.S. benefi-
ciary will be treated as an accumulation
distribution includible in the gross in-
come of the distributee if adequate
records are not provided to the Secretary
to determine the proper treatment of the
distribution. An accumulation distribu-
tion from a foreign trust is generally
taxed pursuant to sections 665 through
668. Section 668, as amended by the
Act, generally imposes an interest
charge on distributions of accumulated
income at the rate applicable to general
underpayments of income tax.
A U.S. beneficiary will not be re-
quired to treat the entire distribution as
an accumulation distribution if the ben-
eficiary obtains from the foreign trust
either a Foreign Grantor Trust Benefi-
ciary Statement (see part 5 of the For-
eign Grantor Trust Information State-
ment as described in Section IV.A. of
this notice) or a Foreign Nongrantor
Trust Beneficiary Statement (described
below) with respect to the distribution.
If a U.S. beneficiary cannot obtain such
a beneficiary statement from the trust, it
is expected that Form 3520 will allow
the U.S. beneficiary to avoid treating the
entire amount as an accumulation distri-
bution if the U.S. beneficiary can pro-
vide certain information regarding actual
distributions from the trust for the prior
three years. Under this ‘‘default treat-
ment,’’ the U.S. beneficiary will be
allowed to treat a portion of the distri-
bution as a distribution of current in-
come based on the average of distribu-
tions from the prior three years, with
only the excess amount of the distribu-
tion treated as an accumulation distribu-
tion (and therefore subject to the interest
charge of section 668). Form 3520 will
describe this default treatment option in
greater detail. A U.S. beneficiary’s use
of this default treatment will not affect
calculations by the trust (e.g., calcula-
tions of the trust’s distributable net
income under section 643(a)).
To completely avoid default treat-
ment, a beneficiary receiving a distribu-
tion from a trust must obtain either a
Foreign Grantor Trust Beneficiary State-
ment or a Foreign Nongrantor Trust
Beneficiary Statement with respect to
the portion of the trust from which the
beneficiary received the distribution.
The beneficiary must attach a copy of
the relevant beneficiary statement(s) to
his or her Form 3520.
If a U.S. beneficiary receives a com-
plete Foreign Grantor Trust Beneficiary
Statement with respect to a distribution
during the taxable year, the beneficiary
should treat the distribution as a gift
from the owner of the trust, and there-
fore, generally as nontaxable. If a U.S.
beneficiary receives a complete Foreign
Nongrantor Trust Beneficiary Statement
that provides adequate information to
determine the U.S. tax consequences of
the distribution from the foreign trust,
the beneficiary may determine the tax
consequences of the distribution on an
actual basis and avoid the default treat-
ment. The U.S. beneficiary may deter-
mine the tax consequences of the distri-
butioninaccordancewiththe
information in the beneficiary statement
only if the beneficiary has a copy of the
relevant beneficiary statement(s) at the
time he or she files his or her income
tax return. A U.S. beneficiary may not
rely on a beneficiary statement if he or
she knows or has reason to know that
the information contained in the state-
ment is incorrect.
A Foreign Nongrantor Trust Benefi-
ciary Statement must contain the follow-
ing information and be set forth in
substantially the following format:
FOREIGN NONGRANTOR TRUST
BENEFICIARY STATEMENT
1. Foreign Trust Background Informa-
tion
A. Name, address and employer iden-
tification number (‘‘EIN’’) of the
trust
B. Name, address and taxpayer iden-
tification number (‘‘TIN’’) (if any)
of the trustee furnishing this state-
ment
C. Method of accounting used by the
trust (cash or accrual)
D. The taxable year of the foreign
trust to which the statement ap-
plies
E. A statement identifying whether
any grantor of the trust was a
partnership or foreign corporation.
If so, attach an explanation of the
relevant facts.
1997–25 I.R.B.
29June 23, 1997

2. U.S. Beneficiary Information
A. Name, address and TIN of U.S.
Beneficiary
B. A description of the property (in-
cludingcash)distributedor
deemed distributed to the U.S.
person during the taxable year,
and the fair market value of the
property distributed.
3. Sufficient information to enable the
U.S. beneficiary to establish the ap-
propriate treatment of any distribu-
tion or deemed distribution for U.S.
tax purposes. Normally, information
similar to the information required by
Schedule K–1 of Form 1041 would
be adequate for this purpose. If rel-
evant, the trust must also provide the
beneficiary with adequate information
for the beneficiary to complete Forms
4970, 5471, and 8621.
4. Representation on Access to Books
and Records
A. A statement that, upon request, the
trust will permit either the Service
or the U.S. beneficiary to inspect
and copy the trust’s permanent
books of account, records, and
such other documents that are nec-
essary to establish the appropriate
treatment of any distribution or
deemed distribution for U.S. tax
purposes; or
B. The name, address and EIN of the
trust’s U.S. agent.
Regarding the procedures for the foreign
trust to appoint a U.S. agent, see Section
IV.B. of this notice.
Section VI. U.S. Recipients of
Foreign Gifts.
The Act creates new reporting re-
quirements under section 6039F for U.S.
persons (other than an organization de-
scribed in section 501(c) and exempt
from tax under section 501(a)) that
receive large gifts (including bequests)
from foreign persons after August 20,
1996. Generally, if the value of the
aggregate foreign gifts received by a
U.S. person during any taxable year
exceeds $10,000, the U.S. recipient must
provide such information as the Secre-
tary prescribes. Section 6039F(a). The
term ‘‘foreign gift’’ means any amount
received from a person other than a
United States person that the recipient
treats as a gift or bequest, but does not
include any qualified transfer within the
meaning of section 2503(e)(2) (relating
to certain transfers for educational or
medical expenses) or any distribution
properly reported under section 6048(c).
Section 6039F(b).
Reporting under section 6039F will
be required on an annual basis on Form
3520. It is expected that Form 3520 will
only require the reporting of general
information necessary to determine
whether a purported gift is properly
classified as a gift or income. For
example, limited information will be
required regarding whether the foreign
donor is an individual, corporation, part-
nership, or estate, and whether the for-
eign donor was acting as a nominee or
intermediary for another person. Also, a
brief description of the property re-
ceived will be required. It is expected
that the form will not require informa-
tion on the identity of the foreign donor
unless the foreign donor is a partnership
or foreign corporation, or is acting as a
nominee or intermediary for such an
entity. However, the U.S. donee may be
required to provide additional informa-
tion, including the identity of the donor,
to the IRS upon request.
If a gift is not reported on Form
3520, the tax consequences of the re-
ceipt of the gift shall be determined by
the Secretary. Section 6039F(c)(1)(A).
In addition, the recipient is subject to a
penalty equal to 5 percent of the value
of the gift for each month in which the
gift is not reported (not to exceed 25
percent). Section 6039F(c)(1)(B). Re-
porting is only required under section
6039F for gifts actually or construc-
tively received by a U.S. person. Fur-
thermore, reporting is required under
section 6039F only if the U.S. person
knows or has reason to know that the
donor is a foreign person.
A. Application of section 6039F to
distributions from and contributions
to trusts
If a foreign trust makes a distribution
to a U.S. beneficiary, the beneficiary
should report the amount as a distribu-
tion from the trust under section
6048(c), rather than as a gift under
section 6039F. Contributions of property
by foreign persons to domestic or for-
eign trusts that have U.S. beneficiaries
are not reportable by the U.S. beneficia-
ries under section 6039F unless the U.S.
persons are treated as receiving the
contribution in the year of the transfer
(e.g., the beneficiary is an owner of that
portion of the trust under section 678).
A domestic trust that is not treated as
owned by another person is required to
report the receipt of a contribution to
the trust from a foreign person as a gift
under section 6039F. A domestic trust
that is treated as owned by a foreign
person is not required to report the
receipt of a contribution to the trust
from a foreign person. However, a U.S.
person should report the receipt of a
distribution from such a trust as a gift
from a foreign person under section
6039F.
B. Reporting thresholds
For purposes of determining whether
the receipt of a gift from a foreign
person is reportable, Treasury and the
Service have determined that different
reporting thresholds are warranted for
gifts received from nonresident alien
individuals, foreign estates, foreign part-
nerships, and foreign corporations. Ac-
cordingly, it is expected that Form 3520
will apply the following reporting
thresholds and requirements:
1. Gifts from foreign individuals
and foreign estates.
A U.S. person is required to report
the receipt of gifts from a nonresident
alien or foreign estate only if the aggre-
gate amount of gifts from that nonresi-
dent alien or foreign estate exceeds
$100,000 during the taxable year. Once
the $100,000 threshold has been met, it
is expected that Form 3520 will require
the donee to separately identify each gift
in excess of $5,000, but will not require
the identification of the donor.
2. Purported gifts from foreign
corporations or foreign part-
nerships
A U.S. person is required to report
the receipt of purported gifts from for-
eign corporations and foreign partner-
ships if the aggregate amount of pur-
ported gifts from all such entities
exceeds $10,000 (as modified by cost-
of-living adjustments under section
6039F(d)) during the taxable year.
Once the $10,000 threshold has been
met, it is expected that Form 3520 will
require the donee to separately identify
all purported gifts from a foreign corpo-
ration or foreign partnership, including
the identity of the donor entity. Pur-
ported gifts from foreign corporations or
foreign partnerships are subject to
recharacterization under new section
672(f)(4).
3. Aggregation rules
To calculate if a U.S. person has
received gifts during the taxable year
from a particular foreign person in ex-
cess of the relevant threshold, the U.S.
person must aggregate gifts from foreign
persons that he knows or has reason to
June 23, 1997
301997–25 I.R.B.

know are related, within the meaning of
section 643(i)(2)(B), whether or not the
gifts from a related person would inde-
pendently exceed the threshold for re-
porting of gifts from that person. If the
relevant reporting threshold is exceeded,
it is expected that Form 3520 will
require the donee to separately identify
each aggregated gift in excess of $5,000
from a nonresident alien or foreign
estate, but will not require the identifica-
tion of such a donor, and to separately
identify each aggregated purported gift
from a foreign corporation or foreign
partnership, including the identity of the
donor entity.
Example 14. Gifts from related foreign individu-
als.A is a U.S. citizen who is married to B. B
and all of B’s brothers, C, D, and E, are not
U.S. persons. In a single taxable year, B makes
a gift of $90,000 to A, C makes a gift of
$40,000 to A, D makes two gifts to A (one of
$4,000 and one of $3,000), and E makes a gift
of $4,000 to A. For that taxable year, A must
report the receipt of $141,000 in gifts from
foreign persons. A must separately identify the
$90,000 gift from B, because B and his brothers
gave gifts in excess of $100,000. A must also
separately identify the $40,000 gift from C,
because C and his brothers gave gifts in excess
of $100,000. A must identify the receipt of
$7,000 in total gifts from D because D and his
brothers gave gifts in excess of $100,000, but is
not required to separately list information about
each transaction because no gift is in excess of
$5,000. A is not required to separately identify
transaction information about E’s gifts, because
gifts from foreign individuals of less than
$5,000 are not required to be separately identi-
fied. Because B, C, and D are individuals, A
need not identify these donors when reporting
the transactions.
Example 15. Gifts from related foreign indi-
vidual and corporation.A is a U.S. citizen who
is married to B. B is the sole shareholder of FC,
a foreign corporation. B is not a U.S. person. In
a taxable year, B makes a gift of $6,000 to A,
and FC makes a purported gift of $8,000 to A.
Because A knows or has reason to know that B
and FC are related, A must aggregate gifts from
B and FC ($14,000). Although the $14,000
aggregate amount deemed received from B does
not exceed the $100,000 threshold with respect
to gifts from nonresident aliens, the $14,000
aggregate amount deemed received from FC
exceeds the $10,000 threshold with respect to
gifts from foreign corporations. Accordingly, A
must separately identify each gift from B and
FC, and must provide identifying information
about FC because it is a foreign corporation.
Section VII. Penalties for Failure to
Provide Information
Substantial penalties under section
6677 and 6039F(c) apply if information
required by section 6048 or section
6039F is not reported or is reported
inaccurately. Generally, the penalty de-
pends on the ‘‘gross value’’ or ‘‘gross
amount’’ of the property involved.
In determining the gross value or
gross amount of property, the valuation
principles of section 2512 and the regu-
lations thereunder must be used, without
regard to any prohibitions or restrictions
on a person’s interest in the property.
Penalties under sections 6677(a) and
6039F will not be imposed if the failure
to file was due to reasonable cause and
not willful neglect. A taxpayer will not
have reasonable cause merely because a
foreign country would impose a civil or
criminal penalty on the trustee (or other
person) for disclosing the required infor-
mation. Section 6677(d). Also, refusal
on the part of a foreign trustee to
provide information for any other rea-
son, including difficulty in producing
the required information or provisions in
the trust instrument that prevent the
disclosure of required information, will
not be considered reasonable cause.
The penalties under section 6677 ap-
ply only to the extent that the transac-
tion is not reported or is reported inac-
curately. Thus, if a U.S. person transfers
property worth $1,000,000 to a foreign
trust, but reports only $400,000 of that
amount, penalties may be imposed only
on the unreported $600,000.
Moreover, if the penalties under both
sections 6677 and 1494(c) could apply
to the failure to report the transfer of
property to a foreign trust, the penalty
under section 6677 will be assessed and
will reduce any penalty otherwise im-
posed under section 1494(c).
If the penalties under both sections
6039F and section 6677 could apply to
the failure to report a distribution from a
foreign trust treated as a gift, the penalty
under section 6677 will be assessed, and
will reduce any penalty otherwise im-
posed under section 6039F.
Section VIII. Transition Rules
A. Filing dates
Generally, to avoid penalties under
sections 1494(c), 6039F, or 6677, Form
3520 must be filed as an attachment to
the taxpayer’s income tax return by the
due date (including extensions) of the
taxpayer’s income tax return. In addi-
tion, unless otherwise provided, a copy
of Form 3520 must be sent to the
Philadelphia Service Center by the same
date. However, with respect to Form
3520 for the taxable year that includes
August 20, 1996 (the ‘‘1996 Form
3520’’), no such penalties will be im-
posed if the taxpayer files the 1996
Form 3520 on or before November 15,
1997, with the Philadelphia Service
Center. Alternatively, no section 1494(c),
6039F, or 6677 penalties will be im-
posed for a failure to file Form 3520 if
the taxpayer files the 1996 Form 3520
by the due date (including extensions)
for the taxpayer’s income tax return for
the first taxable year beginning on or
after January 1, 1997, provided the
taxpayer’s income tax return for the tax
year that includes August 20, 1996,
reflects the information contained in the
1996 Form 3520. Taxpayers who file a
Form 3520 that is not revised as de-
scribed herein will not be considered to
have complied with the information re-
porting requirements of revised sections
1494 and 6048.
Generally, no section 6677 penalty
will be assessed on the U.S. owner of a
foreign trust for a failure to file Form
3520–A if the foreign trust files Form
3520–A with the Philadelphia Service
Center by the fifteenth day of the third
month following the end of the trust’s
taxable year (or later, if pursuant to an
extension of time to file). However, with
respect to Form 3520–A for the taxable
year that includes August 20, 1996 (the
‘‘1996 Form 3520–A’’), no such penalty
will be imposed if the foreign trust files
the 1996 Form 3520–A on or before
October 15, 1997. Alternatively, no sec-
tion 6677 penalty will be imposed if the
foreign trust files the 1996 Form
3520–A by the due date (including ex-
tensions) for the Form 3520–A for the
first taxable year beginning on or after
January 1, 1997, provided the U.S.
owner reflects the information contained
in the 1996 Form 3520–A on the own-
er’s income tax return for the tax year
that includes August 20, 1996.
Example 16. Time to report receipt of 1996 trust
distributions.A, a U.S. citizen whose taxable
year is the calendar year, receives a distribution
from a foreign trust on November 1, 1996. A
reports the distribution as ordinary income
(without an interest charge under section 668)
on his 1996 income tax return, which is filed on
June 15, 1997. No section 6677 penalty will be
imposed if A files a 1996 Form 3520 by
November 15, 1997. Alternatively, A will be
allowed to delay filing his 1996 Form 3520
until he files his 1997 income tax return (by
April 15, 1998, or a later date if the date for
filing the return is extended), but only if A
reflects the correct information contained in the
Form 3520 on his 1996 income tax return.
Thus, if the 1996 Form 3520 indicates that the
distribution should be treated as ordinary in-
come without an interest charge under section
668, A may file the 1996 Form 3520 by April
15, 1998, and need not amend his 1996 income
tax return. However, if the Form 3520 indicates
that the distribution is subject to an interest
charge under section 668, and A files the 1996
Form 3520 on April 15, 1998, A will be liable
1997–25 I.R.B.31June 23, 1997

for the section 6677 penalty unless A also
amends his 1996 income tax return to reflect the
interest charge.
B. Interaction with Notice 96–65
As described in Notice 96–65,
1996–52 I.R.B. 28, the Act amended
section 7701(a)(30) and (31) to set forth
new criteria that must be met for a trust
to qualify as a domestic trust. Certain
domestic trusts will be treated as mak-
ing section 1491 transfers on January 1,
1997, as a result of becoming foreign
trusts under the new law. If a domestic
trust relies in good faith on Notice
96–65 to continue to file tax returns as a
domestic trust, but is unable to meet the
new domestic trust criteria by the end of
the two-year period set forth in the
notice, no U.S. person (transferor,
owner, or beneficiary) will be required
to treat the trust as a foreign trust and
thereby report transfers to or distribu-
tions from that trust on Form 3520
during the two-year period. Further, the
trust will not be required to file Form
3520-A for that two-year period. Finally,
no penalty will be imposed under sec-
tions 1494(c), 6039F, or 6677 for failure
to report transactions with the trust
during that period, or for the trust
failing to file Form 3520–A for that
period. However, if the trust has not
successfully met the new domestic trust
criteria by the expiration of the two-year
period, penalties under sections 1494(c),
6039F, or 6677 will be imposed unless
the relevant Forms 3520 and 3520–A
reporting all transactions during that
two-year period are filed within 90 days
after the expiration of the two-year
period.
C. Domestic Trusts with Foreign
Activities
Section 6048(d)(2) provides that, to
the extent provided in regulations, a
domestic trust may be treated as a
foreign trust for purposes of sections
6048 and 6677 if the trust has substan-
tial activities, or holds substantial prop-
erty, outside the United States. Treasury
and the Service are studying the appro-
priate scope of section 6048(d)(2). Until
further guidance is issued, domestic
trusts will not be treated as foreign
trusts pursuant to that section.
EFFECT ON OTHER GUIDANCE
Section II.B.4. of Notice 97–18,
1997–10 I.R.B. 35, which provides that
a U.S. person who makes a transfer to a
foreign trust may satisfy that person’s
reporting requirements under section
1494 solely by complying with the
reportingrequirementsofsection
6048(a), is hereby modified.
PUBLIC COMMENT INVITED
Treasury and the Service invite com-
ments on the guidance provided by this
notice. Written comments should be sub-
mitted by August 1, 1997 to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attention: CC:CORP:T:R:
(Notice 97–34)
Room 5228
Washington, DC 20044
or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax
regs/comments.html.
The comments submitted will be
available for public inspection and copy-
ing.
PAPERWORK REDUCTION ACT
The collections of information con-
tained in this notice have been reviewed
and approved by the Office of Manage-
ment and Budget for review in accor-
dance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control
number 1545–1538.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collections of information in this
notice are in the sections III, IV, V, and
VI. This information is required by the
IRS to assure compliance with the new
provisions of the Small Business Job
Protection Act of 1996. The likely re-
spondents are individuals, business or
other for-profit institutions, and not-for-
profit institutions.
The estimated total annual reporting
burden is 11,000 hours. The estimated
average annual burden per respondent
varies from .50 hours to 2 hours, de-
pending on individual circumstances,
with an estimated average of 1 hour and
3 minutes. The estimated number of
respondents is 10,500. The estimated
annual frequency of responses is annu-
ally.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
Leslie Cracraft, formerly of the Office
of Associate Chief Counsel (Interna-
tional). For further information regard-
ing sections 1491, 1494, 6039F, 6048
and 6677, contact Michael Kirsch on
(202) 622–3860. For further information
on section 679, contact Willard Yates on
(202) 622–3870. For further information
regarding sections 7701(a)(30) and (31),
contact James Quinn on (202) 622–
3060. For further information regarding
section 672(f), contact Grace Fleeman
on (202) 622–3850. These contact num-
bers are not toll-free calls.
Weighted Average Interest Rate
Update
Notice 97–35
Notice 88–73 provides guidelines for
determining the weighted average inter-
est rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of § 412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for May
1997 is 6.94 percent.
The following rates were determined
for the plan years beginning in the
month shown on next page.
June 23, 1997
321997–25 I.R.B.

MonthYear
Weighted
Average
90% to 107%
Permissible
Range
90% to 110%
Permissible
Range
June19976.876.18 to 7.356.18 to 7.56
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans
Division. For further information regard-
ing this notice, call (202) 622–6076
between 2:30 and 4:00 p.m. Eastern
time (not a toll-free number). Ms.
Prestia’s number is (202) 622–7377
(also not a toll-free number).
1997–25 I.R.B.33June 23, 1997

Part IV. Items of General Interest
Foundations Status of Certain
Organizations
Announcement 97–62
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Academy of Sacred Music, Washington,
DC
American International Health Alliance,
Inc., Washington, DC
Apalachee Bay Volunteer Fire
Department, Inc., Crawfordville, FL
Arts and Crafts Guild of Macon County,
Inc., Lafayette, TN
Asociacion De Vecinos Para Servicios
Para Socorro T.U., El Paso, TX
Atlanta Area Deming Study Group Inc.,
Chamblee, GA
Catholic Faith Alive Inc., Silver Spring,
MD
Clean Florida Keys Inc., Key West, FL
Cross of Christ Ministries Inc., Tulsa,
OK
Belmont Rotary Senior Housing
Program, Inc., Belmont, CA
Better Living All Concerned, Los
Angeles, CA
Brisbane Educational Support Team,
Brisbane, CA
Calabasas Residential Treatment Center,
West Hills, CA
Central Health Initiative Inc., Mt.
Pleasant, MI
Colorado Consortium for Experiential
Education, Greeley, CO
Columbia River Institute, Portland, OR
Columbia Valley Gardens PTA, Tacoma,
WA
Columbia Youth Soccer Association,
Inc., Lake City, FL
Columbus Grove Gift Corporation,
Tucson, AZ
Common Ground, Charlotte, NC
Common Ground Ministries,
Waxahachie, TX
Commonwealth of Independent States
American Alliance, Inc., Highland
Park, IL
Esther Ministries Eternally Settled
Through Honoring Every Righteous,
Philadelphia, PA
Forum for a Common Agenda, Reno,
NV
Friends for Excellence in Education,
Mendocino, CA
Friends of Albuquerque Gymnastics,
Albuquerque, NM
Friends of Al Pi Darko Charitable Trust,
Brooklyn, NY
Friends of Blanches Park, San
Francisco, CA
Friends of Brown Band, Inc., New York,
NY
Friends of Mental Health, El Centro,
CA
Friends of Petrified Sea Gardens,
Saratoga Springs, NY
House of Prayer Ministries Inc., Lake
Placid, FL
Housing and Services, Bangor, ME
International Institute of Molecular
Physiology, Inc., Cambridge, MA
International Sisterhood, Los Angeles,
CA
Lincoln-Woodstock Housing
Opportunities, Inc., N. Woodstock,
NH
Maclaren Foundation, Marblehead, MA
Majority Peoples Fund, New York, NY
Malta Human Services Foundation, New
York, NY
Mariachi O, Alhambra, CA
North Side Family Center, St. Louis,
MO
Ocean-Five Cities Swimming Pool
Foundation, Oceano, CA
Oregon Area General Service Assembly
of AA, Bend, OR
Parent Teacher Student Organization of
Mountain View Elementary School,
Shelton, WA
Rose Marie Wameling Ministries, Inc.,
Tulsa, OK
Rotary Club of Carbondale, Carbondale,
IL
Rotary Club of Central Marin
Foundation, Ross, CA
Rotary Foundation of Lake Forest,
Irvine, CA
Santas Cause, Oak View, CA
Shelter Institute of America, Springfield,
IL
Special Activities Unit for the Aged,
Columbus, OH
Strongsville High School Swim Team
Boosters, Strongsville, OH
Student Parent Support Services Corp.,
Schenevus, NY
United Dyslexia Association, Elko, NV
University City Development Corp.,
Detroit, MI
Veterans Care Project of Calif., Inc.,
Grand Terrace, CA
Vinita Senior Citizens Center, Vinita,
OK
Visions for Youth, Santa Rosa, CA
Vista Educational Media, Redondo
Beach, CA
Western North Carolina Sports Inc.,
Asheville, NC
West Lane Baseball Association,
Florence, OR
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and con-
tributors may thereafter rely upon such
ruling or determination letter as pro-
vided in section 1.509(a)–7 of the
Income Tax Regulations. It is not
the practice of the Service to announce
such revised classification of foundation
status in the Internal Revenue Bulletin.
June 23, 1997341997–25 I.R.B.

Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or en-
rolled actuary, in order to avoid the
institution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue Ser-
vice, may offer his consent to suspension
from such practice. The Director of
Practice, in his discretion, may suspend
an attorney, certified public accountant,
enrolled agent, or enrolled actuary in
accordance with the consent offered.
Attorneys, certified public accoun-
tants, enrolled agents, and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service, the
Director of Practice will announce in the
Internal Revenue Bulletin the names and
addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent, or enrolled actuary so
suspended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Bert Jr., Earol L.Severna Park, MDCPAFebruary 1, 1997 to July 31, 1997
Bernard, Lucius P.Corte Medera, CAAttorneyMarch 10, 1997 to March 9, 2000
Parker, David A.Willmar, MNCPAApril 13, 1997 to April 12, 2000
Sheldon, DonaldNashville, TNCPAApril 24, 1997 to September 23, 1997
Grandt, Lawrence E.Barrington, ILCPAApril 24, 1997 to January 23, 1998
Reese, Rex E.Alexandria, VAAttorneyMay 1, 1997 to April 30, 1999
Glasl, John E.Emporium, PACPAMay 1, 1997 to September 30, 1997
Coulter, Diane E.Monroeville, PACPAMay 1, 1997 to April 30, 1998
Groves, J. RandallMatthews, NCAttorneyMay 1, 1997 to October 31, 1998
Lupiloff, StevenBloomfield, MIAttorneyIndefinite from May 6, 1997
Wilson, Robert L.Spring Hill, FLCPAMay 7, 1997 to October 6, 1998
Sloop, Wayne F.Winston-Salem, NCCPAIndefinite from May 7, 1997
Wilnewic, Mark V.Crystal Lake, ILCPAMay 8, 1997 to November 7, 1997
Lenihan, MichaelCincinnati, OHCPAMay 14, 1997 to July 13, 1997
Bergmann, FrederickTampa, FLCPAJune 1, 1997 to May 30, 1999
Farmer, CraigArlington Hghts, ILCPAJune 1, 1997 to August 31, 1997
Denny, RichardPine Bluff, ARCPAJune 1, 1997 to July 31, 1997
1997–25 I.R.B.
35June 23, 1997

Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
who, within five years, from the date
the expedited proceeding is instituted,
(1) has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for cause;
or (2) has been convicted of any crime
under title 26 of the United States Code
or, of a felony under title 18 of the
United States Code involving dishonesty
or breach of trust.
Attorneys, certified public accoun-
tants, enrolled agents, and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by, or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Service,
the Director of Practice will announce in
the Internal Revenue Bulletin the names
and addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary, and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent, or enrolled actuary so
suspended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding pro-
visions of the applicable regulations:
NameAddressDesignationDate of Suspension
Dally, Candace L.Winston-Salem, NCCPAIndefinite from April 16, 1997
Mellor, Gary D.Norton, KSAttorneyIndefinite from April 16, 1997
Gottesman, MiltonNew York, NYCPAIndefinite from April 16, 1997
Wiener, JamesGermantown, NYAttorneyIndefinite from April 16, 1997
Lunblad, GeraldSacramento, CACPAIndefinite from April 16, 1997
Driscoll, Robert J.Denver, COAttorneyIndefinite from April 16, 1997
Alico, Kenneth N.Orchard Park, NYCPAIndefinite from April 16, 1997
Mack, Roland G.Hyattsville, MDCPAIndefinite from May 1, 1997
June 23, 1997
361997–25 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplifieddescribes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is ampli-
fied. (Compare withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an es-
sential difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered de-
terminative with respect to future trans-
actions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted be-
cause of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regu-
lations subsequently adopted.
Revokeddescribes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Supersededdescribes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previ-
ously published over a period of time in
separate rulings. If the new ruling does
more than restate the substance of a
prior ruling, a combination of terms is
used. For example,modifiedandsuper-
sededdescribes a situation where the
substance of a previously published rul-
ing is being changed in part and is
continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is su-
perseded.
Supplementedis used in situations in
which a list, such as a list of the names
of countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published in
the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
37

Numerical Finding List
1
Bulletins 1997–1 through 1997–24
Announcements:
97–1, 1997–2 I.R.B.63
97–2, 1997–2 I.R.B.63
97–3, 1997–2 I.R.B.63
97–4, 1997–3 I.R.B.14
97–5, 1997–3 I.R.B.15
97–6, 1997–4 I.R.B.11
97–7, 1997–4 I.R.B.12
97–8, 1997–4 I.R.B.12
97–9, 1997–5 I.R.B.27
97–10, 1997–10 I.R.B.64
97–11, 1997–6 I.R.B.19
97–12, 1997–7 I.R.B.55
97–13, 1997–8 I.R.B.38
97–14, 1997–8 I.R.B.38
97–15, 1997–9 I.R.B.23
97–16, 1997–9 I.R.B.23
97–17, 1997–9 I.R.B.23
97–18, 1997–10 I.R.B.67
97–19, 1997–10 I.R.B.68
97–20, 1997–11 I.R.B.22
97–21, 1997–11 I.R.B.23
97–22, 1997–12 I.R.B.47
97–23, 1997–11 I.R.B.23
97–24, 1997–11 I.R.B.24
97–25, 1997–12 I.R.B.47
97–26, 1997–12 I.R.B.48
97–27, 1997–13 I.R.B.30
97–28, 1997–14 I.R.B.15
97–29, 1997–14 I.R.B.16
97–30, 1997–14 I.R.B.16
97–31, 1997–14 I.R.B.16
97–32, 1997–14 I.R.B.17
97–33, 1997–15 I.R.B.8
97–34, 1997–15 I.R.B.8
97–35, 1997–15 I.R.B.9
97–36, 1997–15 I.R.B.10
97–37, 1997–15 I.R.B.10
97–38, 1997–15 I.R.B.10
97–39, 1997–16 I.R.B.27
97–40, 1997–16 I.R.B.28
97–41, 1997–16 I.R.B.28
97–42, 1997–17 I.R.B.19
97–43, 1997–17 I.R.B.19
97–44, 1997–17 I.R.B.19
97–45, 1997–17 I.R.B.20
97–46, 1997–18 I.R.B.53
97–47, 1997–19 I.R.B.94
97–48, 1997–20 I.R.B.8
97–49, 1997–20 I.R.B.8
97–50, 1997–20 I.R.B.8
97–51, 1997–20 I.R.B.9
97–52, 1997–21 I.R.B.22
97–53, 1997–21 I.R.B.22
97–54, 1997–22 I.R.B.23
97–55, 1997–22 I.R.B.23
97–56, 1997–23 I.R.B.17
97–57, 1997–23 I.R.B.18
97–58, 1997–24 I.R.B.13
97–59, 1997–24 I.R.B.13
97–60, 1997-24 I.R.B.14
Notices:
97–1, 1997–2 I.R.B.22
97–2, 1997–2 I.R.B.22
97–3, 1997–1 I.R.B.8
97–4, 1997–2 I.R.B.24
97–5, 1997–2 I.R.B.25
97–6, 1997–2 I.R.B.26
Notices—Continued
97–7, 1997–1 I.R.B.8
97–8, 1997–4 I.R.B.7
97–9, 1997–2 I.R.B.35
97–10, 1997–2 I.R.B.41
97–11, 1997–2 I.R.B.50
97–12, 1997–3 I.R.B.11
97–13, 1997–6 I.R.B.13
97–14, 1997–8 I.R.B.23
97–15, 1997–8 I.R.B.23
97–16, 1997–9 I.R.B.15
97–17, 1997–10 I.R.B.34
97–18, 1997–10 I.R.B.35
97–19, 1997–10 I.R.B.40
97–20, 1997–10 I.R.B.52
97–21, 1997–11 I.R.B.9
97–22, 1997–13 I.R.B.9
97–23, 1997–14 I.R.B.8
97–24, 1997–16 I.R.B.6
97–25, 1997–16 I.R.B.8
97–26, 1997–17 I.R.B.6
97–27, 1997–17 I.R.B.7
97–28, 1997–18 I.R.B.45
97–29, 1997–20 I.R.B.6
97–30, 1997–20 I.R.B.6
97–31, 1997–21 I.R.B.5
97–32, 1997–21 I.R.B.8
97–33, 1997–22 I.R.B.22
Proposed Regulations:
REG–209332–80, 1997–14 I.R.B.9
REG–209040–88, 1997–7 I.R.B.34
REG–209121–89, 1997–11 I.R.B.15
REG–208288–90, 1997–11 I.R.B.14
REG–209494–90, 1997–8 I.R.B.24
REG–208172–91, 1997–10 I.R.B.59
REG–209672–93, 1997–6 I.R.B.15
REG–209709–94 1997–13 I.R.B.12
REG–209729–94, 1997–11 I.R.B.19
REG–209762–95, 1997–3 I.R.B.12
REG–209785–95, 1997–18 I.R.B.46
REG–209817–96, 1997–7 I.R.B.41
REG–209824–96, 1997–11 I.R.B.19
REG–254394–96, 1997–14 I.R.B.14
REG–209823–96, 1997–18 I.R.B.47
REG–209828–96, 1997–6 I.R.B.15
REG–209830–96, 1997–15 I.R.B.7
REG–209834–96, 1997–4 I.R.B.9
REG–209837–96, 1997–23 I.R.B.8
REG–209839–96, 1997–8 I.R.B.26
REG–242996–96, 1997–9 I.R.B.18
REG–246018–96, 1997–8 I.R.B.30
REG–247678–96, 1997–6 I.R.B.17
REG–247862–96, 1997–8 I.R.B.32
REG–248770–96, 1997–8 I.R.B.33
REG–249819–96, 1997–7 I.R.B.50
REG–252231–96, 1997–7 I.R.B.52
REG–252233–96, 1997–9 I.R.B.19
REG–252665–96, 1997–12 I.R.B.46
REG–253578–96, 1997–19 I.R.B.93
REG–105299–97, 1997–23 I.R.B.8
Public Law:
105–2, 1997–18 I.R.B.14
Railroad Retirement Quarterly Rate:
1997–21 I.R.B.4
Revenue Procedures:
97–1, 1997–1 I.R.B.11
97–2, 1997–1 I.R.B.64
97–3, 1997–1 I.R.B.84
97–4, 1997–1 I.R.B.96
Revenue Procedures—Continued
97–5, 1997–1 I.R.B.132
97–6, 1997–1 I.R.B.153
97–7, 1997–1 I.R.B.185
97–8, 1997–1 I.R.B.187
97–9, 1997–2 I.R.B.56
97–10, 1997–2 I.R.B.59
97–11, 1997–6 I.R.B.13
97–12, 1997–4 I.R.B.7
97–13, 1997–5 I.R.B.18
97–14, 1997–5 I.R.B.20
97–15, 1997–5 I.R.B.21
97–16, 1997–5 I.R.B.25
97–17, 1997–9 I.R.B.15
97–18, 1997–10 I.R.B.53
97–19, 1997–10 I.R.B.55
97–20, 1997–11 I.R.B.10
97–21, 1997–12 I.R.B.44
97–22, 1997–13 I.R.B.9
97–23, 1997–17 I.R.B.7
97–24, 1997–16 I.R.B.10
97–24A, 1997–20 I.R.B.7
97–25, 1997–17 I.R.B.8
97–26, 1997–17 I.R.B.17
97–27, 1997–21 I.R.B.10
97–28, 1997–23 I.R.B.9
97–29, 1997–24 I.R.B.9
Revenue Rulings:
97–1, 1997–2 I.R.B.10
97–2, 1997–2 I.R.B.7
97–3, 1997–2 I.R.B.5
97–4, 1997–3 I.R.B.6
97–5, 1997–4 I.R.B.5
97–6, 1997–4 I.R.B.4
97–7, 1997–5 I.R.B.14
97–8, 1997–7 I.R.B.4
97–9, 1997–9 I.R.B.4
97–10, 1997–10 I.R.B.31
97–11, 1997–10 I.R.B.5
97–12, 1997–11 I.R.B.5
97–13, 1997–16 I.R.B.4
97–14, 1997–11 I.R.B.5
97–15, 1997–12 I.R.B.42
97–16, 1997–13 I.R.B.4
97–17, 1997–14 I.R.B.5
97–18, 1997–15 I.R.B.4
97–19, 1997–18 I.R.B.11
97–20, 1997–19 I.R.B.4
97–21, 1997–18 I.R.B.8
97–22, 1997–20 I.R.B.5
97–23, 1997–22 I.R.B.18
97–24, 1997–22 I.R.B.17
97–25, 1997–23 I.R.B.4
97–26, 1997–24 I.R.B.4
Social Security Domestic Coverage Threshold:
1997–9, I.R.B.17
Tax Conventions:
1997–17 I.R.B.5
Treasury Decisions:
8688, 1997–3 I.R.B.7
8689, 1997–3 I.R.B.9
8690, 1997–5 I.R.B.5
8691, 1997–5 I.R.B.16
8692, 1997–3 I.R.B.4
8693, 1997–6 I.R.B.9
8694, 1997–6 I.R.B.11
8695, 1997–4 I.R.B.5
8696, 1997–6 I.R.B.4
8697, 1997–2 I.R.B.11
1
See footnote at end of list.
38

Numerical Finding List—Continued
Bulletins 1997–1 through 1997–24
Treasury Decisions—Continued
8698, 1997–7 I.R.B.29
8699, 1997–6 I.R.B.4
8700, 1997–7 I.R.B.5
8701, 1997–7 I.R.B.23
8702, 1997–8 I.R.B.4
8703, 1997–8 I.R.B.18
8704, 1997–8 I.R.B.12
8705, 1997–8 I.R.B.16
8706, 1997–9 I.R.B.11
8707, 1997–7 I.R.B.17
8708, 1997–10 I.R.B.14
8709, 1997–9 I.R.B.5
8710, 1997–13 I.R.B.4
8711, 1997–12 I.R.B.35
8712, 1997–12 I.R.B.4
8713, 1997–14 I.R.B.4
8714, 1997–15 I.R.B.5
8715, 1997–18 I.R.B.5
8716, 1997–19 I.R.B.5
8717, 1997–24 I.R.B.5
8718, 1997–22 I.R.B.4
8719, 1997–23 I.R.B.4
8720, 1997–23 I.R.B.6
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1996–27
through 1996–53 will be found in Internal
Revenue Bulletin 1997–1, dated January 6, 1997.
39

Finding List of Current Action on
Previously Published Items
1
Bulletins 1997–1 through 1997–24
*Denotes entry since last publication
Revenue Procedures:
66–3
Modified by
97–11, 1997–6 I.R.B.13
87–21
Modified by
97–11, 1997–6 I.R.B.13
92–20
Modified by
97–1, 1997–1 I.R.B.11
92–20
Modified by
97–10, 1997–2 I.R.B.59
92–90
Superseded by
97–1, 1997–1 I.R.B.11
94–52
Revoked by
97–11, 1997–6 I.R.B.13
96–1
Superseded by
97–1, 1997–1 I.R.B.11
96–2
Superseded by
97–2, 1997–1 I.R.B.64
96–3
Superseded by
97–3, 1997–1 I.R.B.84
96–4
Superseded by
97–4, 1997–1 I.R.B.96
96–5
Superseded by
97–5, 1997–1 I.R.B.132
96–6
Superseded by
97–6, 1997–1 I.R.B.153
96–7
Superseded by
97–7, 1997–1 I.R.B.185
96–8
Superseded by
97–8, 1997–1 I.R.B.187
96–24
96–24A
Superseded by
97–24, 1997–16 I.R.B.10
96–37
Obsoleted by
97–26, 1997–17 I.R.B.17
97–2
Amplified by
97–21, 1997–12 I.R.B.44
Revenue Procedures—Continued
97–3
Amplified by
97–23, 1997–17 I.R.B.7
Revenue Rulings:
70–480
Revoked by
97–6, 1997–4 I.R.B.4
72–527
Obsoleted by
8704, 1997–8 I.R.B.12
74–59
Revoked by
8708, 1997–10 I.R.B.14
86–73
Obsoleted by
TD 8717, 1997–24 I.R.B.5
87–50
Obsoleted by
TD 8717, 1997–24 I.R.B.5
87–51
Obsoleted by
TD 8717, 1997–24 I.R.B.5
88–42
Obsoleted by
TD 8717, 1997–24 I.R.B.5
92–19
Supplemented in part by
97–2, 1997–2 I.R.B.7
93–90
Obsoleted by
TD 8717, 1997–24 I.R.B. 5
96–12
Superseded by
97–3, 1997–1 I.R.B.84
96–13
Modified by
97–1, 1997–1 I.R.B.11
96–22
Superseded by
97–3, 1997–1 I.R.B.84
96–34
Superseded by
97–3, 1997–1 I.R.B.84
96–39
Superseded by
97–3, 1997–1 I.R.B.84
96–43
Superseded by
97–3, 1997–1 I.R.B.84
96–56
Superseded by
97–3, 1997–1 I.R.B.84
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–27 through 1996–53 will be found in Inter-
nal Revenue Bulletin 1997–1, dated January 6,
1997.
40

NOTES
41

NOTES
42

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is
sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent
of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These
are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to
the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins
are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may
purchase them from the Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402.
Please allow two to six weeks, plus mailing time, for delivery.
Superintendent of Documents
First Class Mail
Postage and Fees Paid
GPO
Permit No. G–26
U.S. Government Printing Office
Washington, DC 20402
Official Business
Penalty for Private Use, $300

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is
sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent
of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These
are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to
the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins
are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may
purchase them from the Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402.
Please allow two to six weeks, plus mailing time, for delivery.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300