The IRS has released proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. Further, the IRS has issued proposed amendments to the regulations relating to foreign trusts having one or more U.S. beneficiaries. The proposed regulations affect U.S. persons who engage in transactions with, or are treated as the owners of, foreign trusts, and U.S. persons who receive large gifts or bequests from foreign persons.

The proposed regulations generally incorporate the Code Sec. 643(i) guidance that was provided in Notice 97-34, with certain modifications to provide procedural rules, such as how to determine a loan’s yield to maturity and how to extend the period of assessment for any income tax associated with the loan, and anti-abuse rules, such as requiring payments and information reporting to be timely. In addition, the proposed regulations provide guidance implementing the Hiring Incentives to Restore Employment (HIRE) Act amendments to Code Sec. 643(i).

Application of Code Sec.643(i) to loans by or uses of property of a foreign trust

Proposed Reg. §1.643(i)-1(b)(1) provides that, unless an exception applies, any loan of cash or marketable securities made from a foreign trust (whether from trust corpus or income) directly or indirectly to a U.S. grantor or beneficiary of the trust or to any U.S. person related to a U.S. grantor or beneficiary of the trust is treated as a Code Sec. 643(i) distribution to such U.S. grantor or beneficiary as of the date on which the loan is made. Indirect loans for purposes of Code Sec. 643(i) to include loans made through an intermediary, agent or nominee.

Exceptions

Proposed Reg. §1.643(i)-2(a) provides four exceptions to the general rule of Proposed Reg. §1.643(i)-1(b)(1):

• The general rule will not apply to any loan of cash in exchange for a qualified obligation within the meaning of Proposed Reg. §1.643(i)-2(b)(2)(iii).
• In the case of a use of trust property other than a loan of cash or marketable securities, the general rule will not apply to the extent that the foreign trust receives the fair market value of such use within a reasonable period (60 days or less) from the start of the use of the trust property.
• The general rule will not apply to any de minimis use of trust property (aggregate use by members of a group consisting of the U.S. grantors and beneficiaries and the U.S. persons related to them for a total of 14 days or less during the taxable year), other than a loan of cash or marketable securities, by a U.S. grantor or beneficiary or a U.S. person related to a U.S. grantor or beneficiary
• The general rule will not apply to a loan of cash that is made by a foreign corporation to a U.S. beneficiary of the foreign trust to the extent the aggregate amount of all such loans to the beneficiary does not exceed undistributed earnings and profits of the foreign corporation attributable to amounts that are, or have been, included in the beneficiary’s gross income under Code Secs. 951, 951A or 1293.

Qualified Obligation

Under Proposed Reg. §1.643(i)-2(b)(2)(iii)(A), the term qualified obligation means an obligation that satisfies all of the following requirements:

• First, the obligation must be in writing.
• Second, the term of the obligation must not exceed five years.
• Third, all payments on the obligation must be made in cash in U.S. dollars.
• Fourth, the obligation must be issued at par and must provide for stated interest at a fixed rate or a qualified floating rate within the meaning of Reg. §1.1275-5(b).
• Fifth, the yield to maturity must be not less than 100 percent and not greater than 130 percent of the applicable Federal rate in effect under Code Sec. 1274(d) on the day on which the obligation is issued.
• Sixth, all stated interest on the obligation must be qualified stated interest within the meaning of Reg. §1.1273-1(c).

Reporting Requirements

Proposed Reg. §1.643(i)-2(d) provides that any loan of cash or marketable securities by a foreign trust to a U.S. person and any use by a U.S. person of property belonging to a foreign trust, without regard to whether such loan or use of property is treated as a Code Sec. 643(i) distribution, also is a distribution within the meaning of Proposed Reg. §1.6048-4(b) and subject to the information reporting described under Proposed Reg. §1.6048-4(a).

Tax consequences of a Code Sec. 643(i) distribution

Generally, a foreign trust must treat the Code Sec. 643(i) distribution as an amount properly paid, credited, or required to be distributed by the trust as described in Code Sec.661(a)(2) for which the trust may be allowed a distribution deduction in computing its taxable income. Further, a Code Sec. 643(i) distribution of marketable securities would cause a foreign trust to be deemed to have elected to have Code Sec. 643(e)(3) apply to such distribution, which would cause the trust to recognize gain or loss as if the marketable securities had been sold at fair market value.

Further, any capital gain recognized by the foreign trust would be included in the trust’s distributable net income (DNI) pursuant to Code Sec. 643(a)(6)(C). As a result of the deemed election, a U.S. grantor or beneficiary would be treated as including in gross income under Code Sec. 662(a)(2) the fair market value of the marketable securities, and in computing its taxable income, the foreign trust would be allowed to deduct the fair market value of the marketable securities to the extent allowed under Code Sec. 661(a)(2).

Proposed Reg. §1.6048-4(d) describes the rules that a U.S. person (other than a U.S. owner of the distributing trust) must use to determine the tax consequences of a distribution from a foreign trust other than a distribution that is a loan of cash or marketable securities or the use of other trust property that is not treated as a Code Sec. 643(i) distribution under Proposed Reg. §1.643(i)-1. Two methods to determine the tax consequences are provided: (i) the actual calculation method and (ii) the default calculation method. If the U.S. person who receives the distribution does not receive a copy of the relevant statement, the U.S. person must determine the tax consequences of the distribution under the default calculation method. A U.S. person who receives the relevant statement generally may compute the tax consequences of the distribution under either the actual calculation method or the default calculation method.

Penalty for failure to file information

Under Proposed Reg. §1.6039F-1(e)(1), a U.S. person who fails to furnish the required information is subject to a penalty equal to five percent of the amount of the foreign gift for each month (or portion thereof) for which the failure continues, but not to exceed 25 percent of the amount of the foreign gift.

Further, Proposed Reg. §1.6677-1 provides rules for civil penalties that may be assessed if any notice or return required to be filed under proposed Reg. §§1.6048-2 through 1.6048-4 is not timely filed or contains incomplete or incorrect information.

Applicability Dates

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

Comments and Requests for a Public Hearing

A public hearing has been scheduled for August 21, 2024, at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington DC.

Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by July 7, 2024. Outlines must be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124850-08).