Notice 97-34 (IRB 1997-25)

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 regarding 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 under 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 information 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, provided that taxpayers would not be required to file information statements
under section 6048(a) or be subject to
associated penalties under section 6677
until further guidance was issued. Section 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 information returns to be filed by these foreign
1

There are currently two provisions of the Internal
Revenue Code designated as section 6039F. The
second provision was added by the Health Insurance 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 subsequent references to section 6039F in this Notice
relate to section 6039F as contained in the Small
Business Job Protection Act of 1996.

June 23, 1997

trusts and the procedures for foreign
trusts to appoint U.S. agents. Section V
provides guidance regarding the new
reporting requirements for U.S. beneficiaries 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 failure to comply with these reporting requirements. Finally, Section VIII provides special transition rules.
Treasury and the Service expect to
issue regulations incorporating the guidance 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. Beneficiaries.’’ 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 compliance 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 requirements of the Act pertaining to transactions 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 requirements 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 ‘‘obligation’’ are defined as follows.
A ‘‘grantor’’ includes any person who
creates a trust as well as any person
who directly or indirectly makes a gratuitous transfer of money or other property to a trust. A grantor includes a
person who acquires an interest in a

22

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 grantor of the trust. If
one person creates or funds any portion
of a trust primarily as an accommodation 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 distribution 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 circumstances, it could not be reasonably anticipated that the person could possibly
benefit from the trust. For example, for
this purpose a publicly-traded corporation 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 associates of the family would be considered
beneficiaries of such a trust because it
could be reasonably anticipated that the
trust could possibly benefit such persons.
An ‘‘obligation’’ includes any bond,
note, debenture, certificate, bill receivable, account receivable, note receivable,
open account, or other evidence of indebtedness, and, to the extent not previously 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 distribution. In addition, as more fully described below, nongratuitous transfers
(all transfers other than gratuitous transfers) to a foreign trust are reportable
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I.R.B.

under section 1494 if: (a) the U.S.
transferor does not immediately recognize 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 portion of the transfer must be reported
under
section
6048
and
the
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 property 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. Section 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 under these requirements. 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 information. 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 property 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 de2

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.

scribed in section 1491 as well as
section 6048(a). Section 1491 generally
provides that a U.S. person who transfers property to a foreign trust is subject
to a 35 percent excise tax on any
unrecognized gain in the transferred
property. Section 1494 generally provides that transfers described in section
1491 to certain foreign entities (including foreign trusts) must be reported.
Notice 97–18, 1997–10 I.R.B. 35, provided that in the case of transfers to
foreign trusts, reporting obligations under section 1494 may be satisfied if the
U.S. transferor complies with its reporting obligations under section 6048(a)
and the U.S. transferor does not owe
excise tax under section 1491.
B. Section 6048(a) Information Reporting
Except as otherwise provided in Section 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 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 the
property is equal to the fair market
value of the property transferred. For
example, rents, royalties, and compensation paid to a trust are transfers 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 purposes of this determination, if
a U.S. person contributes property to a

23

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 transaction. For example, if a taxpayer elects
to treat a transfer of appreciated property 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 obligations issued by related foreign trusts, see
Section III.C. below.
For purposes of this notice, a transfer
to a foreign trust is a corporate distribution, 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 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
gratuitous transfer. Moreover, a domestic
trust that becomes a foreign trust is
deemed to have made a gratuitous transfer of all its assets immediately before
becoming a foreign trust. See section
1491.
Notwithstanding any other guidance
provided by this notice, a gratuitous
transfer also includes any direct or indirect transfer that is structured with a
principal purpose of avoiding the application 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
provided by regulations. Sections
679(a)(3)(A)(i), 6048(a)(3)(B)(i). For
June 23, 1997

purposes of determining whether an obligation is disregarded, a person is related 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 meaning of section 643(i)(2)(B)) to any
grantor or beneficiary of the trust. Section 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 exercising 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
in determining whether the U.S.
transferor received fair market value
from the foreign trust only if the obligation is a ‘‘qualified obligation.’’
An obligation is a qualified obligation
only if:
(i) The obligation is reduced to writing 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 obligation);
(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 applicable Federal rate (the applicable Federal rate for an obligation is the applicable Federal rate in effect under section
1274(d) for the day on which the obligation 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
June 23, 1997

obligation (this extension is not necessary if the maturity 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
purposes of § 301.6501(c)–1(d); and
(vi) The U.S. transferor reports the
status of the obligation, including principal 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 issued 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 obligation 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 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. 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 interest (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 obligation. The subsequent obligation will be
separately tested to determine if it is a
qualified obligation.
Generally, as discussed above, a gratuitous 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

24

longer be a qualified obligation. However, based on all facts and circumstances, 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 specified 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 understanding. 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 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 contained in revised section 6677 will only apply to
the failure to report transfers in exchange for obligations issued after August 20, 1996.
D. Section 1494 Information Reporting
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 transfer of appreciated property to a foreign
trust and does not immediately recognize all of the gain on the property
transferred (or recognizes gain only by
reason of an election described in section 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
Section II.A.2. of Notice 97–18,
1997–10 I.R.B. 35).
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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 Property to a Foreign Corporation, Foreign
Estate or Trust, or Foreign Partnership’’). See Notice 97–18, Section III.C.
Thus, if a U.S. person transfers appreciated 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 respect to a transfer. Elections under section 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 Service that has not been revoked recognizing its status as exempt from income
taxation under section 501(a).
Section 6048(d)(4) authorizes the Secretary to suspend requirements of section 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 Income and on Capital. Any U.S. person
relying on a tax treaty with Canada to
avoid information reporting must, however, disclose this position under section
6114.
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I.R.B.

Furthermore, the Secretary has determined 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 examples, 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 received fair market value. Therefore, the contribution 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’slength 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

25

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 discount 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 transferred to the trust.
Example 8. Qualified obligation. A, a beneficiary 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 limitations 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 obligation 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 as Example 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 maturity 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

June 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 payments 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 as Example 12, except that A’s rental
payments to FT are in excess of fair market
value. The portion of each of A’s rental payments 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 information. 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 beginning 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. Until 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 information on the form as if the foreign
trust were the U.S. owner required to
file the form, (4) signs the form, (5)
June 23, 1997

attaches a Foreign Grantor Trust Information Statement to the form, (6) sends
a Foreign Grantor Trust Owner Statement (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 provided in Section VIII, Form 3520–A
must be filed and the required statements 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 Information Statement should be submitted in
substantially the following format:
FOREIGN GRANTOR TRUST
INFORMATION STATEMENT
1. Foreign Trust Background Information
A. Name, address and employer identification number (‘‘EIN’’) of trust
B. Name, address and taxpayer identification 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 applies
2. Foreign Trust Balance Sheet. The
foreign trust balance sheet should
contain both beginning and end of
year balances. Amounts may be aggregated 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

26

B. Liabilities
1. Accounts payable
2. Contributions, gifts, grants, etc.
payable
3. Mortgages and notes payable
4. Other liabilities (attach summary 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. Distributions to beneficiaries
(separately state for each U.S.
beneficiary)
E. Tax credits (attach summary
schedule)
4. The Foreign Grantor Trust Owner
Statement
A. Foreign Trust Background Information
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 applies
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)
1997–25

I.R.B.

B. Statement of Net Income Attributable to the Owner. Use U.S. tax
principles to determine the owner’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 schedule)
5. The Foreign Grantor Trust Beneficiary Statement
A. Foreign Trust Background Information
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 applies
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 establishes 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.
1997–25 I.R.B.

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 person. 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 Secretary may determine the amounts required 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 domestic 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 expressly 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 examine records or produce testimony related 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
trustee (or other
authorized person)

27

(title)

(date)

Type or print your name below

TIN (if any)
Address
[Name of agent] accepts this appointment 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 foreign 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 incorrect 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).
June 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 aggregate amount of distributions received
from the trust during the taxable year,
and such other information as the Secretary 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 person. 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 distribution 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 account 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 beneficiary receives a payment from a foreign
trust in exchange for property transferred 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 services as a trustee of the trust, and the
payment exceeds the fair market value
of the services actually performed by
June 23, 1997

the beneficiary, the excess will be
treated as a distribution to the beneficiary.
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,
within the meaning of section
672(f)(2)(B) and the regulations thereunder, 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 respect to distributions from foreign trusts
received by domestic organizations described 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 beneficiary. 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
determined under § 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 expected that Treasury and the Service

28

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 obligation is a qualified obligation only if:
(i) The obligation is reduced to writing 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 obligation);
(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 applicable Federal rate (the applicable Federal rate for an obligation is the applicable Federal rate in effect under section
1274(d) for the day on which the obligation is issued, as published in the
Internal Revenue Bulletin);
(v) The U.S. person extends the period for assessment of any income tax
attributable to the loan 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
issued in consideration for the loan (this
extension is not necessary if the maturity 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 purposes of § 301.6501(c)–1(d); and
(vi) The U.S. person reports the status of the obligation, including principal
and interest payments, on Form 3520 for
each year that the obligation is outstanding.
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) directly or indirectly issues another obligation to the trust the original obligation
will be deemed to have the maturity
date of any such subsequent obligation
1997–25

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 giving 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. beneficiary (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 interest (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 distribution 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. 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 distribution 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 obligation.’’ 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 understanding. For purposes of section 643(i), if an
1997–25

I.R.B.

obligation issued on or before September 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 contained 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. beneficiary will be treated as an accumulation
distribution includible in the gross income of the distributee if adequate
records are not provided to the Secretary
to determine the proper treatment of the
distribution. An accumulation distribution 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 required to treat the entire distribution as
an accumulation distribution if the beneficiary obtains from the foreign trust
either a Foreign Grantor Trust Beneficiary Statement (see part 5 of the Foreign Grantor Trust Information Statement 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 distribution if the U.S. beneficiary can provide certain information regarding actual
distributions from the trust for the prior
three years. Under this ‘‘default treatment,’’ the U.S. beneficiary will be
allowed to treat a portion of the distribution as a distribution of current income based on the average of distributions from the prior three years, with
only the excess amount of the distribution treated as an accumulation distribution (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., calculations of the trust’s distributable net
income under section 643(a)).

29

To completely avoid default treatment, a beneficiary receiving a distribution from a trust must obtain either a
Foreign Grantor Trust Beneficiary Statement 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 complete 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 therefore, 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 treatment. The U.S. beneficiary may determine the tax consequences of the distribution in accordance with the
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 statement is incorrect.
A Foreign Nongrantor Trust Beneficiary Statement must contain the following information and be set forth in
substantially the following format:
FOREIGN NONGRANTOR TRUST
BENEFICIARY STATEMENT
1. Foreign Trust Background Information
A. Name, address and employer identification number (‘‘EIN’’) of the
trust
B. Name, address and taxpayer identification number (‘‘TIN’’) (if any)
of the trustee furnishing this statement
C. Method of accounting used by the
trust (cash or accrual)
D. The taxable year of the foreign
trust to which the statement applies
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.
June 23, 1997

2. U.S. Beneficiary Information
A. Name, address and TIN of U.S.
Beneficiary
B. A description of the property (including cash) distributed or
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 appropriate treatment of any distribution 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 relevant, 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 necessary 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 requirements under section 6039F for U.S.
persons (other than an organization described 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 Secretary 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
June 23, 1997

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, partnership, or estate, and whether the foreign donor was acting as a nominee or
intermediary for another person. Also, a
brief description of the property received will be required. It is expected
that the form will not require information 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 information, 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 receipt 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). Reporting is only required under section
6039F for gifts actually or constructively received by a U.S. person. Furthermore, 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 distribution from the trust under section
6048(c), rather than as a gift under
section 6039F. Contributions of property
by foreign persons to domestic or foreign trusts that have U.S. beneficiaries
are not reportable by the U.S. beneficiaries 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

30

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 partnerships, and foreign corporations. Accordingly, 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 aggregate amount of gifts from that nonresident 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 partnerships
A U.S. person is required to report
the receipt of purported gifts from foreign corporations and foreign partnerships if the aggregate amount of purported gifts from all such entities
exceeds $10,000 (as modified by costof-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 corporation or foreign partnership, including
the identity of the donor entity. Purported 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 excess of the relevant threshold, the U.S.
person must aggregate gifts from foreign
persons that he knows or has reason to
1997–25

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 independently exceed the threshold for reporting 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 identification 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 individuals. 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 identified. Because B, C, and D are individuals, A
need not identify these donors when reporting
the transactions.
Example 15. Gifts from related foreign individual 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 depends on the ‘‘gross value’’ or ‘‘gross
amount’’ of the property involved.
1997–25

I.R.B.

In determining the gross value or
gross amount of property, the valuation
principles of section 2512 and the regulations 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 information. Section 6677(d). Also, refusal
on the part of a foreign trustee to
provide information for any other reason, 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 apply only to the extent that the transaction is not reported or is reported inaccurately. 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 imposed 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 imposed 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 addition, 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 imposed if the taxpayer files the 1996
Form 3520 on or before November 15,
1997, with the Philadelphia Service

31

Center. Alternatively, no section 1494(c),
6039F, or 6677 penalties will be imposed 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 described herein will not be considered to
have complied with the information reporting 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 section 6677 penalty will be imposed if the
foreign trust files the 1996 Form
3520–A by the due date (including extensions) 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 owner’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 income 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

June 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 making 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 distributions 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 sections 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 substantial activities, or holds substantial property, outside the United States. Treasury
and the Service are studying the appropriate scope of section 6048(d)(2). Until
further guidance is issued, domestic
trusts will not be treated as foreign
trusts pursuant to that section.

June 23, 1997

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
reporting requirements of section
6048(a), is hereby modified.
PUBLIC COMMENT INVITED
Treasury and the Service invite comments on the guidance provided by this
notice. Written comments should be submitted 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 copying.
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget for review in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control
number 1545–1538.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays 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 respondents are individuals, business or
other for-profit institutions, and not-forprofit 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-

32

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 annually.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, 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 (International). For further information regarding 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 numbers are not toll-free calls.

Weighted Average Interest Rate
Update
Notice 97–35
Notice 88–73 provides guidelines for
determining the weighted average interest 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.

1997–25

I.R.B.