Reg-251703-96 (nprm)

30796

Federal Register / Vol. 62, No. 108 / Thursday, June 5, 1997 / Proposed Rules

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 examples
illustrate the rules of this section:
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 distribution 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 immediately 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.
beneficiary from the foreign person. The
rule of this paragraph will not apply to
the extent the U.S. beneficiary can
demonstrate 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
involving 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 characterized as
a taxable gift under section 2503(b). For

a definition of U.S. beneficiary, see
section 679.
(2) Examples. The following examples
illustrate the rules of this section:
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
gratuitous 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 person
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 computing 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. income tax principles. 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 the Federal
Register].
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 issued
under 26 U.S.C. 643(a)(7), 672(f)(4) and (6).

Par. 6. Section 301.7701–2 is
amended by adding paragraph (c)(2)(iii)
to read as follows:
§ 301.7701–2
definitions.

*

*
*
(c) * * *

Business entities;

*

*

(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
business entity shall be treated as a
corporation, separate from its single
owner.
*
*
*
*
*
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97–14735 Filed 6–4–97; 8:45 am]
BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG–251703–96]
RIN 1545–AU74

Residence of Trusts and Estates—7701
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:

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 purposes. This document
also provides notice of a public hearing
on these proposed regulations.
DATES: Written comments must be
received 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,
Washington, 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, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively,
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.
SUMMARY:

Federal Register / Vol. 62, No. 108 / Thursday, June 5, 1997 / Proposed Rules
The public hearing will be held in the
Internal Revenue Service Auditorium,
Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION 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)
provides that the term United 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 decisions of the trust
(control test). Section 7701(a)(31)(B)
provides that the term foreign trust
means any trust other than a trust
described in section 7701(a)(30)(E).
Prior to the Act, section 7701(a)(31)
provided that foreign estate and foreign
trust mean 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), citing B.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
treatment of foreign trusts that were
designed 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 foreign or domestic.
Consequently, it enacted 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
fiduciary 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
authority 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 determine 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
provide 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
instrument, the trust has only United
States fiduciaries, such fiduciaries are
administering the trust exclusively in
the United States, and the trust is not
subject to an automatic migration
provision. The IRS and Treasury
Department request comments 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
federal, state, or local court.
The term the United States includes
only the States and the District of

30797

Columbia. 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 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 term the United States is used
in its geographical sense and therefore
excludes territories and possessions.
The term is able to exercise means
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 term primary supervision means
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 term administration of 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
taxpayers, 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
administration 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
primary 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
jurisdiction or otherwise supervise the
administration of the trust directly or
indirectly would cause the trust to
migrate from the United States.

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Federal Register / Vol. 62, No. 108 / Thursday, June 5, 1997 / Proposed Rules

The Control Test
The control test requires that one or
more United States fiduciaries have the
authority to control all substantial
decisions of the trust. Under the
proposed regulations, the term fiduciary
refers to any person described in section
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
fiduciaries because they are exercising
powers traditionally held by fiduciaries
or because they can effectively exercise
control over the fiduciaries.
Substantial decisions are those
decisions 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
exercisable by a grantor that is not a
fiduciary of the trust, or decisions
exercisable by a beneficiary that affect
only the beneficiary’s interest in the
trust.
In accordance with the legislative
history, the proposed regulations
provide that United States fiduciaries
have the authority to control all
substantial decisions 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
proposed 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 August 20, 1996, under
section 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. Notice 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 effect and
should be consulted for these purposes.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant 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
rulemaking 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,
consideration will be given to any
written comments (preferably a signed
original and eight (8) copies) that are
submitted timely to the IRS. All
comments will be available for public
inspection and copying.
A public hearing has been scheduled
for September 16, 1997, at 10 a.m. in the
Internal Revenue Service Auditorium,
Internal Revenue Building, 1111
Constitution Avenue, NW., Washington
DC. Because of access restrictions,
visitors 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
26, 1997.
A period of 10 minutes will be
allotted to each person for making
comments.
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 regulations are James A.

Quinn and Eliana Dolgoff of the Office
of Assistant Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Proposed Amendments to the
Regulations
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
foreign.

Trusts—domestic and

(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
fiduciaries 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 term domestic trust means
a trust that is a United States person.
The term foreign trust means 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.

Federal Register / Vol. 62, No. 108 / Thursday, June 5, 1997 / Proposed Rules
(c) In general—(1) Safe harbor. A trust
is a domestic trust if the trust has only
United States fiduciaries, as defined 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 provision
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. A executes a trust instrument for
the equal benefit of A’s two children, B and
C. The trust instrument provides that DC, a
State Y corporation, is the only trustee of the
trust. Pursuant to the terms of the trust
instrument, the trust is administered in State
Y, a state within the United States. The trust
is not subject to an automatic migration
provision described in paragraph (d)(2)(v) or
(e)(3) of this section. No person other than
DC has 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
purposes of the court test:
(i) Court. The term court includes any
federal, state, or local court.
(ii) The United States. The term the
United States is 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 term is
able to exercise means that a court has
or would have the authority under
applicable law to render orders or
judgments resolving issues concerning
administration of the trust.
(iv) Primary supervision. The term
primary supervision means that a court
has or would have the authority to
determine substantially all issues
regarding 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 term
administration of 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

registered by an authorized fiduciary 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, 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, Illinois
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
qualified 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
supervision over the administration of
the trust. If both a United States court
and a foreign court are able to exercise
primary 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 the administration of the trust
directly or indirectly would cause the
trust to migrate from the United States.
(3) Examples. The following examples
illustrate the rules of this paragraph (d):
Example 1. A, a United States citizen,
executes a trust instrument for the equal
benefit of A’s two United States children.
The trust instrument provides that DC, a
domestic corporation, is to act as trustee of
the trust and that the trust is to be
administered in Country X, a foreign country.
The trust instrument provides that the law of
State Y, a state within the United States, is
to govern the trust. Under the law of Country
X, a court within Country X is able to
exercise primary supervision over the
administration of the trust but, as required by
the trust instrument, applies the law of State
Y 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. Trust T owns a single asset, an
interest in land located in State Y, a state
within the United States. Under the law of

30799

State Y, a trust owning solely real property
within the state is subject to the primary
supervision over the administration of the
trust by a court within State Y. The trust
satisfies the court test.
Example 3. A, a United States citizen,
executes a trust instrument for his own
benefit and the benefit of B, his United States
spouse. The trust instrument provides that
the trust is to be administered in State Y, a
state within the United States, by DC, a State
Y corporation. 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 State Y to Country Z, 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 term
fiduciary includes 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
decisions 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
fiduciary which is a United States
corporation owned by a nonresident
alien is a United States fiduciary.
(ii) Substantial decisions. (A) The
term substantial decisions means 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 replace
a trustee.

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Federal Register / Vol. 62, No. 108 / Thursday, June 5, 1997 / Proposed Rules

(B) Substantial decisions do not
include decisions exercisable by a
grantor, unless the grantor is acting as
a fiduciary under section 7701(a)(6) and
§ 301.7701–6(b). In addition, substantial
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 decisions.
However, the ability of a grantor (other
than a grantor acting as a fiduciary
under section 7701(a)(6) and
§ 301.7701–6(b)) to veto another
person’s substantial decision does not
cause such person to fail to control that
substantial decision. In addition, the
ability of a beneficiary (other than a
beneficiary 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
resignation of a fiduciary. If the
adjustment is made within six months,
the trust is treated as retaining its prechange residence 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 examples
illustrate the rules of this paragraph (e):

Example 1. A is a nonresident alien
individual. A is 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. A is 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 withdrawals and
the trust’s investments are not substantial
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. A is a nonresident alien
individual. A is the grantor of a trust and has
the power to revoke the trust, in whole or in
part and revest assets in A. A is 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 and C, a nonresident
alien. C’s only power is the power to make
distributions from the trust and C can
exercise this power without authorization
from B. In this case, decisions exercisable by
A to have trust assets distributed to A are not
substantial decisions because these decisions
are exercisable by the grantor. However,
distribution decisions exercisable by C are
substantial decisions. Therefore, the trust is
a foreign trust because B does not control all
substantial decisions of the trust.
Example 3. Trust has three fiduciaries, A,
B, and C. A and B are United States citizens
and C is a nonresident alien. The trust
instrument directs that C is to make all of the
trust’s investment decisions, but that A and
B may veto C’s investment decisions. A and
B cannot act to make the investment
decisions on their own. The control test is
not satisfied because the United States
fiduciaries, A and B, do not have the power
to make all of the substantial decisions of the
trust.
Example 4. Trust has two fiduciaries, A
and B, both of whom are United States
citizens. The trust instrument provides that
C, a foreign corporation, will serve as an
advisor and recommend investments to A
and B. A and B may accept or reject C’s
recommendations and can make investments
that C has not recommended. A and B control
all other decisions of the trust. A and B
delegate to C the authority to execute the
investment decisions approved by A and B.
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. A and B are United States citizens
and C is a nonresident alien. The trust
instrument provides that no substantial
decisions of the trust can be made unless
there is unanimity among the fiduciaries. 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 without
C’s agreement.
Example 6. (i) A trust that satisfies the
court test has three fiduciaries, A, B, and C.

A and B are United States citizens and C is
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.
A dies and D becomes a fiduciary of the trust.
Two months after A dies, E, a United States
person, replaces D as a fiduciary of the trust.
During the period after A’s death and before
E begins to serve, the trust satisfies the
control test and remains a domestic trust.
(ii) Assume the same facts as in paragraph
(i) of this Example 6 except that at the end
of the six-month period after A’s death, D has
not been replaced and remains a fiduciary of
the trust. The trust became a foreign trust on
the date A died.
Example 7. Trust has three beneficiaries, A,
B and C, 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
applicable to trusts for taxable years
beginning 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
August 20, 1996, under section
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.
[FR Doc. 97–14736 Filed 6–4–97; 8:45 am]
BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR
Office of Surface Mining Reclamation
and Enforcement
30 CFR Part 934
[SPATS No. ND–036–FOR; State Program
Amendment No. XVIV]

North Dakota Regulatory Program
Office of Surface Mining
Reclamation and Enforcement, Interior.
ACTION: Proposed rule; public comment
period and opportunity for public
hearing on proposed amendment.
AGENCY:

Office of Surface Mining
Reclamation and Enforcement (OSM) is
announcing receipt of a proposed
amendment to the North Dakota
regulatory program (hereinafter, the
SUMMARY: