IRS issues filing guidance on SBJPA's foreign trust and gift reporting provisions.

• Author: Zysik, Jeffrey C.
• Position: Small Business Job Protection Act of 1996

The Small Business Job Protection Act of 1996 enacted extensive information reporting requirements for, among others, foreign trusts and gifts and trust beneficiaries.

Notice 97-34 fleshes out these rules, detailing the information to be filed, by whom and the filing deadlines.

This guidelines is certainly welcome; in some cases, filings must be made within the next two months.

On June 2, 1997, the IRS issued Notice 97 34,(1) which contains guidance on the foreign trust and gift reporting requirements enacted by the Small Business Job Protection Act of 1996 (SBJPA). This article presents a brief discussion of Secs. 6048, 6039F and 1494 as amended by the SBJPA, and a chart summarizing the related Notice 97-34 reporting requirements.

Background

Sec. 6048(a) and (c) generally require reporting in the case of certain transactions between U.S. persons and foreign trusts. Sec. 6048(b) requires a U.S. person who is the grantor of a foreign trust under the Code's grantor trust provisions(2) to ensure that the trust file an information return. Sec. 6048(b) also requires the appointment of a limited U.S. agent by a foreign grantor trust with a U.S. grantor.(3) Sec. 60396(4) requires that a U.S. person receiving gifts from foreign sources in excess of $10,000 per year file an information report with respect to those gifts containing any information required by the Service.

Sec. 1494 imposes a penalty for failure to file a return for any transfer described in Sec. 1491. Sec. 1491, in turn, imposes a 35% excise tax on the built-in gain of an asset transferred by a U.S. person to (among others) a foreign trust or estate. Notice 97-34 requires that certain transfers to foreign trusts by U.S. persons covered by Sec. 1491 be reported on Form 3520.(5)

Secs. 6677 and 6039F impose penalties ranging from 5% to 35% of the gross reportable amount (as defined in Sec. 6677(c)) for failure to meet Secs. 6048,1494 and 6039F reporting requirements. In some cases, additional penalties may be assessed or the income tax treatment of certain items may be subject to recharacterization under Secs. 6677 and 6039F if the required information returns are not filed.

SBJPA Effective Date

The SBJPA amended the reporting rules to substantially increase the reporting requirements for certain transactions between U.S. persons and foreign trusts, estates and donors. Under SBJPA Sections 1901(d) and 1905(a),the amendments to Secs. 6048(a) and (c),6039F and 1494 are effective for covered transactions occurring after Aug. 20, 1996.(6) Under SBJPA Section 1901 (d)(2), Sec. 6048(b) is effective for foreign grantor trusts in the first tax year of the U.S. grantor that begins after 1995, as a result, many affected U.S. taxpayers were required to file information returns for their 1996 tax year. Prior to the issuance of Notice 97-34, no filing guidance was available.

Notice 97-34 Highlights

Threshold for Reporting Foreign Gifts

Although Sec. 6039F requires reporting for foreign-source gifts if in any tax year the aggregate value of such gifts exceeds $10,000,(7) Notice 97-34 raises the reporting threshold for gifts from a foreign estate or individual. Now, gifts from a foreign individual or estate must be reported only if, in the aggregate, they exceed X100,000. Gifts received from foreign partnerships and corporations continue to be subject to reporting if, in the aggregate, the value of such gifts during the U.S. donee's tax year exceeds $10,000.(8)

Trust Obligations

A distribution from a trust to a U.S. person in return for that person's "qualified obligation" is not a distribution subject to reporting. Similarly, a transfer to a foreign trust by a U.S. person in exchange for the trust's qualified obligation is not subject to reporting. Notice 97-34 defines "qualified obligation" for this purpose.

Forms Revision

The Service intends to revise existing Form 3520, Creation of or Transfers to Certain Foreign Trusts, and Form 3520-A, Annual Return of Foreign Trust With U.S. Beneficiaries, to serve as the reporting forms for...