New Reporting Requirements for U.S. Owners and Grantors of Foreign Trusts

New Reporting Requirements for U.S. Owners and Grantors of Foreign Trusts

By Diane L. Mutolo, J.D., LL.M. *

The Hiring Incentives to Restore Employment Act ("the HIRE Act"), signed into law by President Obama on March 18, 2010, amended and added provisions of the Internal Revenue Code with the aim of increasing foreign account tax compliance. The provisions of the Foreign Account Tax Compliance Act (FATCA), enacted as part of the HIRE Act, added Sections 6038D, 1471, 1472, 1473, and 1474 to the Internal Revenue Code, imposing additional information reporting requirements with respect to foreign assets with an aggregate value of over $50,000 (IRC Section 6038D) and imposing additional reporting, documentation, and withholding requirements on foreign financial institutions with respect to certain U.S. accounts (new Chapter 4, Taxes to Enforce Reporting on Certain Foreign Accounts, comprised of IRC Sections 1471, 1472, 1473, and 1474). FATCA also amended certain provisions of the Internal Revenue Code, including amendments that added new reporting requirements for United States owners and United States grantors of foreign trusts.

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The information reporting obligations with respect to foreign trusts are provided for in IRC Section 6048. Under IRC Section 6048(a), on or before the 90th day (or a later day as the Service may prescribe) after any reportable event, the responsible party is to provide written notice of the reportable event to the Service.

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IRC Section 6048(a)(3)(B) provides that a reportable event does not include fair market value sales, i.e., any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. The definition of a reportable event also does not apply to deferred compensation trusts (trusts described in IRC Sections 402(b), 404(a)(4), or 404A)) or a trust determined by the Secretary to be a charitable trust (a trust described in IRC Section 501(c)(3)).

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In addition,... a reportable event also does not include a transfer if "the U.S. transferor immediately recognizes the entire gain on the transfer and it does not have a significant interest in the transferee immediately after the transfer."

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U.S. Owners of Foreign Trusts. IRC Section 6048(b) pertains to a U.S. person who is treated as the owner of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1 (the grantor trust provisions), and it is here where one of the new reporting obligations for U.S. owners of foreign trusts added by FATCA comes into play...

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Form 3520-A. A foreign trust with a U.S. owner must file Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) to comply with the information return requirements under IRC Section 6048(b)...

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Form 3520. A U.S. owner of a foreign trust is to file Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) in order to comply with the U.S. owner's reporting obligations under IRC Section 6048(b), as indicated by the 2010 instructions for Form 3520...

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Amendment of IRC Section 679 and U.S. Grantors of Foreign Trusts. In addition to the amendment of IRC Section 6048, FATCA amended IRC Section 679, affecting the reporting obligations of U.S. grantors of foreign trusts. This EIA discusses the presumption under new subsection (d) of IRC Section 679 that a foreign trust has a United States beneficiary.

IRC Section 679. Generally, under IRC Section 679, a U.S. person who directly or indirectly transfers property to a foreign trust will be treated as the owner for his or her taxable year of the portion of that trust attributable to such property if there is a U.S. beneficiary of any portion of the trust...

Under IRC Section 679(c), certain trusts will be treated as having a U.S. beneficiary...

Presumption of U.S. Beneficiary. Section 532 of FATCA added new subsection (d), which creates a presumption that a foreign trust has a U.S. beneficiary under certain circumstances.

* Diane L. Mutolo, J.D., LL.M. is a member of the New York Bar, and her LL.M. is in Taxation. She is the update author for the LexisNexis Matthew Bender treatise, How to Save Time & Taxes Preparing Fiduciary Income Tax Returns.

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LEXIS users can access the complete commentary here. Additional fees may apply. (Approx. 11 pages)

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