FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR TRUST RULES.

SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR TRUST RULES. (a) General Rule.— 110 STAT. 1911 (1) Subsection (f) of section 672 (relating to special rule where grantor is foreign person) is amended to read as follows: “(f) Subpart Not to Result in Foreign Ownership.— “(1) In general.— Notwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount (if any) being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation. “(2) Exceptions.— “(A) Certain revocable and irrevocable trusts.— Paragraph (1) shall not apply to any portion of a trust if— “(i) the power to revest absolutely in the grantor title to the trust property to which such portion is attributable is exercisable solely by the grantor without the approval or consent of any other person or with the consent of a related or subordinate party who is subservient to the grantor, or “(ii) the only amounts distributable from such portion (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor. “(B) Compensatory trusts.— Except as provided in regulations, paragraph (1) shall not apply to any portion of a trust distributions from which are taxable as compensation for services rendered. “(3) Special rules.— Except as otherwise provided in regulations prescribed by the Secretary— “(A) a controlled foreign corporation (as defined in section 957) shall be treated as a domestic corporation for purposes of paragraph (1), and “(B) paragraph (1) shall not apply for purposes of applying section 1296. “(4) Recharacterization of purported gifts.— In the case of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such circumstances as the Secretary determines to be appropriate to prevent the avoidance of the purposes of this subsection. “(5) Special rule where grantor is foreign person.— If— “(A) but for this subsection, a foreign person would be treated as the owner of any portion of a trust, and “(B) such trust has a beneficiary who is a United States person, such beneficiary shall be treated as the grantor of such portion to the extent such beneficiary has made (directly or indirectly) transfers of property (other than in a sale for full and adequate consideration) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b). “(6) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out110 STAT. 1912 the purposes of this subsection, including regulations providing that paragraph (1) shall not apply in appropriate cases.”. (2) The last sentence of subsection (c) of section 672 is amended by inserting “subsection (f) and” before “sections 674”. (b) Credit for Certain Taxes.— (1) Paragraph (2) of section 665(d) is amended by adding at the end the following new sentence: “Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the term ‘taxes imposed on the trust’ includes the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.”. (2) Paragraph (5) of section 901(b) is amended by adding at the end the following new sentence: “Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.”. (c) Distributions by Certain Foreign Trusts Through Nominees.— (1) Section 643 is amended by adding at the end the following new subsection: “(h) Distributions by Certain Foreign Trusts Through Nominees.— For purposes of this part, any amount paid to a United States person which is derived directly or indirectly from a foreign trust of which the payor is not the grantor shall be deemed in the year of payment to have been directly paid by the foreign trust to such United States person.”. (2) Section 665 is amended by striking subsection (c). (d) Effective Date.— (1) In general.— Except as provided by paragraph (2), the amendments made by this section shall take effect on the date of the enactment of this Act. (2) Exception for certain trusts.— The amendments made by this section shall not apply to any trust— (A) which is treated as owned by the grantor under section 676 or 677 (other than subsection (a)(3) thereof) of the Internal Revenue Code of 1986, and (B) which is in existence on September 19, 1995. The preceding sentence shall not apply to the portion of any such trust attributable to any transfer to such trust after September 19, 1995. (e) Transitional Rule.— If— (1) by reason of the amendments made by this section, any person other than a United States person ceases to be treated as the owner of a portion of a domestic trust, and (2) before January 1, 1997, such trust becomes a foreign trust, or the assets of such trust are transferred to a foreign trust, 110 STAT. 1913 no tax shall be imposed by section 1491 of the Internal Revenue Code of 1986 by reason of such trust becoming a foreign trust or the assets of such trust being transferred to a foreign trust.