[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 453 Introduced in Senate (IS)]

  1st Session
                                 S. 453

 To amend the Internal Revenue Code of 1986 to modify the eligibility 
criteria for the earned income tax credit, to improve tax compliance by 
 United States persons establishing or benefiting from foreign trusts, 
                        and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

            February 16 (legislative day, January 30), 1995

Mr. Moynihan (for himself and Mr. Daschle) (by request) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to modify the eligibility 
criteria for the earned income tax credit, to improve tax compliance by 
 United States persons establishing or benefiting from foreign trusts, 
                        and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Tax Compliance Act 
of 1995''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code.
        TITLE I--PROVISIONS RELATING TO THE EARNED INCOME CREDIT

Sec. 101. Earned income tax credit denied to individuals not authorized 
                            to be employed in the United States.
Sec. 102. Earned income tax credit denied to individuals with 
                            substantial unearned income.
        TITLE II--PROVISIONS RELATING TO INTERNATIONAL TAXATION

Sec. 201. Revision of tax rules on expatriation.
Sec. 202. Improved information reporting on foreign trusts.
Sec. 203. Modification of rules relating to foreign trusts having one 
                            or more United States beneficiaries.
Sec. 204. Foreign persons not to be treated as owners under grantor 
                            trust rules.
Sec. 205. Gratuitous transfers by partnerships and foreign 
                            corporations.
Sec. 206. Information reporting regarding large foreign gifts.
Sec. 207. Modification of rules relating to foreign trusts which are 
                            not grantor trusts.
Sec. 208. Residence of estates and trusts.
                TITLE III--ADDITIONAL EMPOWERMENT ZONES

Sec. 301. Additional empowerment zones.

        TITLE I--PROVISIONS RELATING TO THE EARNED INCOME CREDIT

SEC. 101. EARNED INCOME TAX CREDIT DENIED TO INDIVIDUALS NOT AUTHORIZED 
              TO BE EMPLOYED IN THE UNITED STATES.

    (a) In General.--Section 32(c)(1) (relating to individuals eligible 
to claim the earned income tax credit) is amended by adding at the end 
the following new subparagraph:
                    ``(F) Identification number requirement.--The term 
                `eligible individual' does not include any individual 
                who does not include on the return of tax for the 
                taxable year--
                            ``(i) such individual's taxpayer 
                        identification number, and
                            ``(ii) if the individual is married (within 
                        the meaning of section 7703), the taxpayer 
                        identification number of such individual's 
                        spouse.''
    (b) Special Identification Number.--Section 32 is amended by adding 
at the end the following new subsection:
    ``(k) Identification Numbers.--Solely for purposes of subsections 
(c)(1)(F) and (c)(3)(D), a taxpayer identification number means a 
social security number issued to an individual by the Social Security 
Administration (other than a social security number issued pursuant to 
clause (II) (or that portion of clause (III) that relates to clause 
(II)) of section 205(c)(2)(B)(i) of the Social Security Act).''
    (c) Extension of Procedures Applicable to Mathematical or Clerical 
Errors.--Section 6213(g)(2) (relating to the definition of mathematical 
or clerical errors) is amended by striking ``and' at the end of 
subparagraph (D), by striking the period at the end of subparagraph (E) 
and inserting ``, and'', and by inserting after subparagraph (E) the 
following new subparagraph:
                    ``(F) an omission of a correct taxpayer 
                identification number required under section 23 
                (relating to credit for families with younger children) 
                or section 32 (relating to the earned income tax 
                credit) to be included on a return.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 102. EARNED INCOME TAX CREDIT DENIED TO INDIVIDUALS WITH 
              SUBSTANTIAL UNEARNED INCOME.

    (a) In General.--Paragraph (1) of section 32(c) (relating to 
individuals eligible to claim the earned income tax credit) is amended 
by adding at the end the following new subparagraph:
                    ``(G) Exception for individual with substantial 
                interest and dividend income.--The term `eligible 
                individual' shall not include any individual if the 
                aggregate amount of interest and dividends includible 
                in the gross income of the taxpayer for the taxable 
                year exceeds $2,500.''
    (b) Conforming Amendment.--
            (1) Paragraph (2) of section 32(i) (relating to inflation 
        adjustments) is amended to read as follows:
            ``(2) Unearned income limitation.--In the case of a taxable 
        year beginning in a calendar year after 1996, the dollar amount 
        contained in subsection (c)(1)(G) shall be increased by an 
        amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 1995' for `calendar year 1992' in 
                subparagraph (B) thereof.
        If any amount as adjusted under the preceding sentence is not a 
        multiple of $50, such dollar amount shall be rounded to the 
        nearest multiple of $50.''
            (2) Paragraph (1) of section 32(i) is amended by adding at 
        the end the following new flush sentence:
        ``If any amount as adjusted under the preceding sentence is not 
        a multiple of $10, such dollar amount shall be rounded to the 
        nearest multiple of $10.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

        TITLE II--PROVISIONS RELATING TO INTERNATIONAL TAXATION

SEC. 201. REVISION OF TAX RULES ON EXPATRIATION.

    (a) In General.--Subpart A of part II of subchapter N of chapter 1 
is amended by inserting after section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

    ``(a) General Rules.--For purposes of this subtitle:
            ``(1) Citizens.--If any United States citizen relinquishes 
        his citizenship during a taxable year, all property held by 
        such citizen at the time immediately before such relinquishment 
        shall be treated as sold at such time for its fair market value 
        and any gain or loss shall be taken into account for such 
        taxable year.
            ``(2) Certain residents.--If any long-term resident of the 
        United States ceases to be subject to tax as a resident of the 
        United States for any portion of any taxable year, all property 
        held by such resident at the time of such cessation shall be 
        treated as sold at such time for its fair market value and any 
        gain or loss shall be taken into account for the taxable year 
        which includes the date of such cessation.
    ``(b) Exclusion for Certain Gain.--The amount which would (but for 
this subsection) be includible in the gross income of any taxpayer by 
reason of subsection (a) shall be reduced (but not below zero) by 
$600,000.
    ``(c) Property Treated as Held.--For purposes of this section, 
except as otherwise provided by the Secretary, an individual shall be 
treated as holding--
            ``(1) all property which would be includible in his gross 
        estate under chapter 11 were such individual to die at the time 
        the property is treated as sold,
            ``(2) any other interest in a trust which the individual is 
        treated as holding under the rules of section 679(e) 
        (determined by treating such section as applying to foreign and 
        domestic trusts), and
            ``(3) any other interest in property specified by the 
        Secretary as necessary or appropriate to carry out the purposes 
        of this section.
    ``(d) Exceptions.--The following property shall not be treated as 
sold for purposes of this section:
            ``(1) United states real property interests.--Any United 
        States real property interest (as defined in section 
        897(c)(1)), other than stock of a United States real property 
        holding corporation which does not, on the date the individual 
        relinquishes his citizenship or ceases to be subject to tax as 
        a resident, meet the requirements of section 897(c)(2).
            ``(2) Interest in certain retirement plans.--
                    ``(A) In general.--Any interest in a qualified 
                retirement plan (as defined in section 4974(d)), other 
                than any interest attributable to contributions which 
                are in excess of any limitation or which violate any 
                condition for taxfavored treatment.
                    ``(B) Foreign pension plans.--
                            ``(i) In general.--Under regulations 
                        prescribed by the Secretary, interests in 
                        foreign pension plans or similar retirement 
                        arrangements or programs.
                            ``(ii) Limitation.--The value of property 
                        which is treated as not sold by reason of this 
                        subparagraph shall not exceed $500,000.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Relinquishment of citizenship.--A citizen shall be 
        treated as relinquishing his United States citizenship on the 
        date the United States Department of State issues to the 
        individual a certificate of loss of nationality or on the date 
        a court of the United States cancels a naturalized citizen's 
        certificate of naturalization.
            ``(2) Long-term resident.--
                    ``(A) In general.--The term `long-term resident' 
                means any individual (other than a citizen of the 
                United States) who is a lawful permanent resident of 
                the United States and, as a result of such status, has 
                been subject to tax as a resident in at least 10 
                taxable years during the period of 15 taxable years 
                ending with the taxable year during which the sale 
                under subsection (a) is treated as occurring.
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), there shall not be taken into account--
                            ``(i) any taxable year during which any 
                        prior sale is treated under subsection (a) as 
                        occurring, or
                            ``(ii) any taxable year prior to the 
                        taxable year referred to in clause (i).
    ``(f) Termination of Deferrals, Etc.--On the date any property held 
by an individual is treated as sold under subsection (a)--
            ``(1) any period deferring recognition of income or gain 
        shall terminate, and
            ``(2) any extension of time for payment of tax shall cease 
        to apply and the unpaid portion of such tax shall be due and 
        payable.
    ``(g) Election by Expatriating Residents.--Solely for purposes of 
determining gain under subsection (a)--
            ``(1) In general.--At the election of a resident not a 
        citizen of the United States, property--
                    ``(A) which was held by such resident on the date 
                the individual first became a resident of the United 
                States during the period of long-term residency to 
                which the treatment under subsection (a) relates, and
                    ``(B) which is treated as sold under subsection 
                (a),
        shall be treated as having a basis on such date of not less 
        than the fair market value of such property on such date.
            ``(2) Election.--Such an election shall apply to all 
        property described in paragraph (1), and, once made, shall be 
        irrevocable.
    ``(h) Deferral of Tax on Closely Held Business Interests.--The 
District Director may enter into an agreement with any individual which 
permits such individual to defer payment for not more than 5 years of 
any tax imposed by subsection (a) by reason of holding any interest in 
a closely held business (as defined in section 6166(b)) other than a 
United States real property interest described in subsection (d)(1).
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.
    ``(j) Cross Reference.--

                                ``For termination of United States 
citizenship for tax purposes, see section 7701(a)(47).''
    (b) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following new 
paragraph:
            ``(47) Termination of united states citizenship.--An 
        individual shall not cease to be treated as a United States 
        citizen before the date on which the individual's citizenship 
        is treated as relinquished under section 877A(e)(1).''
    (c) Conforming Amendments.--
            (1) Section 877 is amended by adding at the end the 
        following new subsection:
    ``(f) Termination.--This section shall not apply to any individual 
who is subject to the provisions of section 877A.''
            (2) Paragraph (10) of section 7701(b) is amended by adding 
        at the end the following new sentence: ``This paragraph shall 
        not apply to any individual who is subject to the provisions of 
        section 877A.''
    (d) Clerical Amendment.--The table of sections for subpart A of 
part II of subchapter N of chapter 1 is amended by inserting after the 
item relating to section 877 the following new item:

                              ``Sec. 877A. Tax responsibilities of 
                                        expatriation.''
    (e) Effective Date.--The amendments made by this section shall 
apply to--
            (1) United States citizens who relinquish (within the 
        meaning of section 877A(e)(1) of the Internal Revenue Code of 
        1986, as added by this section) United States citizenship on or 
        after February 6, 1995, and
            (2) long-term residents (as defined in such section) who 
        cease to be subject to tax as residents of the United States on 
        or after such date.

SEC. 202. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

    (a) In General.--Section 6048 (relating to returns as to certain 
foreign trusts) is amended to read as follows:

``SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

    ``(a) Notice of Certain Events.--
            ``(1) General rule.--On or before the 90th day (or such 
        later day as the Secretary may prescribe) after any reportable 
        event, the responsible party shall--
                    ``(A) notify each trustee of the trust of the 
                requirements of subsection (b), and
                    ``(B) provide written notice of such event to the 
                Secretary in accordance with paragraph (2).
            ``(2) Contents of notice.--The notice required by paragraph 
        (1)(B) shall contain such information as the Secretary may 
        prescribe, including--
                    ``(A) the amount of money or other property (if 
                any) transferred to the trust in connection with the 
                reportable event,
                    ``(B) the identity of the trust and of each trustee 
                and beneficiary (or class of beneficiaries) of the 
                trust, and
                    ``(C) a statement that each trustee of the trust 
                has been informed of the requirements of subsection 
                (b).
            ``(3) Reportable event.--For purposes of this subsection, 
        the term `reportable event' means--
                    ``(A) the creation of any foreign trust by a United 
                States person,
                    ``(B) the transfer of any money or property to a 
                foreign trust by a United States person, including a 
                transfer by reason of death,
                    ``(C) a domestic trust becoming a foreign trust,
                    ``(D) the death of a citizen or resident of the 
                United States who is a grantor of a foreign trust, and
                    ``(E) the residency starting date (within the 
                meaning of section 7701(b)(2)(A)) of a grantor of a 
                foreign trust subject to tax under section 679(a)(3).
        Subparagraphs (A) and (B) shall not apply with respect to a 
        trust described in section 404(a)(4) or 404A.
            ``(4) Responsible party.--For purposes of this subsection, 
        the term `responsible party' means--
                    ``(A) the grantor in the case of a reportable event 
                described in subparagraph (A) or (E) of paragraph (3),
                    ``(B) the transferor in the case of a reportable 
                event described in paragraph (3)(B) other than a 
                transfer by reason of death,
                    ``(C) the trustee of the domestic trust in the case 
                of a reportable event described in paragraph (3)(C), 
                and
                    ``(D) the executor of the decedent's estate in the 
                case of a transfer by reason of death.
    ``(b) Trust Reporting Requirements.--If a foreign trust, at any 
time during a taxable year of such trust--
            ``(1) has a grantor who is a United States person and--
                    ``(A) such grantor is treated as the owner of any 
                portion of such trust under the rules of subpart E of 
                part I of subchapter J of chapter 1, or
                    ``(B) any portion of such trust would be included 
                in the gross estate of such grantor if the grantor were 
                to die at such time, or
            ``(2) directly or indirectly distributes, credits, or 
        allocates money or property to any United States person 
        (whether or not the trust has a grantor described in paragraph 
        (1)),
then such trust shall meet the requirements of subsection (c) (relating 
to trust information and agent) and subsection (d) (relating to annual 
return).
    ``(c) Contents of Section 6048 Statement.--
            ``(1) In general.--The requirements of this subsection are 
        met if the trust files with the Secretary a statement which 
        contains such information as the Secretary may prescribe and 
        which--
                    ``(A) identifies a United States person who is the 
                trust's limited agent to provide the Secretary with 
                such information that reasonably should be available to 
                the trust for purposes of applying sections 7602, 7603, 
                and 7604 with respect to any request by the Secretary 
                to examine trust records or produce testimony related 
                to any transaction by the trust or with respect to any 
                summons by the Secretary for such records or testimony, 
                and
                    ``(B) contains an agreement to comply with the 
                requirements of subsection (d).
            ``(2) Special rule.--A foreign trust which appoints an 
        agent described in paragraph (1)(A) shall not be considered to 
        have an office or a permanent establishment in the United 
        States solely because of the activities of such agent pursuant 
        to this section. For purposes of this section, the appearance 
        of persons or production of records by reason of the creation 
        of the agency shall not subject such persons or records to 
        legal process for any purpose other than determining the 
        correct treatment under this title of the activities and 
        operations of the trust.
    ``(d) Annual Returns and Statements.--The requirements of this 
subsection are met if--
            ``(1) the trust makes a return for the taxable year which 
        sets forth a full and complete accounting of all trust 
        activities and operations for the taxable year, and contains 
        such other information as the Secretary may prescribe; and
            ``(2) the trust furnishes such information as the Secretary 
        may prescribe to each United States person--
                    ``(A) who is treated as the owner of any portion of 
                such trust under the rules of subpart E of part I of 
                subchapter J of chapter 1,
                    ``(B) to whom any item with respect to the taxable 
                year is credited or allocated, or
                    ``(C) who receives a distribution from such trust 
                with respect to the taxable year.
    ``(e) Time and Manner of Filing Information.--Any notice, 
statement, or return required under this section shall be made at such 
time and in such manner as the Secretary shall prescribe.
    ``(f) Modification of Return Requirements.--The Secretary is 
authorized to suspend or modify any requirement of this section if the 
Secretary determines that the United States has no significant tax 
interest in obtaining the required information.''
    (b) Penalties.--Section 6677 (relating to failure to file 
information returns with respect to certain foreign trusts) is amended 
to read as follows:

``SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN 
              FOREIGN TRUSTS.

    ``(a) Failure To Report Certain Events.--
            ``(1) In general.--In the case of a reportable event 
        described in any subparagraph of section 6048(a)(3) for which a 
        responsible party does not file a written notice meeting the 
        requirements of section 6048(a)(2) within the time specified in 
        section 6048(a)(1), the responsible party shall pay a penalty 
        of $10,000. If any failure described in the preceding sentence 
        continues for more than 90 days after the day on which the 
        Secretary mails notice of such failure to the responsible 
        party, such party shall pay a penalty (in addition to the 
        $10,000 amount) of $10,000 for each 30-day period (or fraction 
        thereof) during which such failure continues after the 
        expiration of such 90-day period.
            ``(2) 35-percent penalty.--In the case of a reportable 
        event described in subparagraph (A), (B), or (C) of section 
        6048(a)(3) (other than a transfer by reason of death), the 
        aggregate amount of the penalties under paragraph (1) shall not 
        be less than an amount equal to 35 percent of the gross value 
        of the property involved in such event (determined as of the 
        date of the event).
            ``(3) Responsible party.--For purposes of this subsection, 
        the term `responsible party' has the meaning given to such term 
        by section 6048(a)(4).
    ``(b) Failure To Make Certain Statements and Returns.--
            ``(1) In general.--In the case of any failure to meet the 
        requirements of section 6048(b), the appropriate tax treatment 
        of any trust transactions or operations shall be determined by 
        the Secretary in the Secretary's sole discretion from the 
        Secretary's own knowledge or from such information as the 
        Secretary may obtain through testimony or otherwise.
            ``(2) Monetary penalty.--In the case of any failure to meet 
        the requirements of section 6048(b) with respect to a trust 
        described in such section by reason of paragraph (1) thereof, 
        the grantor described in such paragraph (1) shall pay a penalty 
        of $10,000 for each taxable year with respect to which the 
        foreign trust fails to meet such requirements. If any failure 
        described in the preceding sentence continues for more than 90 
        days after the day on which the Secretary mails notice of such 
        failure to such grantor, such grantor shall pay a penalty (in 
        addition to any other penalty) of $10,000 for each 30-day 
        period (or fraction thereof) during which such failure 
        continues after the expiration of such 90-day period.
    ``(c) Reasonable Cause Exception.--No penalty shall be imposed by 
this section on any failure which is shown to be due to reasonable 
cause and not due to willful neglect. The fact that a foreign 
jurisdiction would impose a civil or criminal penalty on the taxpayer 
(or any other person) for disclosing the requested documentation is not 
reasonable cause.
    ``(d) Deficiency Procedures Not To Apply.--Subchapter B of chapter 
63 (relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed by this section.''
    (c) Clerical Amendments.--
            (1) The table of sections for subpart B of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6048 and inserting the following new item:

                              ``Sec. 6048. Information with respect to 
                                        certain foreign trusts.''
            (2) The table of sections for part I of subchapter B of 
        chapter 68 is amended by striking the item relating to section 
        6677 and inserting the following new item:

                              ``Sec. 6677. Failure to file information 
                                        with respect to certain foreign 
                                        trusts.''
    (d) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply--
                    (A) to reportable events occurring on or after 
                February 6, 1995, and
                    (B) to the extent such amendments require reporting 
                for any taxable year under section 6048(b) of the 
                Internal Revenue Code of 1986 (as added by this 
                section), to taxable years beginning after the date of 
                the enactment of this Act.
            (2) Notices.--For purposes of section 6048(a) of such Code, 
        the 90th day referred to therein shall in no event be treated 
        as being earlier than the 90th day after the date of the 
        enactment of this Act.

SEC. 203. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE 
              OR MORE UNITED STATES BENEFICIARIES.

    (a) In General.--Section 679 (relating to foreign trusts having one 
or more United States beneficiaries) is amended to read as follows:

``SEC. 679. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES 
              BENEFICIARIES.

    ``(a) Transferor Treated as Owner.--
            ``(1) In general.--A United States person who directly or 
        indirectly transfers property to a foreign trust (other than a 
        trust described in section 404(a)(4) or section 404A) shall be 
        treated as the owner for his taxable year of the portion of 
        such trust attributable to such property if for such year there 
        is a United States beneficiary of such trust.
            ``(2) Exception.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any sale or exchange of property to a trust if--
                            ``(i) the trust pays fair market value for 
                        such property, and
                            ``(ii) all of the gain to the transferor is 
                        recognized at the time of transfer.
                    ``(B) Certain obligations not taken into account.--
                For purposes of subparagraph (A), in determining 
                whether the transferor received fair market value, 
                there shall not be taken into account--
                            ``(i) any obligation of--
                                    ``(I) the trust,
                                    ``(II) any grantor or beneficiary 
                                of the trust, or
                                    ``(III) any person who is related 
                                (within the meaning of section 
                                643(i)(3)) to any grantor or 
                                beneficiary of the trust, and
                            ``(ii) except as provided in regulations, 
                        any obligation which is guaranteed by a person 
                        described in clause (i).
                    ``(C) Treatment of deemed sale election under 
                section 1057.--For purposes of subparagraph (A), a 
                transfer with respect to which an election under 
                section 1057 is made shall not be treated as a sale or 
                exchange.
            ``(3) Special rules applicable to foreign grantor who later 
        becomes a united states person.--A nonresident alien individual 
        who becomes a United States resident within 5 years after 
        directly or indirectly transferring property to a foreign trust 
        shall be treated for purposes of this section and section 6048 
        as having transferred such property, and any undistributed 
        income (including all realized and unrealized gains) 
        attributable thereto, to the foreign trust immediately after 
        becoming a United States resident. For this purpose, a 
        nonresident alien shall be treated as becoming a resident of 
        the United States on the residency starting date (within the 
        meaning of section 7701(b)(2)(A)).
    ``(b) Beneficiaries Treated as Transferors in Certain Cases.--For 
purposes of this section and section 6048, if--
            ``(1) a citizen or resident of the United States who is 
        treated as the owner of any portion of a trust under subsection 
        (a) dies,
            ``(2) property is transferred to a foreign trust by reason 
        of the death of a citizen or resident of the United States, or
            ``(3) a domestic trust to which any United States person 
        made a transfer becomes a foreign trust,
then, except as otherwise provided in regulations, the trust 
beneficiaries shall be treated as having transferred to such trust (as 
of the date of the applicable event under paragraph (1), (2), or (3)) 
their respective interests (as determined under subsection (e)) in the 
property involved.
    ``(c) Trusts Acquiring United States Beneficiaries.--If--
            ``(1) subsection (a) applies to a trust for the 
        transferor's taxable year, and
            ``(2) subsection (a) would have applied to the trust for 
        the transferor's immediately preceding taxable year but for the 
        fact that for such preceding taxable year there was no United 
        States beneficiary for any portion of the trust,
then, for purposes of this subtitle, the transferor shall be treated as 
having received as an accumulation distribution taxable under subpart D 
an amount equal to the undistributed net income (as determined under 
section 665(a) as of the close of such immediately preceding taxable 
year) attributable to the portion of the trust referred to in 
subsection (a).
    ``(d) Trusts Treated as Having a United States Beneficiary.--
            ``(1) In general.--For purposes of this section, a trust 
        shall be treated as having a United States beneficiary for the 
        taxable year unless--
                    ``(A) under the terms of the trust, no part of the 
                income or corpus of the trust may be paid or 
                accumulated during the taxable year to or for the 
                benefit of a United States person, and
                    ``(B) if the trust were terminated at any time 
                during the taxable year, no part of the income or 
                corpus of such trust could be paid to or for the 
                benefit of a United States person.
        To the extent provided by the Secretary, for purposes of this 
        subsection, the term `United States person' includes any person 
        who was a United States person at any time during the existence 
        of the trust.
            ``(2) Attribution of ownership.--For purposes of paragraph 
        (1), an amount shall be treated as paid or accumulated to or 
        for the benefit of a United States person if such amount is 
        paid to or accumulated for a foreign corporation, foreign 
        partnership, or foreign trust or estate, and--
                    ``(A) in the case of a foreign corporation, more 
                than 50 percent of the total combined voting power of 
                all classes of stock of such corporation entitled to 
                vote is owned (within the meaning of section 958(a)) or 
                is considered to be owned (within the meaning of 
                section 958(b)) by United States shareholders (as 
                defined in section 951(b)),
                    ``(B) in the case of a foreign partnership, a 
                United States person is a partner of such partnership, 
                or
                    ``(C) in the case of a foreign trust or estate, 
                such trust or estate has a United States beneficiary 
                (within the meaning of paragraph (1)).
    ``(e) Determination of Beneficiaries' Interests in Trust.--
            ``(1) General rule.--For purposes of this section, a 
        beneficiary's interest in a foreign trust shall be based upon 
        all relevant facts and circumstances, including the terms of 
        the trust instrument and any letter of wishes or similar 
        document, historical patterns of trust distributions, and the 
        existence of and functions performed by a trust protector or 
        any similar advisor.
            ``(2) Special rule.--In the case of beneficiaries whose 
        interests in a trust cannot be determined under paragraph (1)--
                    ``(A) the beneficiary having the closest degree of 
                kinship to the grantor shall be treated as holding the 
                remaining interests in the trust not determined under 
                paragraph (1) to be held by any other beneficiary, and
                    ``(B) if 2 or more beneficiaries have the same 
                degree of kinship to the grantor, such remaining 
                interests shall be treated as held equally by such 
                beneficiaries.
            ``(3) Constructive ownership.--If a beneficiary of a 
        foreign trust is a corporation, partnership, trust, or estate, 
        the shareholders, partners, or beneficiaries shall be deemed to 
        be the trust beneficiaries for purposes of this section.
            ``(4) Taxpayer return position.--A taxpayer shall clearly 
        indicate on its income tax return--
                    ``(A) the methodology used to determine that 
                taxpayer's trust interest under this section, and
                    ``(B) if the taxpayer knows (or has reason to know) 
                that any other beneficiary of such trust is using a 
                different methodology to determine such beneficiary's 
                trust interest under this section.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending on or after February 6, 1995.
            (2) Section 679(a).--Paragraphs (2) and (3) of section 
        679(a) of the Internal Revenue Code of 1986 (as added by this 
        section) shall apply to--
                    (A) any trust created on or after February 6, 1995, 
                and
                    (B) the portion of any trust created before such 
                date which is attributable to actual transfers of 
                property to the trust on or after such date.
            (3) Section 679(b).--
                    (A) In general.--Paragraphs (1) and (2) of section 
                679(b) of such Code (as so added) shall apply to--
                            (i) any trust created on or after the date 
                        of the enactment of this Act, and
                            (ii) the portion of any trust created 
                        before such date which is attributable to 
                        actual transfers of property to the trust on or 
                        after such date.
                    (B) Section 679(b)(3).--Section 679(b)(3) of such 
                Code (as so added) shall take effect on February 6, 
                1995, without regard to when the property was 
                transferred to the trust.

SEC. 204. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR 
              TRUST RULES.

    (a) In General.--So much of section 672(f) (relating to special 
rule where grantor is foreign person) as precedes paragraph (2) 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 being included (directly or 
        through 1 or more entities) in the gross income of a citizen or 
        resident of the United States or a domestic corporation. The 
        preceding sentence shall not apply to any portion of an 
        investment trust if such trust is treated as a trust for 
        purposes of this title and the grantor of such portion is the 
        sole beneficiary of such portion.''
    (b) Credit for Certain Taxes.--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.''
    (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.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.
    (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, 1996, such trust becomes a foreign 
        trust, or the assets of such trust are transferred to a foreign 
        trust,
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.

SEC. 205. GRATUITOUS TRANSFERS BY PARTNERSHIPS AND FOREIGN 
              CORPORATIONS.

    (a) In General.--Subchapter C of chapter 80 (relating to provisions 
affecting more than one subtitle) is amended by adding at the end the 
following new section:

``SEC. 7874. PURPORTED GIFTS BY PARTNERSHIPS AND FOREIGN CORPORATIONS.

    ``(a) In General.--Any property (including money) that is 
purportedly a direct or indirect gift by a partnership or a foreign 
corporation to a person who is not a partner of the partnership or a 
shareholder of the corporation, respectively, may be recharacterized by 
the Secretary to prevent the avoidance of tax. The Secretary may not 
recharacterize gifts made for bona fide business or charitable 
purposes.
    ``(b) Statements on Recipient's Return.--A taxpayer who receives a 
purported gift subject to subsection (a) shall attach a statement to 
his income tax return for the year of receipt that identifies the 
property received and describes fully the circumstances surrounding the 
purported gift.
    ``(c) Exemption.--Subsection (a) shall not apply to purported gifts 
received by any person during any taxable year if the amount thereof is 
less than $2,500.
    ``(d) Regulations.--The Secretary may prescribe such rules as may 
be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for such subchapter 
C is amended by adding at the end the following new item:

                              ``Sec. 7874. Purported gifts by 
                                        partnerships and foreign 
                                        corporations.''
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts received after the date of the enactment of this Act.

SEC. 206. INFORMATION REPORTING REGARDING LARGE FOREIGN GIFTS.

    (a) In General.--Subpart A of part III of subchapter A of chapter 
61 is amended by inserting after section 6039E the following new 
section:

``SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS.

    ``(a) In General.--If the value of the aggregate foreign gifts 
received by a United States person (other than an organization 
described in section 501(c) and exempt from tax under section 501(a)) 
during any taxable year exceeds $100,000, such United States person 
shall furnish (at such time and in such manner as the Secretary shall 
prescribe) such information as the Secretary may prescribe regarding 
each foreign gift received during such year.
    ``(b) Foreign Gift.--For purposes of this section, the term 
`foreign gift' means any amount received from a person other than a 
United States person which the recipient treats as a gift or bequest. 
Such term shall not include any qualified transfer (within the meaning 
of section 2503(e)(2)).
    ``(c) Penalty For Failure To File Information.--
            ``(1) In general.--If a United States person fails to 
        furnish the information required by subsection (a) with respect 
        to any foreign gift within the time prescribed therefor 
        (including extensions)--
                    ``(A) the tax consequences of the receipt of such 
                gift shall be determined by the Secretary in the 
                Secretary's sole discretion from the Secretary's own 
                knowledge or from such information as the Secretary may 
                obtain through testimony or otherwise, and
                    ``(B) such United States person shall pay (upon 
                notice and demand by the Secretary and in the same 
                manner as tax) an amount equal to 5 percent of the 
                amount of such foreign gift for each month for which 
                the failure continues (not to exceed 25 percent of such 
                amount in the aggregate).
            ``(2) Reasonable cause exception.-- Paragraph (1) shall not 
        apply to any failure to report a foreign gift if the United 
        States person shows that the failure is due to reasonable cause 
        and not due to willful neglect.
    ``(d) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the purposes of this section.''
    (b) Clerical Amendment.--The table of sections for such subpart is 
amended by inserting after the item relating to section 6039E the 
following new item:

                              ``Sec. 6039F. Notice of large gifts 
                                        received from foreign 
                                        persons.''
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts received after the date of the enactment of this Act 
in taxable years ending after such date.

SEC. 207. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS WHICH ARE 
              NOT GRANTOR TRUSTS.

    (a) Modification of Interest Charge on Accumulation 
Distributions.--Subsection (a) of section 668 (relating to interest 
charge on accumulation distributions from foreign trusts) is amended to 
read as follows:
    ``(a) General Rule.--For purposes of the tax determined under 
section 667(a)--
            ``(1) Sum of interest charges for each throwback year.--The 
        interest charge (determined under paragraph (2)) with respect 
        to any distribution is the sum of the interest charges for each 
        of the throwback years to which such distribution is allocated 
        under section 666(a).
            ``(2) Interest charge for year.--Except as provided in 
        paragraph (6), the interest charge for any throwback year on 
        such year's allocable share of the partial tax computed under 
        section 667(b) with respect to any distribution shall be 
        determined for the period--
                    ``(A) beginning on the due date for the throwback 
                year, and
                    ``(B) ending on the due date for the taxable year 
                of the distribution,
        by using the rates and method applicable under section 6621 for 
        underpayments of tax for such period. For purposes of the 
        preceding sentence, the term `due date' means the date 
        prescribed by law (determined without regard to extensions) for 
        filing the return of the tax imposed by this chapter for the 
        taxable year.
            ``(3) Allocable partial tax.--For purposes of paragraph 
        (2), a throwback year's allocable share of the partial tax is 
        an amount equal to such partial tax multiplied by the 
        fraction--
                    ``(A) the numerator of which is the amount deemed 
                by section 666(a) to be distributed on the last day of 
                such throwback year, and
                    ``(B) the denominator of which is the accumulation 
                distribution taken into account under section 666(a).
            ``(4) Throwback year.--For purposes of this subsection, the 
        term `throwback year' means any taxable year to which a 
        distribution is allocated under section 666(a).
            ``(5) Periods of nonresidence.--The period under paragraph 
        (2) shall not include any portion thereof during which the 
        beneficiary was not a citizen or resident of the United States.
            ``(6) Throwback years before 1996.--In the case of any 
        throwback year beginning before 1996--
                    ``(A) interest for the portion of the period 
                described in paragraph (2) which occurs before the 
                first taxable year beginning after 1995 shall be 
                determined by using an interest rate of 6 percent and 
                no compounding, and
                    ``(B) interest for the remaining portion of such 
                period shall be determined as if the partial tax 
                computed under section 667(b) for the throwback year 
                were increased (as of the beginning of such first 
                taxable year) by the amount of the interest determined 
                under subparagraph (A).''
    (b) Rule When Information Not Available.--Subsection (d) of section 
666 is amended by adding at the end the following: ``In the case of a 
distribution from a foreign trust to which section 6048(b) applies, 
adequate records shall not be considered to be available for purposes 
of the preceding sentence unless such trust meets the requirements 
referred to in such section. If a taxpayer is not able to demonstrate 
when a trust was created, the Secretary may use any reasonable 
approximation based on available evidence.''
    (c) Abusive Transactions.--Section 643(a) is amended by inserting 
after paragraph (6) the following new paragraph:
            ``(7) Abusive transactions.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to carry 
        out the purposes of this part, including regulations to prevent 
        avoidance of such purposes.''
    (d) Treatment of Use of Trust Property.--Section 643 (relating to 
definitions applicable to subparts A, B, C, and D) is amended by adding 
at the end the following new subsection:
    ``(i) Use of Foreign Trust Property.--
            ``(1) General rule.--For purposes of subparts B, C, and D, 
        if, during a taxable year of a foreign trust a trust 
        participant of such trust directly or indirectly uses any of 
        the trust's property, the use value for such taxable year shall 
        be treated as an amount paid to such participant (other than 
        from income for the taxable year) within the meaning of 
        sections 661(a)(2) and section 662(a)(2).
            ``(2) Exemption.--Paragraph (1) shall not apply to any 
        trust participant as to whom the aggregate use value during the 
        taxable year does not exceed $2,500.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Use value.--Except as provided in 
                subparagraph (B), the term `use value' means the fair 
                market value of the use of property reduced by any 
                amount paid for such use by the trust participant or by 
                any person who is related to such participant.
                    ``(B) Special rule for cash and cash equivalent.--A 
                direct or indirect loan of cash, or cash equivalent, by 
                a foreign trust shall be treated as a use of trust 
                property by the borrower and the full amount of the 
                loan principal shall be the use value.
                    ``(C) Use by related party.--
                            ``(i) Use by a person who is related to a 
                        trust participant shall be treated as use by 
                        the participant.
                            ``(ii) If property is used by any person 
                        who is a related person with respect to more 
                        than one trust participant, then the property 
                        shall be treated as used by the trust 
                        participant most closely related, by blood or 
                        otherwise, to such person.
                    ``(D) Property includes cash and cash 
                equivalents.--The term `property' includes cash and 
                cash equivalents.
                    ``(E) Trust participant.--The term `trust 
                participant' means each grantor and beneficiary of the 
                trust.
                    ``(F) Related person.--A person is related to a 
                trust participant if the relationship between such 
                persons would result in a disallowance of losses under 
                section 267(b) or 707(b). In applying section 267 for 
                purposes of the preceding sentence--
                            ``(i) section 267(e) shall be applied as if 
                        such person or the trust participant were a 
                        pass-thru entity,
                            ``(ii) section 267(b) shall be applied by 
                        substituting `at least 10 percent' for `more 
                        than 50 percent' each place it appears, and
                            ``(iii) in determining the family of an 
                        individual under section 267(c)(4), such 
                        section shall be treated as including the 
                        spouse (and former spouse) of such individual 
                        and of each other person who is treated under 
                        such section as being a member of the family of 
                        such individual or spouse.
                    ``(G) Subsequent transactions regarding loan 
                principal.--If any loan described in subparagraph (B) 
                is taken into account under paragraph (1), any 
                subsequent transaction between the trust and the 
                original borrower regarding the principal of the loan 
                (by way of complete or partial repayment, satisfaction, 
                cancellation, discharge, or otherwise) shall be 
                disregarded for purposes of this title.''
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after the date of the enactment of this Act.
            (2) Interest charge.--The amendment made by subsection (a) 
        shall apply to interest for throwback years beginning before, 
        on, or after the date of the enactment of this Act.

SEC. 208. RESIDENCE OF ESTATES AND TRUSTS.

    (a) Treatment as United States Person.--Paragraph (30) of section 
7701(a) is amended by striking subparagraph (D) and by inserting after 
subparagraph (C) the following:
                    ``(D) any estate or trust if--
                            ``(i) a court within the United States is 
                        able to exercise primary supervision over the 
                        administration of the estate or trust, and
                            ``(ii) in the case of a trust, one or more 
                        United States fiduciaries have the authority to 
                        control all substantial decisions of the 
                        trust.''
    (b) Conforming Amendment.--Paragraph (31) of section 7701(a) is 
amended to read as follows:
            ``(31) Foreign estate or trust.--The term `foreign estate' 
        or `foreign trust' means any estate or trust other than an 
        estate or trust described in section 7701(a)(30)(D).''
    (c) Effective Date.--The amendments made by this section shall 
apply--
            (1) to taxable years beginning after December 31, 1996, and
            (2) at the election of the trustee of a trust, to taxable 
        years beginning after the date of the enactment of this Act and 
        on or before December 31, 1996.
Such an election, once made, shall be irrevocable.

                TITLE III--ADDITIONAL EMPOWERMENT ZONES

SEC. 301. ADDITIONAL EMPOWERMENT ZONES.

    (a) In General.--Paragraph (2) of section 1391(b) (relating to 
designations of empowerment zones and enterprise communities) is 
amended--
            (1) by striking ``9'' and inserting ``11'',
            (2) by striking ``6'' and inserting ``8'', and
            (3) by striking ``750,000'' and inserting ``1,000,000''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.
                                 <all>
S 453 IS----2
S 453 IS----3
S 453 IS----4