[Federal Register Volume 62, Number 108 (Thursday, June 5, 1997)]
[Proposed Rules]
[Pages 30796-30800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14736]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-251703-96]
RIN 1545-AU74


Residence of Trusts and Estates--7701

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: 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.

[[Page 30797]]

    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 Sec. 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 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.

[[Page 30798]]

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 Sec. 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 * * *


Sec. 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:


Sec. 301.7701-7  Trusts--domestic and foreign.

    (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.

[[Page 30799]]

    (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 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 
Sec. 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.

[[Page 30800]]

    (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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 pre-change 
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