![Proposed Regulations On Loans Of Cash And Property From Foreign Trusts](https://www.taxconnections.com/taxblog/wp-content/uploads/TL-FAHRING-44.jpg?resize=90%2C90&ssl=1)
On May 8, 2024, the Treasury Department issued proposed regulations regarding the classification, taxation, and reporting of foreign trusts. The proposed regulations were issued for sections 643(i), 679, 6039F, 6048, and 6677 of the Internal Revenue Code. The proposed regulations would largely incorporate guidance that the IRS provided in Notice 97-34, with some modifications.[1]
In this post, we’ll take a look at the proposed regulations for section 643(i).
Background
Original Enactment
As first enacted in 1996, section 643(i) of the Internal Revenue Code provides that if a non grantor foreign trust directly or indirectly makes a loan of cash or marketable securities to a United States person who is a grantor or beneficiary or who is related to a grantor or beneficiary of the foreign trust, then that loan is treated as a distribution by the foreign trust to that grantor or beneficiary (a “Section 643(i) distribution”).[2]
A Section 643(i) distribution is treated as having been made by a trust that doesn’t distribute only current income.[3] If adequate records are not provided to determine the proper treatment of a distribution from a foreign trust, then the distribution is treated as an accumulation distribution subject to taxation under subpart D of the trust provisions.[4]
Section 643(i) allows the Treasury Department to make exceptions to this treatment by regulation.[5] The legislative history for Section 643(i) indicates that Congress intended that the Treasury Department issue regulations providing an exception for loans of money or marketable securities with arm’s length terms.[6]
Notice 97-34
On June 23, 1997, the IRS issued Notice 97-34, which provided guidelines an exception to section 643(i) for loans of cash or marketable securities in the case of a “qualified obligation.” [7] The notice defined a “qualified obligation” and provided rules for additional loans between the same parties as well as for the distribution that would result when an obligation ceased to be a qualified obligation.[8] The notice also provided guidance on how to determine the tax consequences of a Section 643(i) distribution.[9]
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