| Instructions for Form 3520 |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:
A separate Form 3520 must be filed for transactions with each foreign trust.
File Form 3520 if:
-
You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding
obligation of a related foreign trust (or a person related to the trust) that you treated as a qualified obligation during
the current tax year.
Responsible party, reportable event, and qualified obligation are defined on pages 3 and 4.
Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for
Part I.
-
You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust
under the
grantor trust rules.
Complete the identifying information on page 1 of the form and Part II. See the instructions for Part II.
-
You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust during the current tax year
or a
related foreign trust held an outstanding obligation issued by you (or a person related to you) that you treated as a qualified
obligation (defined on
page 3) during the current tax year.
Complete the identifying information on page 1 of the form and Part III. See the instructions for Part III.
-
You are a U.S. person who, during the current tax year, received either:
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More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident
alien
individual or foreign estate) that you treated as gifts or bequests; or
-
More than $12,760 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations
or
foreign partnerships) that you treated as gifts.
Complete the identifying information on page 1 of the form and Part IV. See the instructions for Part IV.
Note.
You may also be required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
Form 3520 does not have to be filed to report the following transactions.
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Transfers to foreign trusts described in sections 402(b), 404(a)(4), or 404A.
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Most fair market value (FMV) transfers by a U.S. person to a foreign trust. However, some FMV transfers must nevertheless
be reported on
Form 3520 (e.g., transfers in exchange for obligations that are treated as qualified obligations, transfers of appreciated
property to a foreign trust
for which the U.S. transferor does not immediately recognize all of the gain on the property transferred, transfers involving
a U.S. transferor that
is related to the foreign trust). See Section III of Notice 97-34, 1997-25 I.R.B. 22.
-
Transfers to foreign trusts that have a current determination letter from the IRS recognizing their status as exempt from
income taxation
under section 501(c)(3).
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Transfers to, ownership of, and distributions from a Canadian registered retirement savings plan (RRSP) or a Canadian registered
retirement
income fund (RRIF), where the U.S. citizen or resident alien holding an interest in such RRSP or RRIF is eligible to file
Form 8891, U.S. Information
Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF.
-
Distributions from foreign trusts that are taxable as compensation for services rendered (within the meaning of section 672(f)(2)(B)
and its
regulations), so long as the recipient reports the distribution as compensation income on its applicable federal income tax
return.
-
Distributions from foreign trusts to domestic trusts that have a current determination letter from the IRS recognizing their
status as
exempt from income taxation under section 501(c)(3).
-
Domestic trusts that become foreign trusts to the extent the trust is treated as owned by a foreign person, after application
of section
672(f).
Two transferors or grantors of the same foreign trust, or two U.S. beneficiaries of the same foreign trust, may file a joint
Form 3520, but only if
they file a joint income tax return.
In general, Form 3520 is due on the date that your income tax return is due, including extensions. In the case of a Form 3520
filed with respect to
a U.S. decedent, Form 3520 is due on the date that the estate tax return is due (or would be due if the estate were required
to file a return),
including extensions. Send Form 3520 to the Internal Revenue Service Center, P. O. Box 409101, Ogden, UT 84409.
Form 3520 must have all required attachments to be considered complete.
Note.
If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with
respect to any event or
period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire
before the date that is 3
years after the date on which the required information is reported. See section 6501(c)(8).
If the return is filed by:
-
An individual or a fiduciary, it must be signed and dated by that individual or fiduciary.
-
A partnership, it must be signed and dated by a general partner or limited liability company member.
-
A corporation, it must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting
officer, or
any other corporate officer (such as a tax officer) who is authorized to sign.
The paid preparer must complete the required preparer information and:
Inconsistent Treatment of Items
The U.S. beneficiary and U.S. owner's tax return must be consistent with the Form 3520-A, Annual Information Return of Foreign
Trust With a U.S.
Owner, filed by the foreign trust unless you report the inconsistency to the IRS. If you are treating items on your tax return
differently from the
way the foreign trust treated them on its return, file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment
Request (AAR). See
Form 8082 for more details.
A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally,
the penalty is:
-
35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the transfer,
-
35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of
the
distribution, or
-
5% of the amount of certain foreign gifts for each month for which the failure to report continues (not to exceed a total
of 25%). See
section 6039F(c).
If a foreign trust has a U.S. owner and the trust fails to file the required annual reports on trust activities and income,
the U.S. owner is
subject to a penalty equal to 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person
(the gross reportable
amount). See Form 3520-A.
Additional penalties may be imposed if noncompliance continues after the IRS mails a notice of failure to comply with required
reporting. However,
this penalty may not exceed the gross reportable amount. Also, penalties will only be imposed to the extent that the transaction
is not reported. For
example, if a U.S. person transfers property worth $1 million to a foreign trust but only reports $400,000 of that amount,
penalties could only be
imposed on the unreported $600,000.
For more information, see section 6677.
Reasonable cause.
No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause
and not willful neglect.
Note.
The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly,
reluctance on
the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information
is not reasonable cause.
A distribution is any gratuitous transfer of money or other property from a trust, whether or not the trust is treated as
owned by another person
under the grantor trust rules, and without regard to whether the recipient is designated as a beneficiary by the terms of
the trust. A distribution
includes the receipt of trust corpus and the receipt of a gift or bequest described in section 663(a).
A distribution also includes constructive transfers from a trust. For example, if charges you make on a credit card are paid
by a foreign trust or
guaranteed or secured by the assets of a foreign trust, the amount charged will be treated as a distribution to you by the
foreign trust. Similarly,
if you write checks on a foreign trust's bank account, the amount will be treated as a distribution.
Also, if you receive a payment from a foreign trust in exchange for property transferred to the trust or services rendered
to the trust, and the
FMV of the payment received exceeds the FMV of the property transferred or services rendered, the excess will be treated as
a distribution to you.
Examples
-
If you sell stock with an FMV of $100 to a foreign trust and receive $150 in exchange, you have received a distribution of
$50.
-
If you receive $100 from the trust for services performed by you for the trust, and the services have an FMV of $20, you have
received a
distribution of $80.
See the instructions for Part III, line 25, on page 6, for another example of a distribution from a foreign trust.
Foreign Trust and Domestic Trust
A foreign trust is any trust other than a domestic trust.
A domestic trust is any trust if:
-
A court within the United States is able to exercise primary supervision over the administration of the trust; and
-
One or more U.S. persons have the authority to control all substantial decisions of the trust.
A grantor includes any person who creates a trust or directly or indirectly makes a gratuitous transfer of cash or other property
to a trust. A
grantor includes any person treated as the owner of any part of a foreign trust's assets under sections 671 through 679, excluding
section 678.
Note.
If a partnership or corporation makes a gratuitous transfer to a trust, the partners or shareholders are generally treated
as the grantors of the
trust, unless the partnership or corporation made the transfer for a business purpose of the partnership or corporation.
If a trust makes a gratuitous transfer to another trust, the grantor of the transferor trust is treated as the grantor of
the transferee trust,
except that if a person with a general power of appointment over the transferor trust exercises that power in favor of another
trust, such person is
treated as the grantor of the transferee trust, even if the grantor of the transferor trust is treated as the owner of the
transferor trust.
A grantor trust is any trust to the extent that the assets of the trust are treated as owned by a person other than the trust.
See the grantor
trust rules in sections 671 through 679. A part of the trust may be treated as a grantor trust to the extent that only a portion
of the trust assets
are owned by a person other than the trust.
A gratuitous transfer to a foreign trust is any transfer to the trust other than (a) a transfer for FMV or (b) a distribution
to the trust with
respect to an interest held by the trust (i) in an entity other than a trust (e.g., a corporation or a partnership) or (ii)
in an investment trust
described in Regulations section 301.7701-4(c), a liquidating trust described in Regulations section 301.7701-4(d), or an
environmental remediation
trust described in Regulations section 301.7701-4(e).
A transfer of property to a trust may be considered a gratuitous transfer without regard to whether the transfer is a gift
for gift tax purposes
(see Chapter 12 of Subtitle B of the Code).
For purposes of this determination, if a U.S. person contributes property to a trust in exchange for any type of interest
in the trust, such
interest in the trust will be disregarded in determining whether FMV has been received. In addition, a U.S. person will not
be treated as making a
transfer for FMV merely because the transferor is deemed to recognize gain on the transaction.
If you transfer property to a foreign trust in exchange for an obligation of the trust (or a person related to the trust),
it will be a gratuitous
transfer unless the obligation is a qualified obligation. Obligation and qualified obligation are defined below.
Gross reportable amount is:
-
The gross value of property involved in the creation of a foreign trust or the transfer of property to a foreign trust (including
a transfer
by reason of death);
-
The gross value of any portion of a foreign trust treated as owned by a U.S. person under the grantor trust rules or any part
of a foreign
trust that is included in the gross estate of a U.S. citizen or resident;
-
The gross value of assets deemed transferred at the time a domestic trust to which a U.S. citizen or resident previously transferred
property becomes a foreign trust, provided such U.S. citizen or resident is alive at the time the trust becomes a foreign
trust (see section
679(a)(5)); or
-
The gross amount of distributions received from a foreign trust.
Gross value is the FMV of property as determined under section 2031 and its regulations as if the owner had died on the valuation
date. Although
formal appraisals are not generally required, you should keep contemporaneous records of how you arrived at your good faith
estimate.
A guarantee:
-
Includes any arrangement under which a person, directly or indirectly, assures, on a conditional or unconditional basis, the
payment of
another's obligation;
-
Encompasses any form of credit support, and includes a commitment to make a capital contribution to the debtor or otherwise
maintain its
financial viability; or
-
Includes an arrangement reflected in a “comfort letter,” regardless of whether the arrangement gives rise to a legally enforceable
obligation. If an arrangement is contingent upon the occurrence of an event, in determining whether the arrangement is a guarantee,
you must assume
that the event has occurred.
A nongrantor trust is any trust to the extent that the assets of the trust are not treated as owned by a person other than
the trust. Thus, a
nongrantor trust is treated as a taxable entity. A trust may be treated as a nongrantor trust with respect to only a portion
of the trust assets. See
Grantor Trust above.
An obligation includes any bond, note, debenture, certificate, bill receivable, account receivable, note receivable, open
account, or other
evidence of indebtedness, and, to the extent not previously described, any annuity contract.
An owner of a foreign trust is the person that is treated as owning any of the assets of a foreign trust under the grantor
trust rules.
Property means any property, whether tangible or intangible, including cash.
A qualified obligation, for purposes of this form, is any obligation only if:
-
The obligation is reduced to writing by an express written agreement;
-
The term of the obligation does not exceed 5 years (including options to renew and rollovers) and it is repaid within the
5-year
term;
-
All payments on the obligation are denominated in U.S. dollars;
-
The yield to maturity of the obligation is not less than 100% of the applicable federal rate under section 1274(d) for the
day on which the
obligation is issued and not greater than 130% of the applicable federal rate;
-
The U.S. person agrees to extend the period for assessment of any income or transfer tax attributable to the transfer and
any consequential
income tax changes for each year that the obligation is outstanding, to a date not earlier than 3 years after the maturity
date of the obligation,
unless the maturity date of the obligation does not extend beyond the end of the U.S. person's tax year and is paid within
such period (this is done
on Part I, Schedule A, and Part III, as applicable); and
-
The U.S. person reports the status of the obligation, including principal and interest payments, on Part I, Schedule C, and
Part III, as
applicable, for each year that the obligation is outstanding.
A related person generally includes any person who is related to you for purposes of section 267 and 707(b). This includes,
but is not limited to:
-
A member of your family—your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents,
etc.),
lineal descendants (children, grandchildren, etc.), and the spouses of any of these persons.
-
A corporation in which you, directly or indirectly, own more than 50% in value of the outstanding stock.
See section 643(i)(2)(B) and the regulations under sections 267 and 707(b).
Person related to a foreign trust.
A person is related to a foreign trust if such person, without regard to the transfer at issue, is a grantor of the
trust, a beneficiary of the
trust, or is related to any grantor or beneficiary of the trust. See the definition of related person on page 3.
A reportable event includes:
-
The creation of a foreign trust by a U.S. person.
-
The transfer of any money or property, directly or indirectly, to a foreign trust by a U.S. person, including a transfer by
reason of death.
This includes transfers that are deemed to have occurred under sections 679(a)(4) and (5).
-
The death of a citizen or resident of the United States if:
Responsible party means:
-
The grantor in the case of the creation of an inter vivos trust,
-
The transferor, in the case of a reportable event (defined above) other than a transfer by reason of death, or
-
The executor of the decedent's estate in any other case (whether or not the executor is a U.S. person).
A U.S. agent is a U.S. person (defined below) that has a binding contract with a foreign trust that allows the U.S. person
to act as the trust's
authorized U.S. agent in applying sections 7602, 7603, and 7604 with respect to:
-
Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed,
or required
to be taken into account under the grantor trust rules, with respect to a foreign trust; or
-
Any summons by the IRS for such records or testimony.
A U.S. grantor, a U.S. beneficiary, or a domestic corporation controlled by the grantor or beneficiary may act as a U.S. agent.
However, you may
not treat the foreign trust as having a U.S. agent unless you enter the name, address, and taxpayer identification number
of the U.S. agent on lines
3a through 3g. See Identification numbers on page 5.
If the person identified as the U.S. agent does not produce records or testimony when requested or summoned by the IRS, the
IRS may redetermine the
tax consequences of your transactions with the trust and impose appropriate penalties under section 6677.
The agency relationship must be established by the time the U.S. person files Form 3520 for the relevant tax year and must
continue as long as the
statute of limitations remains open for the relevant tax year. If the agent resigns or liquidates, or its responsibility as
an agent of the trust is
terminated, see Section IV(B) of Notice 97-34.
A U.S. beneficiary generally includes any U.S. person that could possibly benefit (directly or indirectly) from the trust
(including an amended
trust) at any time, whether or not the person is named in the trust instrument as a beneficiary and whether or not the person
can receive a
distribution from the trust in the current year. In addition, a U.S. beneficiary includes:
-
A foreign corporation that is a controlled foreign corporation (as defined in section 957(a)),
-
A foreign partnership if a U.S. person is a partner of the partnership, and
-
A foreign estate or trust if the estate or trust has a U.S. beneficiary.
A foreign trust will be treated as having a U.S. beneficiary unless the terms of the trust instrument specifically prohibit
any distribution of
income or corpus to a U.S. person at any time, even after the death of the U.S. transferor, and the trust cannot be amended
or revised to allow such a
distribution.
A U.S. person is:
-
A citizen or resident alien of the United States (see Pub. 519, U.S. Tax Guide for Aliens, for guidance on determining resident
alien
status),
-
A domestic partnership,
-
A domestic corporation,
-
Any estate (other than a foreign estate, within the meaning of section 7701(a)(31)(A)), and
-
Any domestic trust (defined on page 2).
A U.S. transferor is any U.S. person who:
-
Creates or settles a foreign trust.
-
Directly or indirectly transfers money or property to a foreign trust. This includes a U.S. citizen or resident who has made
a deemed
transfer under section 679(a)(4) or a U.S. resident who has made a deemed transfer under section 679(a)(5).
-
Makes a sale to a foreign trust if the sale was at other than arm's-length terms or was to a related foreign trust, or makes
(or guarantees)
a loan to a related foreign trust.
-
Is the executor of the estate of a U.S. person and:
-
The decedent made a testamentary transfer (a transfer by reason of death) to a foreign trust,
-
Immediately prior to death, the decedent was treated as the owner of any portion of a foreign trust under the grantor trust
rules,
or
-
Any portion of a foreign trust's assets were included in the estate of the decedent.
Generally, the person defined as the transferor is the responsible party (defined above) who must ensure that required information
be provided or
pay appropriate penalties.
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