ACCUMULATED INCOME DISTRIBUTION DEEMED MADE BEFORE TRUST SHIFTED TO DOMESTIC SITUS IS RULED DISTRIBUTED FROM FOREIGN TRUST.

Rev. Rul. 91-6

ISSUE

If a foreign trust accumulates income, changes its situs so as to become a domestic trust, and then makes a distribution to its beneficiary that under the accumulation distribution rules of section 666 of the Internal Revenue Code is deemed to have been made in a year when the trust was a foreign trust, is the distribution treated as a distribution from a foreign trust for purposes of the accumulation distribution rules of sections 665 through 668?

FACTS

G, a nonresident alien, died in 1977, leaving a will that bequeathed a portion of G's estate to FT, a foreign trust. The income beneficiary of FT is B, a United States citizen and resident. The terms of the trust permit the trustee to distribute the income annually to B, or, in the trustee's discretion, to accumulate the income for future distribution to B at such time as the trustee determines.

Until 1987 the trustee accumulated and reinvested the trust income. In 1987 the trustee changed the situs of the trust to the United States in a manner that did not cause a termination of the trust or the constructive distribution of trust assets to B. The trustee then distributed the accumulated income of the trust to B.

LAW

Sections 665 through 668 of the Code (subpart D) provide rules for the treatment of distributions by trusts of accumulated income.

Section 665 defines the terms used in subpart D, including the term "accumulation distribution." Section 666 provides that an accumulation distribution is deemed distributed in preceding taxable years. Section 667 provides for the treatment of the amounts deemed distributed by the trust in the preceding taxable years. Section 668 provides rules for computation of an interest charge that section 667 imposes on accumulation distributions from a foreign trust to a United States beneficiary.

More specifically, section 665(b) of the Code provides that the term "accumulation distribution" means, for any taxable year of the trust, the amount by which the amounts specified in section 661(a)(2) for that taxable year exceed distributable net income for that year reduced (but not below zero) by the amounts specified in section 661(a)(1).

Section 666(a) of the Code provides, in part, that the amount of the accumulation distribution of the trust for a taxable year shall be deemed to be an amount within the meaning of section 661(a)(2) distributed on the last day of each of the preceding taxable years, commencing with the earliest of those years, to the extent that amount exceeds the total of any undistributed net income for all earlier preceding years. The amount deemed distributed in a preceding year under section 666(a) shall not exceed the undistributed net income of that preceding year.

Section 667(a) of the Code provides, in part, that the total of the amounts that are treated under section 666 as having been distributed by a trust in a preceding taxable year shall be included in the income of a beneficiary of the trust when paid, credited, or required to be distributed to the extent that the total would have been included in the income of the beneficiary under section 662(a)(2) if the total had been paid to the beneficiary on the last day of that preceding taxable year. Section 667(a) further provides that the tax to be imposed on a beneficiary whose income includes such an amount shall consist of the sum of (1) a partial tax computed on the taxable income reduced by an amount equal to the total of such amounts, at the rate and in the manner as if section 667 had not been enacted, (2) a partial tax determined as provided in section 667(b), and (3) in the case of a foreign trust, the interest charge determined as provided in section 668. Section 667(d) provides special rules for the computation of the partial tax by foreign trusts.

ANALYSIS

In 1976, Congress amended subpart D by adopting new rules regarding foreign trusts with United States beneficiaries. Congress was concerned that a foreign trust accumulating income subject to a low foreign tax rate was at an advantage compared to a United States trust accumulating income subject to a higher United States tax rate. Congress sought to minimize this advantage by enacting the foreign trust provisions of subpart D. See S. Rep. No. 938, 94th Cong., 2d Sess. 215-217 (1976); 1976-3 (Vol. 3) C.B. 253-255; H.R. Rep. No. 658, 94th Cong., 1st Sess. 206-208 (1975), 1976-3 (Vol. 3) C.B. 898- 900. These provisions include an additional tax burden under section 668 on distributions from an accumulating foreign trust to a United States beneficiary.

The question is whether the accumulation distribution by a trust in a year when it is a domestic trust, which distribution is "deemed" to have been made in a preceding year when the trust was a foreign trust, should be treated as a distribution from a foreign trust for purposes of the subpart D rules.

Under section 666 of the Code, an accumulation distribution is determined as if it had been made by the trust in earlier taxable years. The beneficiary is taxed on amounts deemed distributed in prior taxable years under the provisions of section 667(a). The legislative history of the foreign trust provisions of subpart D indicates a desire to curb a perceived abuse, the accumulation of income by means of a foreign trust at more favorable tax rates for later distribution to a United States beneficiary. Both the statutory framework of subpart D and the expressed congressional intent with respect to foreign trusts justify looking to the status of the trust as foreign or domestic in each taxable year in which a distribution is deemed to have occurred under section 666. Otherwise, a trust could avoid the subpart D foreign trust rules by changing its situs from foreign to domestic before distributing its accumulated income.

Accordingly, the distribution by FT is treated as a distribution by a foreign trust for purposes of the accumulation distribution rules of sections 665 through 668 of the Code.

HOLDING

If a foreign trust accumulates income, changes its situs so as to become a domestic trust, and then makes a distribution that under the accumulation distribution rules of section 666 of the Code is deemed to have been made in a year in which the trust was a foreign trust, the distribution is treated as a distribution from a foreign trust for purposes of the accumulation distribution rules of sections 665 through 668.

DRAFTING INFORMATION

The principal author of this revenue ruling is Ann Veninga of the Office of Assistant Chief Counsel (Passthroughs and Special Industries.) For further information regarding this revenue ruling contact Ms. Veninga on (202) 566-4751 (not a toll-free call).