Firm Wants Clarity on Filing Rules for Foreign Trusts, Estates

May 26, 2021

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-28)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Recommendations for Priority Guidance on Tax Return Filing Requirements of Foreign Trusts and Estates

To Whom it May Concern:

This letter responds to the request for recommendations for priority guidance for the 2021-2022 Priority Guidance Plan. This letter requests consideration be given to a priority guidance project regarding the income tax return filing requirements of foreign trusts and estates. There currently are no regulations regarding such filing requirements. The lack of guidance has resulted in a great deal of confusion among such taxpayers (which include foreign pension trusts).

On April 14, 202 I, the Treasury Department and the Internal Revenue Service (IRS) issued Notice 2021-28. The notice formally invited the public to provide recommendations on what issues should be addressed in the Treasury's priority guidance session for 2021-2022. In determining whether the recommendations are priority, the IRS will consider whether the guidance (1) resolves significant issues relevant to a broad class of taxpayers; (2) reduces controversy and lessen the burden on taxpayers or the IRS; (3) relates to recently enacted legislation; (4) involves existing guidance that is outdated, ineffective, insufficient, etc.; (5) promotes sound tax administration; (6) is administrable on a uniform basis; (7) may be drafted in a manner that is easily understood and applied by taxpayers.

Trusts and estates are generally subject to income tax on their taxable income.¹ Foreign trusts and estates are generally subject to income tax if they (i) receive fixed or determinable annual or periodical (FDAP) income from US sources, or (ii) have income that is effectively connected with a US trade or business (ECI).²

Taxpayers (including trusts and estates) are generally required to file a tax return when required by regulations or statute. Such a return is required to be filed according to forms and regulations prescribed by the IRS or the Treasury Department.³

Trusts and estates are required to file an income tax return if they have gross income of $600 or more or they have a beneficiary that is a nonresident alien. In addition, trusts (but not estates) are required to file an income tax return if they have any taxable income.⁴ Foreign trusts and estates may be exempted from the filing requirement pursuant to regulations if their income subject to tax consists only of FDAP income.⁵

Regulations have not been promulgated regarding the income tax return filing requirements of foreign trusts and estates. As a result, it is possible that foreign trusts and estates may be required to file a return if their income consists only of FDAP income that is fully subjected to withholding or they have one or more beneficiaries that is a nonresident alien.

Trusts and estates are also required to file information returns with respect to their beneficiaries. These returns are required if the trust or estate is required to file a tax return. In such case, a statement (on Schedule K-1) must be furnished to each beneficiary who receives a distribution (or is allocated any item of income, deduction, gain, or loss) during the taxable year.⁶

The tax and information returns of a trust or estate are filed by a fiduciary on behalf of the trust or estate.⁷ Similarly, the fiduciary has the obligation to pay any tax (or other amounts) due on behalf of the trust or estate.⁸

The applicable regulations specify the income tax return forms to be filed by individuals, corporations, and domestic trusts and estates,⁹ but do not specify the forms to be filed by foreign trusts and estates. Applicable form instructions provide that fiduciaries of foreign trusts and estates should file their income tax returns on Form 1040-NR.¹⁰ This is a form designed for nonresident alien individuals.

We request that the guidance cover the following subjects:

We note that on November 25, 2020 we provided comments on Form 1040-NR as it relates to foreign trusts and estates. A copy of these comments are attached.

The requested guidance:

• will resolve significant compliance issues relevant to a broad class of taxpayers (fiduciaries of foreign trusts and estates, including foreign pension trusts);

• will reduce controversy and lessen the burden on taxpayers with regard to whether a return is required (or exempted) and the appropriate form;

• involves existing guidance that is ineffective and insufficient;

• will promote sound tax administration by clarifying the compliance rules;

• will be administrable on a uniform basis since the compliance rules will be clarified; and

• may be drafted in a manner that is easily understood and applied by taxpayers since there are similar regulations that apply to taxpayers other than foreign trusts and estates.

We would be more than happy to discuss these issues with you at a convenient time.

Best regards,

Lee G. Zimet
Alvarez & Marsal Taxand, LLC
Morristown, NJ