Wednesday, August 18, 2021

Appeals Court Finds That the 35% and Not The 5% Penalty Applies To Owner/Beneficiary of Foreign Trust

The Second Circuit in 
Wilson, (CA 2 7/28/2021) 128 AFTR 2d ¶2021-5070,
 overruled a district court, when it found that the 35% penalty for failure to report distributions received from a foreign trust applied to an individual who was both the beneficiary and owner of a foreign trust. The district had found that only the 5% penalty applicable to owners of foreign trusts who failed to file annual returns applied.

IRC §6048 requires U.S. owners of a foreign trust to ensure that the trust files an annual return. IRC §6048(c) requires U.S. beneficiaries of a foreign trust to file a return reporting the distributions they received.

IRC §6677 imposes different penalties for the late filing of those two types of foreign trust-related returns: a 35% penalty for beneficiaries who fail to timely report their distributions (IRC §6677(a)) and a 5% penalty for owners who fail to ensure that their trust timely files an annual return (IRC §6677(b))

Joseph Wilson was the U.S. owner and beneficiary of a foreign trust.

Wilson filed both the distribution report and annual return for tax year 2007 late. The IRS assessed a 35% penalty against Wilson for failing to timely disclose the distribution he received as a beneficiary from the trust. Wilson paid and then filed for a refund, arguing he should have been charged only a 5% penalty that applies to trust owners.

The district court sided with Wilson and found that only the 5% penalty applied when a person is both the owner and beneficiary of a foreign trust. (Wilson, (DC NY 2019) 124 AFTR 2d 2019-6693)

The Court of Appeals for the Second Circuit, vacating the district court's judgment, found that "the plain language of IRC §6048 and IRC §6677 requires that when an individual fails to timely report the distributions he received from a foreign trust, the 35% penalty applies; his concurrent status as owner of the trust does not alter this rule."

Have You Been Assessed a Penalty
 for a Late Form 3520 or 
Late Form 3520A?



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