AICPA Says That Foreign Trust Loan Anti-Abuse Rule Should Be Revised

The U.S. Treasury Department should scrap or revise significantly an anti-abuse rule for nonresident aliens who receive loans from foreign trusts, which was included in proposed regulations on how to report foreign trust transactions, the American Institute of Certified Public Accountants said in a letter published on July 15, 2024.

The AICPA said in its letter that the rule should be significantly revised in several ways if it cannot be eliminated entirely. The proposed rule would treat certain loans as distributions under IRC Section 643(i) that originate from foreign trusts and are granted to a nonresident alien who becomes a U.S. person within two years.

Section 643(I) Would Apply To The Outstanding Loan
Amount From The Date The Beneficiary Becomes A
U.S. Citizen Or Resident
"If The Loan Was Not A Qualified Obligation
As Of The Date That It Was Made"
Under The Proposed Anti-Abuse Rule.

Among the institute's recommendations were applying the rule only on a prospective basis, limiting the applicability of the rule to "only if the loan was made to an individual who was previously a resident alien for at least a three-year period, and if the loan was made within two years before the individual resumed his or her resident alien status."

Treasury issued these proposed regulations in May 8, 2024 which were designed to provide guidance on the requirements for individuals to report their transactions with foreign trusts to the Internal Revenue Service, including the receipt of large gifts.

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