Federal Tax Crimes: 2d Circuit Holds that A U.S. Person Who Is Both Owner and Beneficiary of Foreign Trust Is Liable for Separate Penalties for Failure to Report in Both Categories (August 2, 2021)

Jack Townsend has made available for download his article, “2d Circuit Holds that A U.S. Person Who Is Both Owner and Beneficiary of Foreign Trust Is Liable for Separate Penalties for Failure to Report in Both Categories”, published on his Federal Tax Crimes blog. The abstract is as follows:

There is a U.S. tax compliance problem with offshore activity often beyond the ability of the IRS to obtain or easily obtain relevant information and ensure that tax is properly reported and collected.  A prominent topic on this blog has been the FBAR reporting obligation that, as relevant to tax, assists in U.S. tax compliance with respect to foreign financial accounts.  A similar problem exists for foreign trusts with U.S. owners and beneficiaries and, not surprisingly, there are obligations for the U.S. owners and beneficiaries to report information to the IRS useful for tax compliance.

In Wilson v. United States, ___ F.4th ___, 2021 U.S. App. LEXIS 22315 (2d Cir. July 28, 2021), 2d Cir. here and GS here, the Court held that the following are two separate filing or reporting obligations that can attract separate penalties when both apply:

§ 6048(b)(1) requires “any United States person [who] receives . . . during any taxable year . . . any distribution from a foreign trust” to “make a return with respect to such trust for such year” that includes, inter alia, “the aggregate amount of the distributions so received from such trust;” the penalty for violating this obligation is 5% (by substitution for the 35% amount) for the § 6048(c)(1) penalty). § 6677(b)(2).

§ 6048(c)(1) requires U.S. owners “of any portion of a foreign trust” to “ensure that . . . such trust makes a return for such [taxable] year which sets forth a full and complete accounting of all trust activities and operations for the year” and “other information as the Secretary [of the Treasury] may prescribe;” the penalty is 35% of the gross reportable amount.  § 6677(a)

Click here to view Jack Townsend’s summary of Wilson v. United States, ___ F.4th ___, 2021 U.S. App. LEXIS 22315 (2d Cir. July 28, 2021), 2d Cir.

Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.

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