Residence of Trusts and Estates7701

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-251703-96]

RIN 1545-AU74

Residence of Trusts and Estates--7701

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance

relating to the definition of a trust as a United States person

(domestic trust) or foreign trust. The proposed regulations reflect

changes to the law made by the Small Business Job Protection Act of

1996 and affect the determination of the residency of trusts for

federal tax purposes. This document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by August 4, 1997. Requests to

speak (with outlines of oral comments to be discussed) at the public

hearing scheduled for September 16, 1997, at 10 a.m. must be submitted

by August 26, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-251703-96), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-251703-96), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax_regs/

comments.html.

[[Page 30797]]

The public hearing will be held in the Internal Revenue Service

Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, James A.

Quinn or Eliana Dolgoff, (202) 622-3060; concerning submissions and the

hearing, Evangelista Lee, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 1907 of the Small Business Job Protection Act of 1996 (the

Act), Public Law 104-188, 110 Stat. 1755 (August 20, 1996) amended

sections 7701(a)(30) and (31) to provide a new rule for determining

whether a trust is domestic or foreign (the new rule does not apply to

estates), effective for tax years beginning after December 31, 1996, or

at the election of the trustee of a trust to tax years ending after

August 20, 1996. Section 7701(a)(30)(E) provides that the term United

States person means any trust if (i) a court within the United States

is able to exercise primary supervision over the administration of the

trust (court test), and (ii) one or more United States fiduciaries have

the authority to control all substantial decisions of the trust

(control test). Section 7701(a)(31)(B) provides that the term foreign

trust means any trust other than a trust described in section

7701(a)(30)(E).

Prior to the Act, section 7701(a)(31) provided that foreign estate

and foreign trust mean an estate or trust, as the case may be, the

income of which, from sources without the United States, which is not

effectively connected with the conduct of a trade or business within

the United States, is not includible in gross income under subtitle A.

Accordingly, whether a trust was domestic or foreign depended on

whether the trust was more comparable to a resident or nonresident

alien individual. Thus, it was necessary to consider and weigh various

factors such as the location of the assets, the country under whose

laws the trust was created, the residence of the fiduciary, the

nationality of the decedent or settlor, the nationality of the

beneficiaries, and the location of the administration of the trust. See

Rev. Rul. 60-181 (1960-1 C.B. 257), citing B.W. Jones Trust v.

Commissioner, 46 B.T.A. 531 (1942), aff'd, 132 F.2d 914 (4th Cir.

1943).

The Act made a number of procedural and substantive changes to the

tax treatment of foreign trusts that were designed to improve tax

compliance and administration. In making these overall changes,

Congress believed that it would be appropriate to have an objective

test for determining whether a trust is foreign or domestic.

Consequently, it enacted the two-part test set forth above.

Explanation of Provisions

The proposed regulations provide that a foreign trust is taxed in

the same manner as a nonresident alien. Thus, once a trust is

determined to be a foreign trust, the residency of the fiduciary of the

trust is not relevant in determining the residence of the trust.

Additionally, section 7701(b) does not apply to determine whether a

trust is a resident of the United States, and a foreign trust is not

present in the United States for purposes of section 871(a)(2).

The proposed regulations require that the terms of the trust

instrument and applicable law be applied to determine whether the court

test and the control test are met. The residency of a trust may change

if the result of the court test or control test changes.

The Safe Harbor

The IRS and Treasury Department were concerned that the lack of

authority construing trust law in many states would make it difficult

for taxpayers to determine whether a trust is domestic or foreign under

the court and control tests. Specifically, it may be difficult to

determine whether the court of a particular state would assert primary

supervision over the administration of a trust if that trust had never

appeared before a court. Therefore, the proposed regulations provide a

safe harbor based upon the principle that when the administration of a

trust is conducted entirely within a particular locality, the local

courts will exercise primary supervision over the trust. Restatement

(2d) of Conflicts of Laws Sec. 267. The safe harbor provides that a

trust is a domestic trust if, pursuant to the terms of a trust

instrument, the trust has only United States fiduciaries, such

fiduciaries are administering the trust exclusively in the United

States, and the trust is not subject to an automatic migration

provision. The IRS and Treasury Department request comments on whether

this special rule is sufficient to address the lack of a well-developed

body of local law.

The Court Test

The proposed regulations define the relevant terms for purposes of

the court test. The term court includes any federal, state, or local

court.

The term the United States includes only the States and the

District of Columbia. Accordingly, a court within a territory or

possession of the United States or within a foreign country is not a

court within the United States and a trust subject to the primary

supervision of such a court fails to meet the court test. The IRS and

Treasury Department request comments on the conclusion that the term

the United States is used in its geographical sense and therefore

excludes territories and possessions.

The term is able to exercise means that if petitioned, a court has

or would have the authority under applicable law to render orders or

judgments resolving issues concerning administration of the trust.

The term primary supervision means that a court has or would have

the authority to determine substantially all issues regarding the

administration of the trust. Simply having jurisdiction over the

trustee, a beneficiary, or trust property is not primary supervision.

The term administration of the trust means the carrying out of the

duties imposed on a fiduciary by the terms of the trust instrument and

applicable law.

In order to provide certainty to taxpayers, the proposed

regulations provide some bright-line rules for satisfying the court

test. A trust meets the court test if an authorized fiduciary registers

the trust in a court within the United States under a state statute

that has provisions substantially similar to Article VII, Trust

Administration, of the Uniform Probate Code.

In the case of a testamentary trust established under a will

probated within the United States, if all fiduciaries of the trust have

been qualified as trustees of the trust by a court within the United

States, the trust meets the court test.

In the case of an inter vivos trust, if the fiduciaries or

beneficiaries take steps with a court within the United States (such as

the filing of a written request with the court) that cause the

administration of the trust to be subject to the primary supervision of

the court, the trust meets the court test.

The proposed regulations clarify that if both a United States court

and a foreign court are able to exercise primary supervision over the

administration of the trust, the trust will be considered to meet the

court test.

The proposed regulations contain rules addressing automatic

migration clauses, also known as ``flee clauses.'' The proposed

regulations provide that the court test is not met if a United States

court's attempt to assert jurisdiction or otherwise supervise the

administration of the trust directly or indirectly would cause the

trust to migrate from the United States.

[[Page 30798]]

The Control Test

The control test requires that one or more United States

fiduciaries have the authority to control all substantial decisions of

the trust. Under the proposed regulations, the term fiduciary refers to

any person described in section 7701(a)(6) and Sec. 301.7701-6(b). For

purposes of the control test, any other person that has the power to

control substantial decisions of the trust, for example a trust

protector, will also be treated as a fiduciary. The proposed

regulations treat such persons as fiduciaries because they are

exercising powers traditionally held by fiduciaries or because they can

effectively exercise control over the fiduciaries.

Substantial decisions are those decisions that persons are

authorized or required to make under the terms of the trust instrument

and applicable law and that are not ministerial. Included in the

proposed regulations is a nonexclusive list of substantial decisions.

Substantial decisions do not include decisions exercisable by a grantor

that is not a fiduciary of the trust, or decisions exercisable by a

beneficiary that affect only the beneficiary's interest in the trust.

In accordance with the legislative history, the proposed

regulations provide that United States fiduciaries have the authority

to control all substantial decisions of the trust when they have the

power by vote or otherwise to make all of the substantial decisions of

the trust and no foreign fiduciary has the power to veto the

substantial decisions of the United States fiduciaries.

The proposed regulations contain rules addressing automatic

migration clauses, also known as ``flee clauses.'' The proposed

regulations provide that the control test is not met if an attempt by

any governmental agency or creditor to collect information from or

assert a claim against the trust would cause one or more substantial

decisions of the trust to no longer be controlled by United States

fiduciaries.

The proposed regulations are proposed to apply to trusts for

taxable years beginning after December 31, 1996, and to a trust whose

trustee has elected to apply sections 7701(a)(30) and (31) to the trust

for taxable years ending after August 20, 1996, under section

1907(a)(3)(B) of the Act. Notice 96-65 (1996-52 I.R.B. 28) grants

trusts that meet the conditions specified in that notice additional

time to comply with the new domestic trust criteria contained in the

Act and allows such trusts to continue to file as domestic trusts

during the period specified in that notice. Notice 96-65 also addresses

the time and manner for making the election provided by the Act to

apply the new domestic trust criteria retroactively for taxable years

of the trust ending after August 20, 1996. Notice 96-65 remains in

effect and should be consulted for these purposes.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. It also has

been determined that section 553(b) of the Administrative Procedure Act

(5 U.S.C. chapter 5) does not apply to these regulations, and because

the regulation does not impose a collection of information on small

entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (preferably a

signed original and eight (8) copies) that are submitted timely to the

IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for September 16, 1997, at 10

a.m. in the Internal Revenue Service Auditorium, Internal Revenue

Building, 1111 Constitution Avenue, NW., Washington DC. Because of

access restrictions, visitors will not be admitted beyond the Internal

Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by August 4, 1997, and submit an outline of the

topics to be discussed and the time to be devoted to each topic

(preferably a signed original and eight (8) copies) by August 26, 1997.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information: The principal authors of these regulations

are James A. Quinn and Eliana Dolgoff of the Office of Assistant Chief

Counsel (Passthroughs and Special Industries). However, other personnel

from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Sec. 301.7701-5 [Amended]

Par. 2. The last sentence of section 301.7701-5 is removed.

Par. 3. Section 301.7701-7 is added to read as follows:

Sec. 301.7701-7 Trusts--domestic and foreign.

(a) In general. (1) A trust is a United States person if--

(i) A court within the United States is able to exercise primary

supervision over the administration of the trust (court test); and

(ii) One or more United States fiduciaries have the authority to

control all substantial decisions of the trust (control test).

(2) A trust is a United States person for purposes of the Internal

Revenue Code at any time that the trust meets both the court test and

the control test. For purposes of the regulations in this chapter, the

term domestic trust means a trust that is a United States person. The

term foreign trust means any trust other than a domestic trust.

(3) Except as otherwise provided in part I, subchapter J, chapter 1

of the Code, the taxable income of a foreign trust is computed in the

same manner as the taxable income of a nonresident alien. Thus, section

7701(b) does not apply to determine whether a foreign trust is a

resident alien. In addition, a foreign trust is not considered to be

present in the United States for purposes of section 871(a)(2).

(b) Applicable law. The terms of the trust instrument and

applicable law must be applied to determine whether the court test and

the control test are met.

[[Page 30799]]

(c) In general--(1) Safe harbor. A trust is a domestic trust if the

trust has only United States fiduciaries, as defined in paragraph (e)

of this section, the trust is administered exclusively in the United

States pursuant to the terms of a trust instrument, and the trust is

not subject to an automatic migration provision described in paragraph

(d)(2)(v) or (e)(3) of this section.

(2) Example. The following example illustrates the rule of

paragraph (c)(1) of this section:

Example. A executes a trust instrument for the equal benefit of

A's two children, B and C. The trust instrument provides that DC, a

State Y corporation, is the only trustee of the trust. Pursuant to

the terms of the trust instrument, the trust is administered in

State Y, a state within the United States. The trust is not subject

to an automatic migration provision described in paragraph (d)(2)(v)

or (e)(3) of this section. No person other than DC has any power

over the trust. The trust satisfies the safe harbor of paragraph

(c)(1) and is a domestic trust.

(d) The court test--(1) Definitions. The following definitions

apply for purposes of the court test:

(i) Court. The term court includes any federal, state, or local

court.

(ii) The United States. The term the United States is used in this

section in a geographical sense. Thus, for purposes of the court test,

the United States includes only the States and the District of

Columbia. See section 7701(a)(9). Accordingly, a court within a

territory or possession of the United States or within a foreign

country is not a court within the United States.

(iii) Is able to exercise. The term is able to exercise means that

a court has or would have the authority under applicable law to render

orders or judgments resolving issues concerning administration of the

trust.

(iv) Primary supervision. The term primary supervision means that a

court has or would have the authority to determine substantially all

issues regarding the administration of the entire trust. A court may

have primary supervision even if another court has jurisdiction over a

trustee, a beneficiary, or trust property.

(v) Administration. The term administration of the trust means the

carrying out of the duties imposed on a fiduciary by the terms of the

trust instrument and applicable law, including maintaining the books

and records of the trust, filing tax returns, defending the trust from

suits by creditors, and determining the amount and timing of

distributions.

(2) Situations that meet the court test--(i) Uniform Probate Code.

A trust meets the court test if a trust is registered by an authorized

fiduciary in a court within the United States under a state statute

that has provisions substantially similar to Article VII, Trust

Administration, of the Uniform Probate Code, 8 Uniform Laws Annotated 1

(West Supp. 1997), available from the National Conference of

Commissioners on Uniform State Laws, 676 North St. Clair Street, Suite

1700, Chicago, Illinois 60611.

(ii) Testamentary trust. In the case of a trust created pursuant to

the terms of a will probated within the United States (other than an

ancillary probate), if all fiduciaries of the trust have been qualified

as trustees of the trust by a court within the United States, the trust

meets the court test.

(iii) Inter vivos trust. In the case of a trust other than a

testamentary trust, if the fiduciaries and/or beneficiaries take steps

with a court within the United States that cause the administration of

the trust to be subject to the primary supervision of the court, the

trust meets the court test.

(iv) A United States and a foreign court are able to exercise

primary supervision over the administration of the trust. If both a

United States court and a foreign court are able to exercise primary

supervision over the administration of the trust, the trust meets the

court test.

(v) Automatic migration provisions. Notwithstanding any other

provision in this section, a court within the United States is not

considered to have primary supervision over the administration of the

trust if the trust instrument provides that a United States court's

attempt to assert jurisdiction or otherwise supervise the

administration of the trust directly or indirectly would cause the

trust to migrate from the United States.

(3) Examples. The following examples illustrate the rules of this

paragraph (d):

Example 1. A, a United States citizen, executes a trust

instrument for the equal benefit of A's two United States children.

The trust instrument provides that DC, a domestic corporation, is to

act as trustee of the trust and that the trust is to be administered

in Country X, a foreign country. The trust instrument provides that

the law of State Y, a state within the United States, is to govern

the trust. Under the law of Country X, a court within Country X is

able to exercise primary supervision over the administration of the

trust but, as required by the trust instrument, applies the law of

State Y to the trust. No court within the United States is able to

exercise primary supervision over the administration of the trust.

The trust fails to satisfy the court test and therefore is a foreign

trust.

Example 2. Trust T owns a single asset, an interest in land

located in State Y, a state within the United States. Under the law

of State Y, a trust owning solely real property within the state is

subject to the primary supervision over the administration of the

trust by a court within State Y. The trust satisfies the court test.

Example 3. A, a United States citizen, executes a trust

instrument for his own benefit and the benefit of B, his United

States spouse. The trust instrument provides that the trust is to be

administered in State Y, a state within the United States, by DC, a

State Y corporation. The trust instrument further provides that in

the event that a creditor sues the trustee in a United States court,

the trust will migrate from State Y to Country Z, a foreign

jurisdiction, so that no United States court will have jurisdiction

over the trust. A court within the United States is not able to

exercise primary supervision over the administration of the trust

because the United States court's jurisdiction over the

administration of the trust is automatically terminated in the event

the court attempts to assert jurisdiction. Therefore, the trust

fails to satisfy the court test from the time of its creation and is

a foreign trust.

(e) Control test--(1) Definitions--(i) United States fiduciary. The

term fiduciary includes any person described in section 7701(a)(6) and

Sec. 301.7701-6(b). In addition, for purposes of this section, any

other person who has the power to control one or more substantial

decisions of the trust (and therefore has a power ordinarily held by a

fiduciary) will be treated as a fiduciary. A person may be treated as a

fiduciary even if the trust instrument provides for the person to be

relieved of personal liability for violation of duties. A United States

fiduciary is a fiduciary that is a United States person within the

meaning of section 7701(a)(30). For example, a fiduciary which is a

United States corporation owned by a nonresident alien is a United

States fiduciary.

(ii) Substantial decisions. (A) The term substantial decisions

means those decisions (other than those described in paragraph

(e)(1)(ii)(B) of this section) that persons are authorized or required

to make under the terms of the trust instrument and applicable law and

that are not ministerial. Substantial decisions include, but are not

limited to--

(1) Whether and when to distribute income or corpus;

(2) The amount of any distributions;

(3) The selection of a beneficiary;

(4) The power to make investment decisions;

(5) Whether a receipt is allocable to income or principal;

(6) Whether to terminate the trust;

(7) Whether to compromise, arbitrate, or abandon claims of the

trust;

(8) Whether to sue on behalf of the trust or to defend suits

against the trust; and

(9) Whether to remove, add, or replace a trustee.

[[Page 30800]]

(B) Substantial decisions do not include decisions exercisable by a

grantor, unless the grantor is acting as a fiduciary under section

7701(a)(6) and Sec. 301.7701-6(b). In addition, substantial decisions

do not include decisions exercisable by a beneficiary, unless the

beneficiary is acting as a fiduciary under section 7701(a)(6) and

Sec. 301.7701-6(b), that affect solely the portion of the trust in

which the beneficiary has an interest. Decisions that are ministerial

include decisions regarding details such as the bookkeeping, the

collection of rents, and the execution of investment decisions made by

the fiduciaries.

(iii) Control. Control means having the power, by vote or

otherwise, to make all of the substantial decisions of the trust, with

no other person having the power to veto the substantial decisions.

However, the ability of a grantor (other than a grantor acting as a

fiduciary under section 7701(a)(6) and Sec. 301.7701-6(b)) to veto

another person's substantial decision does not cause such person to

fail to control that substantial decision. In addition, the ability of

a beneficiary (other than a beneficiary acting as a fiduciary under

section 7701(a)(6) and Sec. 301.7701-6(b)) to veto another person's

substantial decision that affects solely the portion of the trust in

which the beneficiary has an interest does not cause such person to

fail to control that substantial decision.

(2) Replacement of a fiduciary. In the event of an inadvertent

change in the fiduciaries that would cause a change in the residency of

a trust, the trust is allowed six months from the date of the change in

the fiduciaries to adjust either the fiduciaries or the residence of

the fiduciaries so as to avoid a change in the residence of the trust.

Inadvertent changes in the fiduciaries include the death of a fiduciary

or the abrupt resignation of a fiduciary. If the adjustment is made

within six months, the trust is treated as retaining its pre-change

residence during the six-month period. If the adjustment is not made

within six months, the trust residence changes as of the date of the

inadvertent change.

(3) Automatic migration provisions. Notwithstanding any other

provision in this section, United States fiduciaries are not considered

to control all substantial decisions of the trust if an attempt by any

governmental agency or creditor to collect information from or assert a

claim against the trust would cause one or more substantial decisions

of the trust to no longer be controlled by United States fiduciaries.

(4) Examples. The following examples illustrate the rules of this

paragraph (e):

Example 1. A is a nonresident alien individual. A is the grantor

and beneficiary of an individual retirement account (IRA) and has

the exclusive power to make decisions regarding withdrawals from the

IRA and to direct its investments. A is not a fiduciary as defined

in paragraph (e)(1)(i) of this section. The IRA has a single United

States trustee and no foreign trustees. The United States trustee

has the power to control all decisions of the trust other than

withdrawal and investment decisions. In this case, decisions

regarding withdrawals and the trust's investments are not

substantial decisions because these decisions are solely exercisable

by the grantor. Therefore, the control test is satisfied because the

United States fiduciary controls all substantial decisions.

Example 2. A is a nonresident alien individual. A is the grantor

of a trust and has the power to revoke the trust, in whole or in

part and revest assets in A. A is the owner of the trust under

section 676. A is not a fiduciary as defined in paragraph (e)(1)(i)

of this section. The trust has two trustees, B, a United States

person and C, a nonresident alien. C's only power is the power to

make distributions from the trust and C can exercise this power

without authorization from B. In this case, decisions exercisable by

A to have trust assets distributed to A are not substantial

decisions because these decisions are exercisable by the grantor.

However, distribution decisions exercisable by C are substantial

decisions. Therefore, the trust is a foreign trust because B does

not control all substantial decisions of the trust.

Example 3. Trust has three fiduciaries, A, B, and C. A and B are

United States citizens and C is a nonresident alien. The trust

instrument directs that C is to make all of the trust's investment

decisions, but that A and B may veto C's investment decisions. A and

B cannot act to make the investment decisions on their own. The

control test is not satisfied because the United States fiduciaries,

A and B, do not have the power to make all of the substantial

decisions of the trust.

Example 4. Trust has two fiduciaries, A and B, both of whom are

United States citizens. The trust instrument provides that C, a

foreign corporation, will serve as an advisor and recommend

investments to A and B. A and B may accept or reject C's

recommendations and can make investments that C has not recommended.

A and B control all other decisions of the trust. A and B delegate

to C the authority to execute the investment decisions approved by A

and B. The control test is satisfied because the United States

fiduciaries control all substantial decisions of the trust.

Example 5. Trust has three fiduciaries, A, B, and C. A and B are

United States citizens and C is a nonresident alien. The trust

instrument provides that no substantial decisions of the trust can

be made unless there is unanimity among the fiduciaries. The control

test is not satisfied because the United States fiduciaries do not

control all the substantial decisions of the trust. No substantial

decisions can be made without C's agreement.

Example 6. (i) A trust that satisfies the court test has three

fiduciaries, A, B, and C. A and B are United States citizens and C

is a nonresident alien. Decisions are made by majority vote of the

fiduciaries. The trust instrument provides that upon the death or

resignation of any of the fiduciaries, D, a nonresident alien, is

the successor fiduciary. A dies and D becomes a fiduciary of the

trust. Two months after A dies, E, a United States person, replaces

D as a fiduciary of the trust. During the period after A's death and

before E begins to serve, the trust satisfies the control test and

remains a domestic trust.

(ii) Assume the same facts as in paragraph (i) of this Example 6

except that at the end of the six-month period after A's death, D

has not been replaced and remains a fiduciary of the trust. The

trust became a foreign trust on the date A died.

Example 7. Trust has three beneficiaries, A, B and C, all of

whom are nonresident aliens. Each beneficiary has the right to

receive all of the income from his or her share of the trust for

life. Each beneficiary also has a limited power of appointment over

his or her respective share of the trust. The trust has only one

fiduciary, D, a United States citizen. The trust meets the control

test because the United States fiduciary controls all substantial

decisions of the trust notwithstanding the beneficiaries' powers of

appointment over their respective interests.

(f) Effective date. This section is applicable to trusts for

taxable years beginning after December 31, 1996, and to trusts whose

trustee has elected to apply sections 7701(a)(30) and (31) to the trust

for taxable years ending after August 20, 1996, under section

1907(a)(3)(B) of the Small Business Job Protection Act of 1996, Public

Law 104-188, 110 Stat. 1755 (26 U.S.C. 7701 note).

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 97-14736 Filed 6-4-97; 8:45 am]

BILLING CODE 4830-01-U