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 (8/2/21)

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, 6 F.4th 432 (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)

For those wanting to read the statutes, § 6048 is here and § 6077 is here.

Based on that holding, the Court reversed the district court’s holding that a U.S. person subject who was both owner and distribution beneficiary could be subject to only the owner penalty of 5%.

Basically, the Court’s reasoning is that the plain meaning of the statutes imposes two separate reporting obligations and separate penalties for each without any indication that only one penalty applies for a pattern of conduct that violates both reporting obligations.