§668 Interest Charge on Accumulation Distributions From Foreign Trusts

Summary

When a foreign trust pays an accumulation distribution, the IRS adds an interest charge to the tax on that payment. The interest is figured using the usual underpayment interest rates and method. The interest covers a period that starts a calculated number of years before the distribution and ends on the distribution date. That number of years is a weighted average: for each past year that still had undistributed net income, multiply that year’s undistributed net income by how many taxable years lie between that year and the distribution year (count the earlier year but not the distribution year). Add those products, divide by the total undistributed net income, and round as the IRS says. Undistributed income year: a past trust year that still had undistributed net income and when the beneficiary was a U.S. citizen or resident for part of the year. Undistributed net income: the income from a trust year that was not paid out. When part of the interest period is before January 1, 1996, interest for that part is 6% and does not compound until January 1, 1996. When a distribution is made, it reduces earlier years’ undistributed net income in proportion. The interest added and the partial tax together cannot be more than the accumulation distribution paid (excluding amounts already treated as distributed under the special deemed-distribution rules). The interest charge cannot be deducted on any tax return.