US Court of Appeals Applies a Multi-Million Dollar Penalty on a Trust Distribution

In a recent case, the US Court of Appeals has upheld a significant penalty against the owner and beneficiary of a foreign trust distribution who did not file timely returns.

The failure to file US trust returns for foreign trusts can result in penalties beginning at $10,000 per omission and reaching as high as:

Ownership of a foreign trust’s assets can be counterintuitive exercise from a US tax standpoint. If the trust is settled by a US person, the grantor trust rules may treat said person as the “tax owner” notwithstanding an intention to distribute or history of distributions to the trust beneficiaries.

In general, Canadian trusts settled by non-US citizen and residents are treated as foreign non-grantor trusts under US tax law where US resident and/or citizen beneficiaries would have to report trust distributions on a timely basis.

In the recent Wilson case (Wilson v. United States, NO. 20-603, 2021 BL 282871 (2d Cir. July 28, 2021)), Joseph Wilson was the sole owner and beneficiary of a foreign trust to which he contributed $9 million in 2003. In 2007, when the trust was worth $9.2 million, he liquidated the trust.

Wilson did not file his returns on time, for the trust’s 2007 tax year and was assessed a 35% penalty of greater than $3.2 million. Though deceased shortly thereafter, his estate’s representatives carried on the fight against the penalty.

A US district court granted partial summary judgement agreeing with the taxpayer that only a 5% penalty should apply. However, the US Court of Appeals for the Second Circuit has overturned the decision and has approved the 35% penalty assessed by the IRS.

If you are US citizen resident in Canada who has organized a Canadian trust or have a Canadian foreign trust with US beneficiaries, timely compliance is imperative. This case demonstrates the IRS’s perseverance for applying and collecting on penalties.

Please contact your Zeifmans advisor or Stanley Abraham at 647.256.7551 if you have any questions about this article or your particular set of facts.


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...