The 35% penalty under I.R.C. section 6677 for failing to report a distribution from a foreign trust applies against a person who is both the beneficiary and grantor/owner of a foreign trust. At least, that is now the rule for taxpayers in the second circuit. This draconian penalty for failing to properly report a foreign trust is applicable even if the taxpayer and trust paid all required taxes, if any, with respect to the trust.
In the case before the court, the taxpayer (Wilson) was the sole owner and beneficiary of a foreign trust. He received a distribution from the foreign trust. He filed his tax return late. The IRS assessed a penalty equal to 35% of the amount of the distribution for failing to timely disclose the distribution.