In the case of Wilson, et. al. v. United States, Case No. 2:19-cv-05037, US District Court, Eastern District of New York,[1] the Court found that the sole owner/beneficiary of a trust could only be assessed the 5% penalty under §6677 as the owner.  The Court denied the IRS’s attempt to impose the 35% penalty under that section on distributions received.

The issue involves the requirement under IRC §6048 for information reporting by certain foreign trusts.  If a party fails to file the required reports, penalties are imposed under IRC §6677.