[Federal Register Volume 65, Number 152 (Monday, August 7, 2000)]
[Proposed Rules]
[Pages 48198-48202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19896]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-108522-00]
RIN 1545-AY25


Recognition of Gain on Certain Transfers to Certain Foreign 
Trusts and Estates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section 684 
of the Internal Revenue Code relating to recognition of gain on certain 
transfers to certain foreign trusts and estates. The proposed 
regulations affect United States persons who transfer property to 
foreign trusts and estates. This document also provides notice of a 
public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by November 6, 
2000. Requests to speak (with outlines of oral comments to be 
discussed) at the public hearing scheduled for November 8, 2000, must 
be submitted by October 18, 2000.

ADDRESSES: Send submissions to: CC:MSP:RU (REG-108522-00), room 5226, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:MSP:RU (REG-
108522-00), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at: http://www.irs.gov/tax_regs/regslist.html. The 
public hearing will be held in Room 3313, Internal Revenue Building, 
1111 Constitution Ave., NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Karen A. 
Rennie Quarrie at (202) 622-3880; concerning the submissions and 
hearing, Sonya M. Cruse at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 684 of the Internal Revenue Code (Code) was added by 
Section 1131(b) of the Taxpayer Relief Act of 1997 (the Act), Public 
Law 105-34 (111 Stat. 788) (August 5, 1997). The addition affects the 
transfer of property by United States persons to certain foreign trusts 
and foreign estates.

1. Prior Law

    Prior to the enactment of section 684, section 1491, with certain 
exceptions, imposed a 35-percent excise tax on transfers of property by 
a United States person to a foreign trust or estate. Section 1491 
applied to all transfers of appreciated property whether or not at fair 
market value and whether or not the transfer was made with donative 
intent. The excise tax was intended to curtail transfers of appreciated 
property to foreign trusts, because a foreign trust could dispose of 
the property and invest the proceeds of the sale outside the United 
States without incurring any U.S. tax. If the excise tax applied, the 
foreign trust could not increase the basis of the property contributed 
to the trust. Under section 1492(3), the U.S. transferor could make an 
election under section 1057 to treat a transfer of appreciated property 
to a foreign trust as a sale or exchange of such property and pay an 
income tax instead of an excise tax on the gain.

2. Overview of Changes

    Section 1131 of the Act repealed sections 1491 through 1494 and 
section 1057 of the Code and enacted section 684. In so doing, Congress 
eliminated the excise tax on transfers of appreciated property to 
foreign trusts and foreign estates in favor of an income tax on 
transfers of appreciated property to foreign trusts and foreign 
estates. Unlike previous law, however, Congress provided explicit 
regulatory authority to make exceptions to the mandatory tax on such 
transfers. These regulations explain the application of section 684 and 
provide certain exceptions from its application.
    Pursuant to section 684(a) of the Code, any transfer of property by 
a U.S. person to a foreign trust or estate is treated as a taxable 
disposition of the property, except to the extent provided in 
regulations. Such a transfer is treated as a sale or exchange of the 
property for its fair market value. The U.S. transferor must 
immediately recognize gain equal to the excess of the property's fair 
market value over its adjusted basis in the hands of the U.S. 
transferor.
    Pursuant to section 684(b), a U.S. person will not be required to 
recognize gain on the transfer of property to a foreign trust if the 
U.S. transferor (or other person) is considered to be the owner of the 
trust under section 671.
    Pursuant to section 684(c), if a domestic trust becomes a foreign 
trust, all trust assets are considered to be transferred to a foreign 
trust. Thus, appreciated property owned by the trust will be deemed 
sold on the date that the trust status changes from domestic to 
foreign, and gain must be recognized on that date.

Explanation of Provisions

Section1.684-1  Recognition of Gain on Transfers to Certain Foreign 
Trusts and Estates

    Subject to certain exceptions discussed below, the proposed 
regulations provide a general rule of

[[Page 48199]]

immediate recognition of gain when a U.S. person transfers appreciated 
property to a foreign trust or estate. This immediate gain recognition 
applies even if the U.S. transferor might otherwise have been eligible 
to defer gain recognition under another provision of the Code. Losses 
are not permitted to be recognized under the provision. Moreover, if 
multiple assets are transferred, the U.S. transferor may not offset 
losses in some property against gains in other property under the 
provision.
    A U.S. person who transfers property to a foreign trust must comply 
with the reporting requirements set forth in section 6048 of the Code. 
See Notice 97-34 (1997-1 C.B. 422), which provides guidance regarding 
the foreign trust reporting requirements under section 6048.

Section 1.684-2  Transfers

    The proposed regulations define the term transfer broadly to mean 
any direct, indirect or constructive transfer. The determination of 
whether an indirect or constructive transfer has occurred is made under 
the rules set forth in proposed regulation Sec. 1.679-3(c) and 
Sec. 1.679-3(d), respectively, published elsewhere in this issue of the 
Federal Register.
    The proposed regulations provide that, if a U.S. person is 
considered the owner of any portion of a trust, a transfer of property 
from that portion of the trust will be considered a transfer by the 
U.S. person that owns that portion of the trust. Thus, for example, a 
U.S. person cannot avoid the application of section 684 by first 
transferring property to a trust which he is treated as owning under 
the grantor trust rules, then having that trust transfer the property 
to a foreign trust that he is not treated as owning.

Section 1.684-3  Exceptions to the General Rule of Gain Recognition

    Under the proposed regulations, certain types of transfers are 
excepted from the general rule of gain recognition set forth in 
Sec. 1.684-1. A U.S. person who transfers property to a foreign trust 
will not be required to recognize gain on the transfer to the extent 
such trust is considered owned by any person. For example, if a U.S. 
person transfers property to a foreign trust that is treated as having 
a U.S. beneficiary under section 679 and the U.S. person is treated as 
the owner of the trust under that section, the general rule of gain 
recognition will not apply at that time. If, however, the trust 
subsequently ceases to be treated as owned by the U.S. person, 
Sec. 1.684-2(e) provides that the U.S. person will be treated as having 
transferred the assets of the trust to a foreign trust immediately 
before the U.S. person ceases to be considered the owner of the 
original trust. As a result, the U.S. person will be subject to the 
general rule of gain recognition at that time (unless another 
exception, such as the exception for certain transfers on death, 
applies).
    A transfer by a U.S. person to a trust which has received a ruling 
or determination letter from the IRS recognizing the trust's exempt 
status under section 501(c)(3) will be exempt from the general rule of 
gain recognition if the trust's ruling or determination letter has been 
neither revoked nor modified.
    The proposed regulations also provide an exception for transfers by 
a U.S. person to a foreign trust at death if the property transferred 
is included in the U.S. person's gross estate for U.S. estate tax 
purposes and the basis of the property in the hands of the foreign 
trust is determined under section 1014(a) of the Code. For example, if 
a U.S. person previously transferred property to a foreign trust and 
was treated as the owner of the trust under section 679, for purposes 
of section 684 the cessation of ownership status upon the U.S. person's 
death is treated as a deemed transfer to the foreign trust by the 
decedent immediately before her death. If the person retained 
sufficient powers over the trust to cause the trust property to be 
included in her gross estate for estate tax purposes and the basis of 
the property in the hands of the foreign trust is determined under 
section 1014(a) of the Code, the general rule of gain recognition does 
not apply. However, to the extent the trust property is not included in 
her estate and the foreign trust does not receive a step-up in basis in 
the property under section 1014(a), the exception does not apply.
    The proposed regulations also provide an exception to the general 
rule of gain recognition under Sec. 1.684-1 if property is transferred 
for fair market value to an unrelated foreign trust. The determination 
of whether a foreign trust is a related foreign trust is made under the 
principles set forth in Sec. 1.679-1(c)(5). Thus, for example, if a 
U.S. person sells property for fair market value to an unrelated 
foreign trust, the general rule of section 684 will not apply. However, 
if the sale is to a related foreign trust, immediate gain recognition 
is required (unless another exception applies), even if another 
provision of the Code would permit deferral of recognition.
    Finally, the proposed regulations provide that the general rule 
does not apply to a distribution to a trust with respect to an interest 
held by the trust in a non-trust entity (e.g., a corporation or 
partnership), or an interest in certain commercial trusts. For example, 
if a foreign trust owns stock of a U.S. corporation and the U.S. 
corporation makes a distribution to the trust that is properly 
characterized as a dividend with respect to the trust's stock 
ownership, section 684 does not apply.

Section 1.684-4  Outbound Migration of Domestic Trust

    The proposed regulations provide that if a U.S. person transfers 
property to a domestic trust and, for any reason, the domestic trust 
becomes a foreign trust, the domestic trust will be deemed to have 
transferred all of its assets to a foreign trust. The domestic trust 
must immediately recognize gain unless an exception in Sec. 1.684-3 
applies at that time (e.g., the U.S. person is living at the time of 
the trust's change in status and is treated as the owner of the trust 
under section 679). The domestic trust must also fulfill the reporting 
requirements set forth in section 6048 of the Code and Notice 97-34.
    The proposed regulations incorporate the relief for inadvertent 
migrations set forth in Sec. 301.7701-7(d)(2). For example, if a 
trust's status changes from domestic to foreign because of an 
inadvertent change in the trustee, the trust will avoid the application 
of the general gain recognition rule if, within 12 months, it makes 
necessary changes to the trustee in order to remain a domestic trust.

Section 1.684-5  Effective Dates

    This section of the proposed regulations provides effective dates 
with respect to Secs. 1.684-1 through 1.684-4. The rules apply with 
respect to transfers of property to foreign trusts or foreign estates 
made after August 7, 2000. The primary reason for this effective date 
is to immediately address taxpayer concerns with respect to the 
provision of regulatory exceptions to the general rule of gain 
recognition under section 684(a). It should be noted, however, that the 
Internal Revenue Service is not restricted from applying general income 
tax principles to transactions prior to the effective dates of the 
proposed regulations to determine, for example, that a U.S. person has 
made a transfer to a foreign trust.

Special Analysis

    It has been determined that this notice of proposed rule making is 
not a significant regulatory action as defined

[[Page 48200]]

in Executive Order 12866. Therefore, regulatory assessment is not 
required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rule making will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small businesses.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. The IRS and 
Treasury specifically request comments on the clarity of the proposed 
regulations and how they can be made easier to understand. All comments 
will be available for public inspection and copying.
    A public hearing has been scheduled for November 8, 2000, at 10 
a.m. in room 3313, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Because of access restrictions, visitors will not 
be admitted beyond the Internal Revenue Building lobby more than 15 
minutes before the start of the hearing.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by November 6, 2000, and submit an outline of 
the topics to be discussed and the time to be devoted to each topic 
(signed original and eight (8) copies) by October 18, 2000.
    A period of ten (10) minutes will be allocated to each person for 
making comments.
    An agenda showing the scheduling to the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.
    Drafting Information: The principal author of these regulations is 
Karen A. Rennie Quarrie of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.684-1 also issued under 26 U.S.C. 643(a)(7) and 
684(a).
    Section 1.684-2 also issued under 26 U.S.C. 643(a)(7) and 
684(a).,
    Section 1.684-3 also issued under 26 U.S.C. 643(a)(7) and 
684(a).
    Section 1.684-4 also issued under 26 U.S.C. 643(a)(7) and 
684(a).
    Section 1.684-5 also issued under 26 U.S.C. 643(a)(7) and 
684(a). * * *

    Par. 2. Sections 1.684-1, 1.684-2, 1.684-3, 1.684-4 and 1.684-5 are 
added under the undesignated centerheading ``Miscellaneous'' to read as 
follows:


Sec. 1.684-1  Recognition of gain on transfers to certain foreign 
trusts and estates.

    (a) Immediate recognition of gain--(1) In general. Any U.S. person 
who transfers property to a foreign trust or foreign estate shall be 
required to recognize gain at the time of the transfer equal to the 
excess of the fair market value of the property transferred over the 
adjusted basis (for purposes of determining gain) of such property in 
the hands of the U.S. transferor unless an exception applies under the 
provisions of Sec. 1.684-3. The amount of gain recognized is determined 
on an asset-by-asset basis.
    (2) No recognition of loss. Under this section a U.S. person may 
not recognize loss on the transfer of an asset to a foreign trust or 
foreign estate. A U.S. person may not offset gain realized on the 
transfer of an appreciated asset to a foreign trust or foreign estate 
by a loss realized on the transfer of a depreciated asset to the 
foreign trust or foreign estate.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) U.S. person. The term U.S. person means a United States person 
as defined in section 7701(a)(30), and includes a nonresident alien 
individual who elects under section 6013(g) to be treated as a resident 
of the United States.
    (2) U.S. transferor. The term U.S. transferor means any U.S. person 
who makes a transfer (as defined in Sec. 1.684-2) of property to a 
foreign trust or foreign estate.
    (3) Foreign trust. Section 7701(a)(31)(B) defines foreign trust.
    (4) Foreign estate. Section 7701(a)(31)(A) defines foreign estate.
    (c) Reporting requirements. A U.S. person who transfers property to 
a foreign trust or foreign estate must comply with the reporting 
requirements under section 6048.
    (d) Examples. The following examples illustrate the rules of this 
section. In all examples, A is a U.S. person and FT is a foreign trust. 
The examples are as follows:

    Example 1. Transfer to foreign trust.  A transfers property that 
has a fair market value of 1000X to FT. A's adjusted basis in the 
property is 400X. FT has no U.S. beneficiary within the meaning of 
Sec. 1.679-2, and no person is treated as owning any portion of FT. 
Under paragraph (a)(1) of this section, A recognizes gain at the 
time of the transfer equal to 600X.
    Example 2. Transfer of multiple properties. A transfers property 
Q, with a fair market value of 1000X, and property R, with a fair 
market value of 2000X, to FT. At the time of the transfer, A's 
adjusted basis in property Q is 700X, and A's adjusted basis in 
property R is 2200X. FT has no U.S. beneficiary within the meaning 
of Sec. 1.679-2, and no person is treated as owning any portion of 
FT. Under paragraph (a)(1) of this section, A recognizes the 300X of 
gain attributable to property Q. Under paragraph (a)(2) of this 
section, A does not recognize the 200X of loss attributable to 
property R, and may not offset that loss against the gain 
attributable to property Q.
    Example 3. Transfer for less than fair market value. A transfers 
property that has a fair market value of 1000X to FT in exchange for 
400X of cash. A's adjusted basis in the property is 200X. FT has no 
U.S. beneficiary within the meaning of Sec. 1.679-2, and no person 
is treated as owning any portion of FT. Under paragraph (a)(1) of 
this section, A recognizes gain at the time of the transfer equal to 
800X.
    Example 4. Exchange of property for private annuity. A transfers 
property that has a fair market value of 1000X to FT in exchange for 
FT's obligation to pay A 50X per year for the rest of A's life. The 
obligation has an issue price of 1000X. A's adjusted basis in the 
property is 100X. FT has no U.S. beneficiary within the meaning of 
Sec. 1.679-2, and no person is treated as owning any portion of FT. 
A is required to recognize gain equal to 900X immediately upon 
transfer of the property to the trust. This result applies even 
though A might otherwise have been allowed to defer recognition of 
gain under another provision of the Internal Revenue Code.
    Example 5. Transfer of property to related foreign trust in 
exchange for qualified obligation. A transfers property that has a 
fair market value of 1000X to FT in exchange for FT's obligation to 
make payments to A during the next four years. FT is related to A as 
defined in Sec. 1.679-1(c)(5). The obligation, which has an issue 
price of 1000X, is treated as a qualified obligation within the 
meaning of Sec. 1.679-4(d), and no person is treated as owning any 
portion of FT. A's adjusted basis in the property is 100X. A is 
required to

[[Page 48201]]

recognize gain equal to 900X immediately upon transfer of the 
property to the trust. This result applies even though A might 
otherwise have been allowed to defer recognition of gain under 
another provision of the Internal Revenue Code. Section 1.684-3(d) 
provides rules relating to transfers for fair market value to 
unrelated foreign trusts.


Sec. 1.684-2  Transfers.

    (a) In general. A transfer means a direct, indirect, or 
constructive transfer.
    (b) Indirect transfers--(1) In general. Section 1.679-3(c) shall 
apply to determine if a transfer to a foreign trust or foreign estate, 
by any person, is treated as an indirect transfer by a U.S. person to 
the foreign trust or foreign estate.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (b). In all examples, A is a U.S. citizen, FT is a foreign 
trust, and I is A's uncle, who is a nonresident alien. The examples are 
as follows:

    Example 1. Principal purpose of tax avoidance. A creates and 
funds FT for the benefit of A's cousin, who is a nonresident alien. 
FT has no U.S. beneficiary within the meaning of Sec. 1.679-2, and 
no person is treated as owning any portion of FT. In 2004, A decides 
to transfer additional property with a fair market value of 1000X 
and an adjusted basis of 600X to FT. Pursuant to a plan with a 
principal purpose of avoiding the application of section 684, A 
transfers the property to I. I subsequently transfers the property 
to FT. Under paragraph (b) of this section and Sec. 1.679-3(c), A is 
treated as having transferred the property to FT.
    Example 2. U.S. person unable to demonstrate that intermediary 
acted independently. A creates and funds FT for the benefit of A's 
cousin, who is a nonresident alien. FT has no U.S. beneficiary 
within the meaning of Sec. 1.679-2, and no person is treated as 
owning any portion of FT. On July 1, 2004, A transfers property with 
a fair market value of 1000X and an adjusted basis of 300X to I, a 
foreign person. On January 1, 2007, at a time when the fair market 
value of the property is 1100X, I transfers the property to FT. A is 
unable to demonstrate to the satisfaction of the Commissioner, under 
Sec. 1.679-3(c)(2)(ii), that I acted independently of A in making 
the transfer to FT. Under this paragraph (b) and Sec. 1.679-3(c), A 
is treated as having transferred the property to FT. Under this 
paragraph (b) and Sec. 1.679-3(c)(3), I is treated as an agent of A, 
and the transfer is deemed to have been made on January 1, 2007. 
Under Sec. 1.684-1(a), A recognizes gain equal to 800X on that date.

    (c) Constructive transfers. Section 1.679-3(d) shall apply to 
determine if a transfer to a foreign trust or foreign estate is treated 
as a constructive transfer by a U.S. person to the foreign trust or 
foreign estate.
    (d) Transfers by certain trusts--(1) In general. If any portion of 
a trust is treated as owned by a U.S. person, a transfer of property 
from that portion of the trust to a foreign trust is treated as a 
transfer from the owner of that portion to the foreign trust.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (d). In all examples, A is a U.S. person, DT is a domestic 
trust, and FT is a foreign trust. The examples are as follows:

    Example 1. Transfer by a domestic trust. On January 1, 2001, A 
transfers property which has a fair market value of 1000X and an 
adjusted basis of 200X to DT. A retains the power to revoke DT. On 
January 1, 2003, DT transfers property which has a fair market value 
of 500X and an adjusted basis of 100X to FT. At the time of the 
transfer, FT has no U.S. beneficiary as defined in Sec. 1.679-2 and 
no person is treated as owning any portion of FT. A is treated as 
having transferred the property to FT and is required to recognize 
gain of 400X, under Sec. 1.684-1, at the time of the transfer by DT 
to FT.
    Example 2. Transfer by a foreign trust. On January 1, 2001, A 
transfers property which has a fair market value of 1000X and an 
adjusted basis of 200X to FT1. At the time of the transfer, FT1 has 
a U.S. beneficiary as defined in Sec. 1.679-2 and A is treated as 
the owner of FT1 under section 679. On January 1, 2003, FT1 
transfers property which has a fair market value of 500X and an 
adjusted basis of 100X to FT2. At the time of the transfer, FT2 has 
no U.S. beneficiary as defined in Sec. 1.679-2 and no person is 
treated as owning any portion of FT2. A is treated as having 
transferred the property to FT2 and is required to recognize gain of 
400X, under Sec. 1.684-1, at the time of the transfer by FT1 to FT2.

    (e) Transfers when foreign trust no longer treated as owned by a 
U.S. person--(1) In general. If any portion of a foreign trust is 
treated as owned by a U.S. person under subpart E of part I of 
subchapter J, chapter 1 of the Internal Revenue Code, and such portion 
ceases to be treated as owned by that person under such subpart, the 
U.S. person shall be treated as having transferred, immediately before 
the trust is no longer treated as owned by that U.S. person, the assets 
of such portion to a foreign trust.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (e). In all examples, A is a U.S. citizen and FT is a foreign 
trust. The examples are as follows:

    Example 1. Loss of U.S. beneficiary. (i) On January 1, 2001, A 
transfers property, which has a fair market value of 1000X and an 
adjusted basis of 400X, to FT. At the time of the transfer, FT has a 
U.S. beneficiary within the meaning of Sec. 1.679-2, and A is 
treated as owning FT under section 679. Under Sec. 1.684-3(a), 
Sec. 1.684-1 does not cause A to recognize gain at the time of the 
transfer.
    (ii) On July 1, 2003, FT ceases to have a U.S. beneficiary 
within the meaning of Sec. 1.679-2, and as of that date neither A 
nor any other person is treated as owning any portion of FT. On that 
date, the fair market value of the property is 1200X, and its 
adjusted basis equals 350X. Under paragraph (e)(1) of this section, 
A is treated as having transferred the property to FT on July 1, 
2003, and must recognize 850X of gain at that time under Sec. 1.684-
1.
    Example 2. Death of grantor. (i) The initial facts are the same 
as in paragraph (i) of Example 1.
    (ii) On July 1, 2003, A dies, and as of that date no other 
person is treated as the owner of FT. On that date, the fair market 
value of the property is 1200X, and its adjusted basis equals 350X. 
Under paragraph (e)(1) of this section, A is treated as having 
transferred the property to FT immediately before his death, and 
generally is required to recognize 850X of gain at that time under 
Sec. 1.684-1. However, an exception may apply under Sec. 1.684-3(c).
    Example 3. Release of a power. (i) On January 1, 2001, A 
transfers property that has a fair market value of 500X and an 
adjusted basis of 200X to FT. At the time of the transfer, FT does 
not have a U.S. beneficiary within the meaning of Sec. 1.679-2. 
However, A retains the power to revoke the trust. A is treated as 
the owner of the trust under section 676 and, therefore, under 
Sec. 1.684-3(a), A is not required to recognize gain under 
Sec. 1.684-1 at the time of the transfer.
    (ii) On January 1, 2007, A releases the power to revoke the 
trust and, as of that date, neither A nor any other person is 
treated as owning any portion of FT. On that date, the fair market 
value of the property is 900X, and its adjusted basis is 200X. Under 
paragraph (e)(1) of this section, A is treated as having transferred 
the property to FT on January 1, 2007, and must recognize 700X of 
gain at that time.
    (f) Transfers to entities owned by a foreign trust. Section 1.679-
3(f) provides rules that apply with respect to transfers of property by 
a U.S. person to an entity in which a foreign trust holds an ownership 
interest.


Sec. 1.684-3  Exceptions to general rule of gain recognition.

    (a) Transfers to grantor trusts. The general rule of gain 
recognition under Sec. 1.684-1 shall not apply to any transfer of 
property by a U.S. person to a foreign trust to the extent that any 
person is treated as the owner of the trust under section 671. Section 
1.684-2(e) provides rules regarding a subsequent change in the status 
of the trust.
    (b) Transfers to charitable trusts. The general rule of gain 
recognition under Sec. 1.684-1 shall not apply to any transfer of 
property to a foreign trust that has received a ruling or determination 
letter, which has been neither revoked nor modified, from the Internal 
Revenue Service recognizing the trust's exempt status under section 
501(c)(3).
    (c) Certain transfers at death. The general rule of gain 
recognition under Sec. 1.684-1 shall not apply to any transfer of 
property by reason of death of the U.S. transferor if such property is

[[Page 48202]]

included in the gross estate of the U.S. transferor for Federal estate 
tax purposes and the basis of the property in the hands of the foreign 
trust is determined under section 1014(a).
    (d) Transfers for fair market value to unrelated trusts. The 
general rule of gain recognition under Sec. 1.684-1 shall not apply to 
any transfer of property for fair market value to a foreign trust that 
is not a related foreign trust as defined in Sec. 1.679-1(c)(5). 
Section Sec. 1.671-2(e)(2)(ii) defines fair market value.
    (e) Certain distributions to trusts. For purposes of this section, 
a transfer does not include a distribution to a trust with respect to 
an interest held by such trust in an entity other than a trust or an 
interest in certain investment trusts described in Sec. 301.7701-4(c) 
of this chapter, liquidating trusts described in Sec. 301.7701-4(d) of 
this chapter, or environmental remediation trusts described in 
Sec. 301.7701-4(e) of this chapter.
    (f) Examples. The following examples illustrate the rules of this 
section. In all examples, A is a U.S. citizen and FT is a foreign 
trust. The examples are as follows:

    Example 1. Transfer to owner trust. In 2001, A transfers 
property which has a fair market value of 1000X and an adjusted 
basis equal to 400X to FT. At the time of the transfer, FT has a 
U.S. beneficiary within the meaning of Sec. 1.679-2, and A is 
treated as owning FT under section 679. Under paragraph (a) of this 
section, Sec. 1.684-1 does not cause A to recognize gain at the time 
of the transfer. See Sec. 1.684-2(e) for rules that may require A to 
recognize gain if the trust is no longer owned by A.
    Example 2. Property included in U.S. transferor's estate at 
death. (i) The initial facts are the same as Example 1.
    (ii) A dies on July 1, 2004. The fair market value at A's death 
of all property transferred to FT by A is 1500X. The basis in the 
property is 400X. A retained the power to revoke FT, thus, the value 
of all property owned by FT at A's death is includible in A's gross 
estate for U.S. estate tax purposes. Pursuant to paragraph (c) of 
this section, A is not required to recognize gain under Sec. 1.684-1 
to the extent the property is included in A's gross estate and the 
basis of the property in the hands of the foreign trust is 
determined under section 1014(a).
    Example 3. Property not included in U.S. transferor's estate at 
death. (i) The initial facts are the same as Example 1.
    (ii) A dies on July 1, 2004. The fair market value at A's death 
of all property transferred to FT by A is 1500X. The basis in the 
property is 400X. A retained no power over FT and the value of the 
property transferred to FT is not required to be included in A's 
gross estate. Under Sec. 1.684-2(e)(1), A is treated as having 
transferred the property to FT immediately before his death, and 
must recognize 1100X of gain at that time under Sec. 1.684-1.
    Example 4. Transfer of property for fair market value to an 
unrelated foreign trust. A sells a house with a fair market value of 
1000X to FT in exchange for a 30-year note issued by FT. A is not 
related to FT as defined in Sec. 1.679-1(c)(5). The note has an 
issue price of 1000X. FT is not treated as owned by any person. 
Pursuant to paragraph (d) of this section, A is not required to 
recognize gain under Sec. 1.684-1.


Sec. 1.684-4  Outbound migrations of domestic trusts.

    (a) In general. If a U.S. person transfers property to a domestic 
trust, and such trust becomes a foreign trust, the trust shall be 
treated for purposes of this section as having transferred all of its 
assets to a foreign trust and the trust is required to recognize gain 
on the transfer under Sec. 1.684-1(a). The trust must also comply with 
the rules of section 6048.
    (b) Date of transfer. The transfer described in this section shall 
be deemed to occur immediately before, but on the same date that, the 
trust meets the definition of a foreign trust set forth in section 
7701(a)(31)(B).
    (c) Inadvertent migrations. In the event of an inadvertent 
migration, as defined in Sec. 301.7701(d)(2) of this chapter, a trust 
may avoid the application of this section by complying with the 
procedures set forth in Sec. 301.7701-7(d)(2) of this chapter.
    (d) Examples. The following examples illustrate the rules of this 
section. In all examples, A is a U.S. citizen, B is a U.S. citizen, C 
is a nonresident alien, T is a trust. The examples are as follows:

    Example 1. Migration of domestic trust with U.S. beneficiaries. 
A transfers property which has a fair market value of 1000X and an 
adjusted basis equal to 400X to T, a domestic trust, for the benefit 
of A's children who are also United States citizens. B is the 
trustee of T. On January 1, 2001, while A is still alive, B resigns 
as trustee and C becomes successor trustee under the terms of the 
trust. Pursuant to Sec. 301.7701-7(d) of this chapter, T becomes a 
foreign trust. T has U.S. beneficiaries within the meaning of 
Sec. 1.679-2 and A is, therefore, treated as owning FT under section 
679. Pursuant to Sec. 1.684-3(a), neither A nor T is required to 
recognize gain at the time of the migration. Section 1.684-2(e) 
provides rules that may require A to recognize gain upon a 
subsequent change in the status of the trust.
    Example 2. Migration of domestic trust with no U.S. 
beneficiaries. A transfers property which has a fair market value of 
1000X and an adjusted basis equal to 400X to T, a domestic trust for 
the benefit of A's mother who is not a citizen or resident of the 
United States. B is the trustee of T. On January 1, 2001, while A is 
still alive, B resigns as trustee and C becomes successor trustee 
under the terms of the trust. Pursuant to Sec. 301.7701-7(d) of this 
chapter, T becomes a foreign trust, FT. FT has no U.S. beneficiaries 
within the meaning of Sec. 1.679-2 and no person is treated as 
owning any portion of FT. T is required to recognize gain of 600X on 
January 1, 2001. Paragraph (c) of this section provides rules with 
respect to an inadvertent migration of a domestic trust.


Sec. 1.684-5  Effective date.

    (a) Sections 1.684-1 through 1.684-4 apply to transfers of property 
to foreign trusts and foreign estates after August 7, 2000.

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 00-19896 Filed 8-2-00; 1:04 pm]
BILLING CODE 4830-01-P