[Federal Register Volume 66, Number 140 (Friday, July 20, 2001)]
[Rules and Regulations]
[Pages 37886-37897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17971]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8955]
RIN 1545-A075


Foreign Trusts That Have U.S. Beneficiaries

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 679 of 
the Internal Revenue Code relating to transfers of property by U.S. 
persons to foreign trusts having one or more United States 
beneficiaries. The final regulations affect United States persons who 
transfer property to foreign trusts.

DATES: Effective Date: These regulations are effective July 20, 2001.
    Applicability Date: For dates of applicability, see Sec. 1.679-7.

FOR FURTHER INFORMATION CONTACT: Willard W. Yates at (202) 622-3880 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On August 7, 2000, the IRS and Treasury published a notice of 
proposed rulemaking (REG-209038-89) in the Federal Register (65 FR 
48185) inviting comments relating to the treatment of U.S. persons who 
transfer property to foreign trusts that have one or more U.S. 
beneficiaries. Comments responding to the notice of proposed rulemaking 
were received and a public hearing was held on November 8, 2000. After 
consideration of all of the comments, the proposed regulations are 
adopted as revised by this Treasury decision. The revisions are 
discussed below.

[[Page 37887]]

Explanation of Provisions

Comments Relating to Sec. 1.679-2: Trusts Treated as Having a U.S. 
Beneficiary

A. Benefit to a U.S. Person

    Under Sec. 1.679-2(a)(1) of the proposed regulations, a foreign 
trust that has received property from a U.S. transferor is treated as 
having a U.S. beneficiary unless during the taxable year of the U.S. 
transferor both of the following tests are satisfied: (i) No part of 
the income or corpus of the trust may be paid or accumulated to or for 
the benefit of, either directly or indirectly, a U.S. person; and (ii) 
if the trust is terminated at any time during the taxable year, no part 
of the income or corpus of the trust could be paid to or for the 
benefit of, either directly or indirectly, a U.S. person.
    Section 1.679-2(a)(2)(i) of the proposed regulations provides that, 
for purposes of applying these tests, income or corpus is considered to 
be paid or accumulated to or for the benefit of a U.S. person during a 
taxable year of the U.S. transferor if during that year, directly or 
indirectly, income may be distributed to, or accumulated for the 
benefit of a U.S. person, or corpus may be distributed to, or held for 
the future benefit of, a U.S. person. This determination is made 
without regard to whether income or corpus is actually distributed to a 
U.S. person during that year, and without regard to whether a U.S. 
person's interest in the trust income or corpus is contingent on a 
future event. The proposed regulations provide a narrow exception with 
respect to certain contingent beneficiaries whose interests in the 
trust are so remote as to be negligible.
    One commenter suggests that Sec. 1.679-2(a)(2) of the proposed 
regulations (specifically, Example 5 of Sec. 1.679-2(a)(2)(iii)) is 
overly broad. The commenter suggests that a foreign trust should not be 
treated as having a U.S. beneficiary where the trust's only asset 
consists of stock of a foreign corporation, the trust will terminate 
one year after the death of a U.S. transferor, whereupon distributions 
of corpus or income may be made to a U.S. person, and the trust 
receives no income from the corporation during the term of its 
existence. The commenter argues that because the foreign trust receives 
no income from the foreign corporation during the trust's existence, 
the U.S. person's status as a beneficiary provides the U.S. person with 
nothing of value and, therefore, the foreign trust should not be 
treated as having a U.S. beneficiary.
    The commenter's argument overlooks the clear legislative intent 
underlying section 679 that a foreign trust will be treated as having a 
U.S. beneficiary even in situations where there exists only the 
possibility of distribution of income or corpus to or the accumulation 
of corpus for the benefit of a U.S. person. H.R. Rep. No. 658, 94th 
Cong., 1st Sess., at 210 (1975). The fact that a foreign trust holds an 
asset, such as the stock of a foreign corporation, that produces no 
income during the term of the trust's existence is of no import for 
purposes of determining whether the trust will be treated as having a 
U.S. beneficiary. The determining factor in such a situation is that 
the trust holds corpus for the future benefit of a U.S. person, 
regardless of whether the corpus consists of stock with respect to 
which no dividends have been paid or some other asset that produces no 
current income. Accordingly, the final regulations adopt the rule of 
the proposed regulations.

B. Records and Documents

    Section 1.679-2(a)(4) of the proposed regulations provides that a 
trust may be treated as having a U.S. beneficiary by reference, inter 
alia, to written and oral agreements and understandings not contained 
in the trust document, and to whether the terms of the trust instrument 
are actually or reasonably expected to be disregarded by the parties to 
the trust. A commenter states that this rule creates new and unclear 
rules for purposes of determining whether an arrangement constitutes a 
trust for Federal income tax purposes.
    The determination as to whether an arrangement will be treated as a 
trust is made pursuant to the rules set forth in Sec. 301.7701-4 of the 
regulations. The regulations under section 679 address only the 
determination of whether a foreign trust will be treated as having a 
U.S. beneficiary. The final regulations are not intended to provide 
factors in addition to the rules of Sec. 301.7701-4 for purposes of 
determining whether an arrangement constitutes a trust for Federal 
income tax purposes.

C. Trusts Acquiring a U.S. Beneficiary

    The proposed regulations anticipate situations where the 
beneficiary of a foreign trust may change. Section 1.679-2(c)(1) of the 
proposed regulations provides that if a foreign trust is not treated as 
having a U.S. beneficiary (within the meaning of Sec. 1.679-2(a)) but 
subsequently is treated as having a U.S. beneficiary, the U.S. 
transferor is treated as having additional income in the first taxable 
year of the U.S. transferor in which the trust is treated as having a 
U.S. beneficiary. The amount of the additional income is equal to the 
trust's undistributed net income, as defined in section 665(a), at the 
end of the U.S. transferor's immediately preceding taxable year and is 
subject to the rules of section 668, providing for an interest charge 
on accumulation distributions from foreign trusts.
    A commenter suggests that the rule treating the U.S. transferor as 
having additional income in the first year the foreign trust acquires 
the U.S. beneficiary exceeds the authority of section 679, noting that 
in most cases the transferor will not have received any income from the 
trust.
    Section 1.679-2(c)(1) of the proposed regulations follows closely 
the legislative history underlying section 679 regarding the U.S. 
transferor's recognition of additional income. The legislative history 
provides that the amount of the additional income shall be the foreign 
trust's undistributed net income, i.e., accumulated income that would 
be taxable to a beneficiary upon distribution, as of the close of the 
immediately preceding taxable year. H.R. Rep. No. 658, 94th Cong., 1st 
Sess., at 211, Fn. 13 (1975). In short, the legislative history 
provides that the U.S. transferor's additional income shall receive the 
same treatment as accumulation distributions to beneficiaries of a 
foreign trust. Accumulated income distributions to beneficiaries of 
foreign trusts are subject to the interest charge provided for in 
section 668. Accordingly, the provision for additional income in 
Sec. 1.679-2(c)(1) of the final regulations, as well as the application 
of the interest charge provided for in section 668, are necessary to 
carry out the legislative purpose of section 679. The rule of the 
proposed regulations is adopted by the final regulations without 
change.

Comments Relating to Sec. 1.679-3: Transfers

A. Indirect Transfers--Principal Purpose of Tax Avoidance

    Section 1.679-3(a) of the proposed regulations broadly defines the 
term transfer as any direct, indirect, or constructive transfer by a 
U.S. person to a foreign trust. Section 1.679-3(c) of the proposed 
regulations provides rules for determining when there is an indirect 
transfer. Under Sec. 1.679-3(c)(1) of the proposed regulations, a 
transfer to a foreign trust by any person to whom a U.S. person 
transfers property (referred to as an intermediary) is treated as an 
indirect transfer by a U.S. person if the transfer is made pursuant to 
a plan one of the principal purposes of which is the avoidance of U.S. 
tax. Section 1.679-

[[Page 37888]]

3(c)(2) of the proposed regulations deems a transfer to have been made 
pursuant to such a plan if certain conditions are present.
    The deemed-principal-purpose test of Sec. 1.679-3(c)(2) of the 
proposed regulations is similar to the deemed-principal-purpose test in 
Sec. 1.643(h)-1(a) of the regulations, which concerns distributions 
from foreign trusts to U.S. persons through intermediaries, except that 
the presumption in the proposed regulations applies without regard to 
the period of time between the transfer from the U.S. person to the 
intermediary and from the intermediary to the foreign trust. In 
contrast, the deemed-principal-purpose test of Sec. 1.643(h)-
1(a)(2)(ii) applies only if property is distributed to the U.S. person 
during the period beginning 24 months before and ending 24 months after 
the intermediary's receipt of property from the foreign trust. A 
commenter suggests that a similar time limit should be provided in 
Sec. 1.679-3(c)(2) with respect to outbound transfers.
    In the context of section 643(h), Treasury and the IRS weighed the 
potential for abuse in that area against the possible adverse effect 
that the deemed-principal-purpose test could have on legitimate 
transactions, and concluded that a time limitation in Sec. 1.643(h)-
1(a)(2) was appropriate. However, Treasury and the IRS believe the 
potential for abuse is greater in the case of outbound transfers to 
foreign trusts than in the case of inbound trust distributions to U.S. 
beneficiaries. Congress enacted section 679 in order to prevent the 
tax-free accumulation of income earned by foreign trusts over long 
periods of time that provided foreign trusts with an unwarranted 
advantage over domestic trusts. H.R. Rep. No. 658, 94th Cong., 1st 
Sess., at 207 (1975). Providing for a time limitation to the 
application of Sec. 1.679-3(c) could allow for easy circumvention of 
Congress' purpose in enacting section 679. Treasury and the IRS 
recognize that some transfers that were not intended to avoid U.S. tax 
may come within the presumption in the absence of a specific time 
limit. However, under such circumstances Sec. 1.679-3(c)(2)(ii) 
provides taxpayers with a way to rebut the application of the deemed-
principal-purpose test. Therefore, the final regulations do not include 
a time limitation to the application of Sec. 1.679-3(c)(2)(i).

B. Indirect Transfers--Corporate Distributions

    One commenter asked about the application of the indirect transfer 
rules set forth in Sec. 1.679-3(c) of the proposed regulations to 
successive corporate distributions up a chain of wholly-owned 
corporations to an ultimate shareholder that is a foreign trust. The 
commenter expressed concern that, if one of the lower-tier corporations 
were a domestic corporation, Sec. 1.679-3(c) of the proposed 
regulations could potentially treat the distributions as an indirect 
transfer from the domestic corporation to the foreign trust that would 
be subject to the general rule of Sec. 1.679-1.
    Even if the distributions were characterized as an indirect 
transfer from a domestic corporation to a foreign trust under 
Sec. 1.679-3(c), the indirect transfer would generally be treated as a 
transfer for fair market value under the final sentence of Sec. 1.679-
4(b)(1) and would therefore be excepted from the general rule of 
Sec. 1.679-1 pursuant to Sec. 1.679-4(a)(4). Therefore, no special 
rules have been added to the final regulations to address this 
situation.

C. Transfers to Entities Owned by Foreign Trusts

    Section 1.679-3(f) of the proposed regulations provides specific 
rules regarding transfers by a U.S. person to an entity owned by a 
foreign trust if the U.S. person is related to the foreign trust. The 
transfer is treated as a transfer from the U.S. person to the foreign 
trust, followed by a transfer from the foreign trust to the entity 
owned by the foreign trust, unless the U.S. person demonstrates to the 
satisfaction of the Commissioner that the transfer to the entity is 
properly attributable to the U.S. person's ownership interest in the 
entity. A commenter noted potential conflicts with this rule and 
judicial doctrines concerning constructive corporate distributions.
    Section 1.679-3(f) is not intended to override judicial doctrines 
concerning constructive corporate distributions. For example, if 
judicial doctrines would recharacterize a direct transfer of property 
by a domestic corporation to an entity owned by a foreign trust as a 
constructive dividend of the property to the domestic corporation's 
shareholder followed by a constructive transfer of the property by that 
shareholder to the foreign trust and a constructive contribution by the 
foreign trust to the entity owned by the foreign trust, then those 
judicial doctrines would apply (and Sec. 1.679-3(f) would not apply) to 
the transaction.

Comments Relating to Sec. 1.679-4: Exceptions to General Rule--
Transfers to Trusts Described in Section 501(c)(3)

    Section 1.679-4(a)(3) of the proposed regulations provides an 
exception to the general rule of Sec. 1.679-1 for transfers to a 
foreign trust that has already received a ruling or determination 
letter from the IRS recognizing the trust's tax exempt status under 
section 501(c)(3), provided that the letter has been neither revoked 
nor modified. Commenters questioned the requirement that a foreign 
trust obtain a ruling or determination letter from the IRS recognizing 
the trust's tax exempt status under section 501(c)(3). They assert that 
the requirement may interfere with a U.S. person's ability to make 
contributions to a foreign charitable entity that may not be familiar 
with U.S. tax laws and may not have any reason to obtain a 
determination letter from the IRS. They suggest that the final 
regulations require only that the U.S. transferor disclose to the IRS, 
at such time and in such manner as the IRS may provide, that the 
transfer has been made and that the transferor believes the transferee 
is an organization described in section 501(c)(3).
    In response to commenters' concerns, the final regulations 
eliminate the requirement that the foreign trust receive a ruling or 
determination letter from the IRS recognizing the trust's tax-exempt 
status under section 501(c)(3). The final regulations provide instead 
that the general rule of Sec. 1.679-1 does not apply to any transfer of 
property to a foreign trust that is described in section 501(c)(3). 
However, taxpayers should be aware that, under Notice 97-34 (1997-1 
C.B. 422), the U.S. transferor has a reporting obligation on Form 3520 
with respect to such a transfer, unless the foreign trust has received 
a ruling or determination letter from the IRS recognizing the trust's 
tax exempt status under section 501(c)(3). Moreover, if the IRS 
subsequently determines that the foreign trust is not described in 
section 501(c)(3), the exception will not apply for any taxable year of 
the U.S. transferor, and the U.S. transferor may be subject to interest 
and penalties, if applicable.

Clarification Regarding Section 958

    The final regulations clarify the language of Sec. 1.958-1(b) of 
the proposed regulations with respect to persons who are treated as 
owners under sections 671 through 679 of any portion of a foreign trust 
that includes the stock of a foreign corporation.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section

[[Page 37889]]

553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations and, because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a 
Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses.

Drafting Information

    The principal author of these final regulations is Willard W. Yates 
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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 1.679-1 also issued under 26 U.S.C. 643(a)(7) and 
679(d).
    Section 1.679-2 also issued under 26 U.S.C. 643(a)(7) 
and679(d).,
    Section 1.679-3 also issued under 26 U.S.C. 643(a)(7) and 
679(d).
    Section 1.679-4 also issued under 26 U.S.C. 643(a)(7), 679(a)(3) 
and 679(d).
    Section 1.679-5 also issued under 26 U.S.C. 643(a)(7) and 
679(d).
    Section 1.679-6 also issued under 26 U.S.C. 643(a)(7) and 
679(d).
    * * *


    Par. 2.  Sections 1.679-0, 1.679-1, 1.679-2, 1.679-3, 1.679-4, 
1.679-5, 1.679-6, and 1.679-7 are added under the undesignated center 
heading ``Grantors and Others Treated as Substantial Owners'' to read 
as follows:


Sec. 1.679-0  Outline of major topics.

    This section lists the major paragraphs contained in Secs. 1.679-1 
through 1.679-7 as follows:


Sec. 1.679-1  U.S. transferor treated as owner of foreign trust.

    (a) In general.
    (b) Interaction with sections 673 through 678.
    (c) Definitions.
    (1) U.S. transferor.
    (2) U.S. person.
    (3) Foreign trust.
    (4) Property.
    (5) Related person.
    (6) Obligation.
    (d) Examples.

Sec. 1.679-2  Trusts treated as having a U.S. beneficiary.

    (a) Existence of U.S. beneficiary.
    (1) In general.
    (2) Benefit to a U.S. person
    (i) In general.
    (ii) Certain unexpected beneficiaries.
    (iii) Examples.
    (3) Changes in beneficiary's status.
    (i) In general.
    (ii) Examples.
    (4) General rules.
    (i) Records and documents.
    (ii) Additional factors.
    (iii) Examples.
    (b) Indirect U.S. beneficiaries.
    (1) Certain foreign entities.
    (2) Other indirect beneficiaries.
    (3) Examples.
    (c) Treatment of U.S. transferor upon foreign trust's 
acquisition or loss of U.S. beneficiary.
    (1) Trusts acquiring a U.S. beneficiary.
    (2) Trusts ceasing to have a U.S. beneficiary.
    (3) Examples.

Sec. 1.679-3  Transfers.

    (a) In general.
    (b) Transfers by certain trusts.
    (1) In general.
    (2) Example.
    (c) Indirect transfers.
    (1) Principal purpose of tax avoidance.
    (2) Principal purpose of tax avoidance deemed to exist.
    (3) Effect of disregarding intermediary.
    (i) In general.
    (ii) Special rule.
    (iii) Effect on intermediary.
    (4) Related parties.
    (5) Examples.
    (d) Constructive transfers.
    (1) In general.
    (2) Examples.
    (e) Guarantee of trust obligations.
    (1) In general.
    (2) Amount transferred.
    (3) Principal repayments.
    (4) Guarantee.
    (5) Examples.
    (f) Transfers to entities owned by a foreign trust.
    (1) General rule.
    (2) Examples.

Sec. 1.679-4  Exceptions to general rule.

    (a) In general.
    (b) Transfers for fair market value.
    (1) In general.
    (2) Special rule.
    (i) Transfers for partial consideration.
    (ii) Example.
    (c) Certain obligations not taken into account.
    (d) Qualified obligations.
    (1) In general.
    (2) Additional loans.
    (3) Obligations that cease to be qualified.
    (4) Transfers resulting from failed qualified obligations.
    (5) Renegotiated loans.
    (6) Principal repayments.
    (7) Examples.

Sec. 1.679-5  Pre-immigration trusts.

    (a) In general.
    (b) Special rules.
    (1) Change in grantor trust status.
    (2) Treatment of undistributed income.
    (c) Examples.


Sec. 1.679-6  Outbound migrations of domestic trusts.

    (a) In general.
    (b) Amount deemed transferred.
    (c) Example.


Sec. 1.679-7  Effective dates.

    (a) In general.
    (b) Special rules.


Sec. 1.679-1  U.S. transferor treated as owner of foreign trust.

    (a) In general. A U.S. transferor who transfers property to a 
foreign trust is treated as the owner of the portion of the trust 
attributable to the property transferred if there is a U.S. beneficiary 
of any portion of the trust, unless an exception in Sec. 1.679-4 
applies to the transfer.
    (b) Interaction with sections 673 through 678. The rules of this 
section apply without regard to whether the U.S. transferor retains any 
power or interest described in sections 673 through 677. If a U.S. 
transferor would be treated as the owner of a portion of a foreign 
trust pursuant to the rules of this section and another person would be 
treated as the owner of the same portion of the trust pursuant to 
section 678, then the U.S. transferor is treated as the owner and the 
other person is not treated as the owner.
    (c) Definitions. The following definitions apply for purposes of 
this section and Secs. 1.679-2 through 1.679-7:
    (1) U.S. transferor. The term U.S. transferor means any U.S. person 
who makes a transfer (as defined in Sec. 1.679-3) of property to a 
foreign trust.
    (2) U.S. person. The term U.S. person means a United States person 
as defined in section 7701(a)(30), a nonresident alien individual who 
elects under section 6013(g) to be treated as a resident of the United 
States, and an individual who is a dual resident taxpayer within the 
meaning of Sec. 301.7701(b)-7(a) of this chapter.
    (3) Foreign trust. Section 7701(a)(31)(B) defines the term foreign

[[Page 37890]]

trust. See also Sec. 301.7701-7 of this chapter.
    (4) Property. The term property means any property including cash.
    (5) Related person. A person is a related person if, without regard 
to the transfer at issue, the person is--
    (i) A grantor of any portion of the trust (within the meaning of 
Sec. 1.671-2(e)(1));
    (ii) An owner of any portion of the trust under sections 671 
through 679;
    (iii) A beneficiary of the trust; or
    (iv) A person who is related (within the meaning of section 
643(i)(2)(B)) to any grantor, owner or beneficiary of the trust.
    (6) Obligation. The term obligation means any bond, note, 
debenture, certificate, bill receivable, account receivable, note 
receivable, open account, or other evidence of indebtedness, and, to 
the extent not previously described, any annuity contract.
    (d) Examples. The following examples illustrate the rules of 
paragraph (a) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's father, who is a 
resident alien, D is A's uncle, who is a nonresident alien, and FT is a 
foreign trust. The examples are as follows:

    Example 1. Interaction with section 678. A creates and funds FT. 
FT may provide for the education of B by paying for books, tuition, 
room and board. In addition, C has the power to vest the trust 
corpus or income in himself within the meaning of section 678(a)(1). 
Under paragraph (b) of this section, A is treated as the owner of 
the portion of FT attributable to the property transferred to FT by 
A and C is not treated as the owner thereof.
    Example 2. U.S. person treated as owner of a portion of FT. D 
creates and funds FT for the benefit of B. D retains a power 
described in section 676 and Sec. 1.672(f)-3(a)(1). A transfers 
property to FT. Under sections 676 and 672(f), D is treated as the 
owner of the portion of FT attributable to the property transferred 
by D. Under paragraph (a) of this section, A is treated as the owner 
of the portion of FT attributable to the property transferred by A.


Sec. 1.679-2  Trusts treated as having a U.S. beneficiary.

    (a) Existence of U.S. beneficiary--(1) In general. The 
determination of whether a foreign trust has a U.S. beneficiary is made 
on an annual basis. A foreign trust is treated as having a U.S. 
beneficiary unless during the taxable year of the U.S. transferor--
    (i) No part of the income or corpus of the trust may be paid or 
accumulated to or for the benefit of, directly or indirectly, a U.S. 
person; and
    (ii) If the trust is terminated at any time during the taxable 
year, no part of the income or corpus of the trust could be paid to or 
for the benefit of, directly or indirectly, a U.S. person.
    (2) Benefit to a U.S. person--(i) In general. For purposes of 
paragraph (a)(1) of this section, income or corpus may be paid or 
accumulated to or for the benefit of a U.S. person during a taxable 
year of the U.S. transferor if during that year, directly or 
indirectly, income may be distributed to, or accumulated for the 
benefit of, a U.S. person, or corpus may be distributed to, or held for 
the future benefit of, a U.S. person. This determination is made 
without regard to whether income or corpus is actually distributed to a 
U.S. person during that year, and without regard to whether a U.S. 
person's interest in the trust income or corpus is contingent on a 
future event.
    (ii) Certain unexpected beneficiaries. Notwithstanding paragraph 
(a)(2)(i) of this section, for purposes of paragraph (a)(1) of this 
section, a person who is not named as a beneficiary and is not a member 
of a class of beneficiaries as defined under the trust instrument is 
not taken into consideration if the U.S. transferor demonstrates to the 
satisfaction of the Commissioner that the person's contingent interest 
in the trust is so remote as to be negligible. The preceding sentence 
does not apply with respect to persons to whom distributions could be 
made pursuant to a grant of discretion to the trustee or any other 
person. A class of beneficiaries generally does not include heirs who 
will benefit from the trust under the laws of intestate succession in 
the event that the named beneficiaries (or members of the named class) 
have all deceased (whether or not stated as a named class in the trust 
instrument).
    (iii) Examples. The following examples illustrate the rules of 
paragraphs (a)(1) and (2) of this section. In these examples, A is a 
resident alien, B is A's son, who is a resident alien, C is A's 
daughter, who is a nonresident alien, and FT is a foreign trust. The 
examples are as follows:

    Example 1. Distribution of income to U.S. person. A transfers 
property to FT. The trust instrument provides that all trust income 
is to be distributed currently to B. Under paragraph (a)(1) of this 
section, FT is treated as having a U.S. beneficiary.
    Example 2. Income accumulation for the benefit of a U.S. person. 
In 2001, A transfers property to FT. The trust instrument provides 
that from 2001 through 2010, the trustee of FT may distribute trust 
income to C or may accumulate the trust income. The trust instrument 
further provides that in 2011, the trust will terminate and the 
trustee may distribute the trust assets to either or both of B and 
C, in the trustee's discretion. If the trust terminates unexpectedly 
prior to 2011, all trust assets must be distributed to C. Because it 
is possible that income may be accumulated in each year, and that 
the accumulated income ultimately may be distributed to B, a U.S. 
person, under paragraph (a)(1) of this section FT is treated as 
having a U.S. beneficiary during each of A's tax years from 2001 
through 2011. This result applies even though no U.S. person may 
receive distributions from the trust during the tax years 2001 
through 2010.
    Example 3. Corpus held for the benefit of a U.S. person. The 
facts are the same as in Example 2, except that from 2001 through 
2011, all trust income must be distributed to C. In 2011, the trust 
will terminate and the trustee may distribute the trust corpus to 
either or both of B and C, in the trustee's discretion. If the trust 
terminates unexpectedly prior to 2011, all trust corpus must be 
distributed to C. Because during each of A's tax years from 2001 
through 2011 trust corpus is held for possible future distribution 
to B, a U.S. person, under paragraph (a)(1) of this section FT is 
treated as having a U.S. beneficiary during each of those years. 
This result applies even though no U.S. person may receive 
distributions from the trust during the tax years 2001 through 2010.
    Example 4. Distribution upon U.S. transferor's death. A 
transfers property to FT. The trust instrument provides that all 
trust income must be distributed currently to C and, upon A's death, 
the trust will terminate and the trustee may distribute the trust 
corpus to either or both of B and C. Because B may receive a 
distribution of corpus upon the termination of FT, and FT could 
terminate in any year, FT is treated as having a U.S. beneficiary in 
the year of the transfer and in subsequent years.
    Example 5. Distribution after U.S. transferor's death. The facts 
are the same as in Example 4, except the trust instrument provides 
that the trust will not terminate until the year following A's 
death. Upon termination, the trustee may distribute the trust assets 
to either or both of B and C, in the trustee's discretion. All trust 
assets are invested in the stock of X, a foreign corporation, and X 
makes no distributions to FT. Although no U.S. person may receive a 
distribution until the year after A's death, and FT has no realized 
income during any year of its existence, during each year in which A 
is living corpus may be held for future distribution to B, a U.S. 
person. Thus, under paragraph (a)(1) of this section FT is treated 
as having a U.S. beneficiary during each of A's tax years from 2001 
through the year of A's death.
    Example 6. Constructive benefit to U.S. person. A transfers 
property to FT. The trust instrument provides that no income or 
corpus may be paid directly to a U.S. person. However, the trust 
instrument provides that trust corpus may be used to satisfy B's 
legal obligations to a third party by making a payment directly to 
the third party. Under paragraphs (a)(1) and (2) of this section, FT 
is treated as having a U.S. beneficiary.
    Example 7. U.S. person with negligible contingent interest. A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to C, and upon C's death, all 
corpus is to be

[[Page 37891]]

distributed to whomever of C's three children is then living. All of 
C's children are nonresident aliens. Under the laws of intestate 
succession that would apply to FT, if all of C's children are 
deceased at the time of C's death, the corpus would be distributed 
to A's heirs. A's living relatives at the time of the transfer 
consist solely of two brothers and two nieces, all of whom are 
nonresident aliens, and two first cousins, one of whom, E, is a U.S. 
citizen. Although it is possible under certain circumstances that E 
could receive a corpus distribution under the applicable laws of 
intestate succession, for each year the trust is in existence A is 
able to demonstrate to the satisfaction of the Commissioner under 
paragraph (a)(2)(ii) of this section that E's contingent interest in 
FT is so remote as to be negligible. Provided that paragraph (a)(4) 
of this section does not require a different result, FT is not 
treated as having a U.S. beneficiary.
    Example 8. U.S. person with non-negligible contingent interest. 
A transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to D, A's uncle, who is a 
nonresident alien, and upon A's death, the corpus is to be 
distributed to D if he is then living. Under the laws of intestate 
succession that would apply to FT, B and C would share equally in 
the trust corpus if D is not living at the time of A's death. A is 
unable to demonstrate to the satisfaction of the Commissioner that 
B's contingent interest in the trust is so remote as to be 
negligible. Under paragraph (a)(2)(ii) of this section, FT is 
treated as having a U.S. beneficiary as of the year of the transfer.
    Example 9. U.S. person as member of class of beneficiaries. A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to D, A's uncle, who is a 
nonresident alien, and upon A's death, the corpus is to be 
distributed to D if he is then living. If D is not then living, the 
corpus is to be distributed to D's descendants. D's grandson, E, is 
a resident alien. Under paragraph (a)(2)(ii) of this section, FT is 
treated as having a U.S. beneficiary as of the year of the transfer.
    Example 10. Trustee's discretion in choosing beneficiaries. A 
transfers property to FT. The trust instrument provides that the 
trustee may distribute income and corpus to, or accumulate income 
for the benefit of, any person who is pursuing the academic study of 
ancient Greek, in the trustee's discretion. Because it is possible 
that a U.S. person will receive distributions of income or corpus, 
or will have income accumulated for his benefit, FT is treated as 
having a U.S. beneficiary. This result applies even if, during a tax 
year, no distributions or accumulations are actually made to or for 
the benefit of a U.S. person. A may not invoke paragraph (a)(2)(ii) 
of this section because a U.S. person could benefit pursuant to a 
grant of discretion in the trust instrument.
    Example 11. Appointment of remainder beneficiary. A transfers 
property to FT. The trust instrument provides that the trustee may 
distribute current income to C, or may accumulate income, and, upon 
termination of the trust, trust assets are to be distributed to C. 
However, the trust instrument further provides that D, A's uncle, 
may appoint a different remainder beneficiary. Because it is 
possible that a U.S. person could be named as the remainder 
beneficiary, and because corpus could be held in each year for the 
future benefit of that U.S. person, FT is treated as having a U.S. 
beneficiary for each year.
    Example 12. Trust not treated as having a U.S. beneficiary. A 
transfers property to FT. The trust instrument provides that the 
trustee may distribute income and corpus to, or accumulate income 
for the benefit of C. Upon termination of the trust, all income and 
corpus must be distributed to C. Assume that paragraph (a)(4) of 
this section is not applicable under the facts and circumstances and 
that A establishes to the satisfaction of the Commissioner under 
paragraph (a)(2)(ii) of this section that no U.S. persons are 
reasonably expected to benefit from the trust. Because no part of 
the income or corpus of the trust may be paid or accumulated to or 
for the benefit of, either directly or indirectly, a U.S. person, 
and if the trust is terminated no part of the income or corpus of 
the trust could be paid to or for the benefit of, either directly or 
indirectly, a U.S. person, FT is not treated as having a U.S. 
beneficiary.
    Example 13. U.S. beneficiary becomes non-U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that, as 
long as B remains a U.S. resident, no distributions of income or 
corpus may be made from the trust to B. The trust instrument further 
provides that if B becomes a nonresident alien, distributions of 
income (including previously accumulated income) and corpus may be 
made to him. If B remains a U.S. resident at the time of FT's 
termination, all accumulated income and corpus is to be distributed 
to C. In 2007, B becomes a nonresident alien and remains so 
thereafter. Because income may be accumulated during the years 2001 
through 2007 for the benefit of a person who is a U.S. person during 
those years, FT is treated as having a U.S. beneficiary under 
paragraph (a)(1) of this section during each of those years. This 
result applies even though B cannot receive distributions from FT 
during the years he is a resident alien and even though B might 
remain a resident alien who is not entitled to any distribution from 
FT. Provided that paragraph (a)(4) of this section does not require 
a different result and that A establishes to the satisfaction of the 
Commissioner under paragraph (a)(2)(ii) of this section that no 
other U.S. persons are reasonably expected to benefit from the 
trust, FT is not treated as having a U.S. beneficiary under 
paragraph (a)(1) of this section during tax years after 2007.

    (3) Changes in beneficiary's status--(i) In general. For purposes 
of paragraph (a)(1) of this section, the possibility that a person that 
is not a U.S. person could become a U.S. person will not cause that 
person to be treated as a U.S. person for purposes of paragraph (a)(1) 
of this section until the tax year of the U.S. transferor in which that 
individual actually becomes a U.S. person. However, if a person who is 
not a U.S. person becomes a U.S. person for the first time more than 5 
years after the date of a transfer to the foreign trust by a U.S. 
transferor, that person is not treated as a U.S. person for purposes of 
applying paragraph (a)(1) of this section with respect to that 
transfer.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (a)(3) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Non-U.S. beneficiary becomes U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to C and that, upon the 
termination of FT, all corpus is to be distributed to C. Assume that 
paragraph (a)(4) of this section is not applicable under the facts 
and circumstances and that A establishes to the satisfaction of the 
Commissioner under paragraph (a)(2)(ii) of this section that no U.S. 
persons are reasonably expected to benefit from the trust. Under 
paragraph (a)(3)(i) of this section, FT is not treated as having a 
U.S. beneficiary during the tax years of A in which C remains a 
nonresident alien. If C first becomes a resident alien in 2004, FT 
is treated as having a U.S. beneficiary commencing in that year 
under paragraph (a)(3) of this section. See paragraph (c) of this 
section regarding the treatment of A upon FT's acquisition of a U.S. 
beneficiary.
    Example 2. Non-U.S. beneficiary becomes U.S. person more than 5 
years after transfer. The facts are the same as in Example 1, except 
C first becomes a resident alien in 2007. FT is treated as not 
having a U.S. beneficiary under paragraph (a)(3)(i) of this section 
with respect to the property transfer by A. However, if C had 
previously been a U.S. person during any prior period, the 5-year 
exception in paragraph (a)(3)(i) of this section would not apply in 
2007 because it would not have been the first time C became a U.S. 
person.

    (4) General rules--(i) Records and documents. Even if, based on the 
terms of the trust instrument, a foreign trust is not treated as having 
a U.S. beneficiary within the meaning of paragraph (a)(1) of this 
section, the trust may nevertheless be treated as having a U.S. 
beneficiary pursuant to paragraph (a)(1) of this section based on the 
following--
    (A) All written and oral agreements and understandings relating to 
the trust;
    (B) Memoranda or letters of wishes;
    (C) All records that relate to the actual distribution of income 
and corpus; and
    (D) All other documents that relate to the trust, whether or not of 
any purported legal effect.
    (ii) Additional factors. For purposes of determining whether a 
foreign trust is treated as having a U.S. beneficiary within the 
meaning of paragraph (a)(1) of this section, the following additional 
factors are taken into account--

[[Page 37892]]

    (A) If the terms of the trust instrument allow the trust to be 
amended to benefit a U.S. person, all potential benefits that could be 
provided to a U.S. person pursuant to an amendment must be taken into 
account;
    (B) If the terms of the trust instrument do not allow the trust to 
be amended to benefit a U.S. person, but the law applicable to a 
foreign trust may require payments or accumulations of income or corpus 
to or for the benefit of a U.S. person (by judicial reformation or 
otherwise), all potential benefits that could be provided to a U.S. 
person pursuant to the law must be taken into account, unless the U.S. 
transferor demonstrates to the satisfaction of the Commissioner that 
the law is not reasonably expected to be applied or invoked under the 
facts and circumstances; and
    (C) If the parties to the trust ignore the terms of the trust 
instrument, or if it is reasonably expected that they will do so, all 
benefits that have been, or are reasonably expected to be, provided to 
a U.S. person must be taken into account.
    (iii) Examples. The following examples illustrate the rules of 
paragraph (a)(4) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Amendment pursuant to local law. A creates and funds 
FT for the benefit of C. The terms of FT (which, according to the 
trust instrument, cannot be amended) provide that no part of the 
income or corpus of FT may be paid or accumulated during the taxable 
year to or for the benefit of any U.S. person, either during the 
existence of FT or at the time of its termination. However, pursuant 
to the applicable foreign law, FT can be amended to provide for 
additional beneficiaries, and there is an oral understanding between 
A and the trustee that B can be added as a beneficiary. Under 
paragraphs (a)(1) and (a)(4)(ii)(B) of this section, FT is treated 
as having a U.S. beneficiary.
    Example 2. Actions in violation of the terms of the trust. A 
transfers property to FT. The trust instrument provides that no U.S. 
person can receive income or corpus from FT during the term of the 
trust or at the termination of FT. Notwithstanding the terms of the 
trust instrument, a letter of wishes directs the trustee of FT to 
provide for the educational needs of B, who is about to begin 
college. The letter of wishes contains a disclaimer to the effect 
that its contents are only suggestions and recommendations and that 
the trustee is at all times bound by the terms of the trust as set 
forth in the trust instrument. Under paragraphs (a)(1) and 
(a)(4)(ii)(C) of this section, FT is treated as having a U.S. 
beneficiary.

    (b) Indirect U.S. beneficiaries--(1) Certain foreign entities. For 
purposes of paragraph (a)(1) of this section, an amount is treated as 
paid or accumulated to or for the benefit of a U.S. person if the 
amount is paid to or accumulated for the benefit of--
    (i) A controlled foreign corporation, as defined in section 957(a);
    (ii) A foreign partnership, if a U.S. person is a partner of such 
partnership; or
    (iii) A foreign trust or estate, if such trust or estate has a U.S. 
beneficiary (within the meaning of paragraph (a)(1) of this section).
    (2) Other indirect beneficiaries. For purposes of paragraph (a)(1) 
of this section, an amount is treated as paid or accumulated to or for 
the benefit of a U.S. person if the amount is paid to or accumulated 
for the benefit of a U.S. person through an intermediary, such as an 
agent or nominee, or by any other means where a U.S. person may obtain 
an actual or constructive benefit.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b). Unless otherwise noted, A is a resident alien. B is A's 
son and is a resident alien. FT is a foreign trust. The examples are as 
follows:

    Example 1. Trust benefitting foreign corporation. A transfers 
property to FT. The beneficiary of FT is FC, a foreign corporation. 
FC has outstanding solely 100 shares of common stock. B owns 49 
shares of the FC stock and FC2, also a foreign corporation, owns the 
remaining 51 shares. FC2 has outstanding solely 100 shares of common 
stock. B owns 49 shares of FC2 and nonresident alien individuals own 
the remaining 51 FC2 shares. FC is a controlled foreign corporation 
(as defined in section 957(a), after the application of section 
958(a)(2)). Under paragraphs (a)(1) and (b)(1)(i) of this section, 
FT is treated as having a U.S. beneficiary.
    Example 2. Trust benefitting another trust. A transfers property 
to FT. The terms of FT permit current distributions of income to B. 
A transfers property to another foreign trust, FT2. The terms of FT2 
provide that no U.S. person can benefit either as to income or 
corpus, but permit current distributions of income to FT. Under 
paragraph (a)(1) of this section, FT is treated as having a U.S. 
beneficiary and, under paragraphs (a)(1) and (b)(1)(iii) of this 
section, FT2 is treated as having a U.S. beneficiary.
    Example 3. Trust benefitting another trust after transferor's 
death. A transfers property to FT. The terms of FT require that all 
income from FT be accumulated during A's lifetime. In the year 
following A's death, a share of FT is to be distributed to FT2, 
another foreign trust, for the benefit of B. Under paragraphs (a)(1) 
and (b)(1)(iii) of this section, FT is treated as having a U.S. 
beneficiary beginning with the year of A's transfer of property to 
FT.
    Example 4. Indirect benefit through use of debit card. A 
transfers property to FT. The trust instrument provides that no U.S. 
person can benefit either as to income or corpus. However, FT 
maintains an account with FB, a foreign bank, and FB issues a debit 
card to B against the account maintained by FT and B is allowed to 
make withdrawals. Under paragraphs (a)(1) and (b)(2) of this 
section, FT is treated as having a U.S. beneficiary.
    Example 5. Other indirect benefit. A transfers property to FT. 
FT is administered by FTC, a foreign trust company. FTC forms IBC, 
an international business corporation formed under the laws of a 
foreign jurisdiction. IBC is the beneficiary of FT. IBC maintains an 
account with FB, a foreign bank. FB issues a debit card to B against 
the account maintained by IBC and B is allowed to make withdrawals. 
Under paragraphs (a)(1) and (b)(2) of this section, FT is treated as 
having a U.S. beneficiary.

    (c) Treatment of U.S. transferor upon foreign trust's acquisition 
or loss of U.S. beneficiary--(1) Trusts acquiring a U.S. beneficiary. 
If a foreign trust to which a U.S. transferor has transferred property 
is not treated as having a U.S. beneficiary (within the meaning of 
paragraph (a) of this section) for any taxable year of the U.S. 
transferor, but the trust is treated as having a U.S. beneficiary 
(within the meaning of paragraph (a) of this section) in any subsequent 
taxable year, the U.S. transferor is treated as having additional 
income in the first such taxable year of the U.S. transferor in which 
the trust is treated as having a U.S. beneficiary. The amount of the 
additional income is equal to the trust's undistributed net income, as 
defined in section 665(a), at the end of the U.S. transferor's 
immediately preceding taxable year and is subject to the rules of 
section 668, providing for an interest charge on accumulation 
distributions from foreign trusts.
    (2) Trusts ceasing to have a U.S. beneficiary. If, for any taxable 
year of a U.S. transferor, a foreign trust that has received a transfer 
of property from the U.S. transferor ceases to be treated as having a 
U.S. beneficiary, the U.S. transferor ceases to be treated as the owner 
of the portion of the trust attributable to the transfer beginning in 
the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary (unless the U.S. transferor is treated as an owner thereof 
pursuant to sections 673 through 677). The U.S. transferor is treated 
as making a transfer of property to the foreign trust on the first day 
of the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary. The amount of the property deemed to be transferred to the 
trust is the portion of the trust attributable to the prior

[[Page 37893]]

transfer to which paragraph (a)(1) of this section applied. For rules 
regarding the recognition of gain on transfers to foreign trusts, see 
section 684.
    (3) Examples. The rules of this paragraph (c) are illustrated by 
the following examples. A is a resident alien, B is A's son, and FT is 
a foreign trust. The examples are as follows:

    Example 1.  Trust acquiring U.S. beneficiary. (i) In 2001, A 
transfers stock with a fair market value of $100,000 to FT. The 
stock has an adjusted basis of $50,000 at the time of the transfer. 
The trust instrument provides that income may be paid currently to, 
or accumulated for the benefit of, B and that, upon the termination 
of the trust, all income and corpus is to be distributed to B. At 
the time of the transfer, B is a nonresident alien. A is not treated 
as the owner of any portion of FT under sections 673 through 677. FT 
accumulates a total of $30,000 of income during the taxable years 
2001 through 2003. In 2004, B moves to the United States and becomes 
a resident alien. Assume paragraph (a)(4) of this section is not 
applicable under the facts and circumstances.
    (ii) Under paragraph (c)(1) of this section, A is treated as 
receiving an accumulation distribution in the amount of $30,000 in 
2004 and immediately transferring that amount back to the trust. The 
accumulation distribution is subject to the rules of section 668, 
providing for an interest charge on accumulation distributions.
    (iii) Under paragraphs (a)(1) and (3) of this section, beginning 
in 2005, A is treated as the owner of the portion of FT attributable 
to the stock transferred by A to FT in 2001 (which includes the 
portion attributable to the accumulated income deemed to be 
retransferred in 2004).
    Example 2.  Trust ceasing to have U.S. beneficiary. (i) The 
facts are the same as in Example 1. In 2008, B becomes a nonresident 
alien. On the date B becomes a nonresident alien, the stock 
transferred by A to FT in 2001 has a fair market value of $125,000 
and an adjusted basis of $50,000.
    (ii) Under paragraph (c)(2) of this section, beginning in 2009, 
FT is not treated as having a U.S. beneficiary, and A is not treated 
as the owner of the portion of the trust attributable to the prior 
transfer of stock. For rules regarding the recognition of gain on 
the termination of ownership status, see section 684.


Sec. 1.679-3  Transfers.

    (a) In general. A transfer means a direct, indirect, or 
constructive transfer.
    (b) 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) Example. The following example illustrates this paragraph (b):

    Example.  In 2001, A, a U.S. citizen, creates and funds DT, a 
domestic trust. A has the power to revest absolutely in himself the 
title to the property in DT and is treated as the owner of DT 
pursuant to section 676. In 2004, DT transfers property to FT, a 
foreign trust. A is treated as having transferred the property to FT 
in 2004 for purposes of this section.

    (c) Indirect transfers--(1) Principal purpose of tax avoidance. A 
transfer to a foreign trust by any person (intermediary) to whom a U.S. 
person transfers property is treated as an indirect transfer by a U.S. 
person to the foreign trust if such transfer is made pursuant to a plan 
one of the principal purposes of which is the avoidance of United 
States tax.
    (2) Principal purpose of tax avoidance deemed to exist. For 
purposes of paragraph (c)(1) of this section, a transfer is deemed to 
have been made pursuant to a plan one of the principal purposes of 
which was the avoidance of United States tax if--
    (i) The U.S. person is related (within the meaning of paragraph 
(c)(4) of this section) to a beneficiary of the foreign trust, or has 
another relationship with a beneficiary of the foreign trust that 
establishes a reasonable basis for concluding that the U.S. transferor 
would make a transfer to the foreign trust; and
    (ii) The U.S. person cannot demonstrate to the satisfaction of the 
Commissioner that--
    (A) The intermediary has a relationship with a beneficiary of the 
foreign trust that establishes a reasonable basis for concluding that 
the intermediary would make a transfer to the foreign trust;
    (B) The intermediary acted independently of the U.S. person;
    (C) The intermediary is not an agent of the U.S. person under 
generally applicable United States agency principles; and
    (D) The intermediary timely complied with the reporting 
requirements of section 6048, if applicable.
    (3) Effect of disregarding intermediary--(i) In general. Except as 
provided in paragraph (c)(3)(ii) of this section, if a transfer is 
treated as an indirect transfer pursuant to paragraph (c)(1) of this 
section, then the intermediary is treated as an agent of the U.S. 
person, and the property is treated as transferred to the foreign trust 
by the U.S. person in the year the property is transferred, or made 
available, by the intermediary to the foreign trust. The fair market 
value of the property transferred is determined as of the date of the 
transfer by the intermediary to the foreign trust.
    (ii) Special rule. If the Commissioner determines, or if the 
taxpayer can demonstrate to the satisfaction of the Commissioner, that 
the intermediary is an agent of the foreign trust under generally 
applicable United States agency principles, the property will be 
treated as transferred to the foreign trust in the year the U.S. person 
transfers the property to the intermediary. The fair market value of 
the property transferred will be determined as of the date of the 
transfer by the U.S. person to the intermediary.
    (iii) Effect on intermediary. If a transfer of property is treated 
as an indirect transfer under paragraph (c)(1) of this section, the 
intermediary is not treated as having transferred the property to the 
foreign trust.
    (4) Related parties. For purposes of this paragraph (c), a U.S. 
transferor is treated as related to a U.S. beneficiary of a foreign 
trust if the U.S. transferor and the beneficiary are related for 
purposes of section 643(i)(2)(B), with the following modifications--
    (i) For purposes of applying section 267 (other than section 
267(f)) and section 707(b)(1), ``at least 10 percent'' is used instead 
of ``more than 50 percent'' each place it appears; and
    (ii) The principles of section 267(b)(10), using ``at least 10 
percent'' instead of ``more than 50 percent,'' apply to determine 
whether two corporations are related.
    (5) Examples. The rules of this paragraph (c) are illustrated by 
the following examples:

    Example 1.  Principal purpose of tax avoidance. A, a U.S. 
citizen, creates and funds FT, a foreign trust, for the benefit of 
A's children, who are U.S. citizens. In 2004, A decides to transfer 
an additional 1000X to the foreign trust. Pursuant to a plan with a 
principal purpose of avoiding the application of section 679, A 
transfers 1000X to  I, a foreign person. I subsequently transfers 
1000X to FT. Under paragraph (c)(1) of this section, A is treated as 
having made a transfer of 1000X to FT.
    Example 2.  U.S. person unable to demonstrate that intermediary 
acted independently. A, a U.S. citizen, creates and funds FT, a 
foreign trust, for the benefit of A's children, who are U.S. 
citizens. On July 1, 2004, A transfers XYZ stock to D, A's uncle, 
who is a nonresident alien. D immediately sells the XYZ stock and 
uses the proceeds to purchase ABC stock. On January 1, 2007, D 
transfers the ABC stock to FT. A is unable to demonstrate to the 
satisfaction of the Commissioner, pursuant to paragraph (c)(2) of 
this section, that D acted independently of A in making the transfer 
to FT. Under paragraph (c)(1) of this section, A is treated as 
having transferred the ABC stock to FT. Under paragraph (c)(3) of 
this section, D is treated as an agent of A, and the transfer is 
deemed to have been made on January 1, 2007.
    Example 3.  Indirect loan to foreign trust. A, a U.S. citizen, 
previously created and funded FT, a foreign trust, for the benefit 
of

[[Page 37894]]

A's children, who are U.S. citizens. On July 1, 2004, A deposits 
500X with FB, a foreign bank. On January 1, 2005, FB loans 450X to 
FT. A is unable to demonstrate to the satisfaction of the 
Commissioner, pursuant to paragraph (c)(2) of this section, that FB 
has a relationship with FT that establishes a reasonable basis for 
concluding that FB would make a loan to FT or that FB acted 
independently of A in making the loan. Under paragraph (c)(1) of 
this section, A is deemed to have transferred 450X directly to FT on 
January 1, 2005. Under paragraph (c)(3) of this section, FB is 
treated as an agent of A. For possible exceptions with respect to 
qualified obligations of the trust, and the treatment of principal 
repayments with respect to obligations of the trust that are not 
qualified obligations, see Sec. 1.679-4.
    Example 4.  Loan to foreign trust prior to deposit of funds in 
foreign bank. The facts are the same as in Example 3, except that A 
makes the 500X deposit with FB on January 2, 2005, the day after FB 
makes the loan to FT. The result is the same as in Example 3.

    (d) Constructive transfers--(1) In general. For purposes of 
paragraph (a) of this section, a constructive transfer includes any 
assumption or satisfaction of a foreign trust's obligation to a third 
party.
    (2) Examples. The rules of this paragraph (d) are illustrated by 
the following examples. In each example, A is a U.S. citizen and FT is 
a foreign trust. The examples are as follows:

    Example 1. Payment of debt of foreign trust. FT owes 1000X to Y, 
an unrelated foreign corporation, for the performance of services by 
Y for FT. In satisfaction of FT's liability to Y, A transfers to Y 
property with a fair market value of 1000X. Under paragraph (d)(1) 
of this section, A is treated as having made a constructive transfer 
of the property to FT.
    Example 2. Assumption of liability of foreign trust. FT owes 
1000X to Y, an unrelated foreign corporation, for the performance of 
services by Y for FT. A assumes FT's liability to pay Y. Under 
paragraph (d)(1) of this section, A is treated as having made a 
constructive transfer of property with a fair market value of 1000X 
to FT.

    (e) Guarantee of trust obligations--(1) In general. If a foreign 
trust borrows money or other property from any person who is not a 
related person (within the meaning of Sec. 1.679-1(c)(5)) with respect 
to the trust (lender) and a U.S. person (U.S. guarantor) that is a 
related person with respect to the trust guarantees (within the meaning 
of paragraph (e)(4) of this section) the foreign trust's obligation, 
the U.S. guarantor is treated for purposes of this section as a U.S. 
transferor that has made a transfer to the trust on the date of the 
guarantee in an amount determined under paragraph (e)(2) of this 
section. To the extent this paragraph causes the U.S. guarantor to be 
treated as having made a transfer to the trust, a lender that is a U.S. 
person shall not be treated as having transferred that amount to the 
foreign trust.
    (2) Amount transferred. The amount deemed transferred by a U.S. 
guarantor described in paragraph (e)(1) of this section is the 
guaranteed portion of the adjusted issue price of the obligation 
(within the meaning of Sec. 1.1275-1(b)) plus any accrued but unpaid 
qualified stated interest (within the meaning of Sec. 1.1273-1(c)).
    (3) Principal repayments. If a U.S. person is treated under this 
paragraph (e) as having made a transfer by reason of the guarantee of 
an obligation, payments of principal to the lender by the foreign trust 
with respect to the obligation are taken into account on and after the 
date of the payment in determining the portion of the trust 
attributable to the property deemed transferred by the U.S. guarantor.
    (4) Guarantee. For purposes of this section, the term guarantee--
    (i) Includes any arrangement under which a person, directly or 
indirectly, assures, on a conditional or unconditional basis, the 
payment of another's obligation;
    (ii) Encompasses any form of credit support, and includes a 
commitment to make a capital contribution to the debtor or otherwise 
maintain its financial viability; and
    (iii) Includes an arrangement reflected in a comfort letter, 
regardless of whether the arrangement gives rise to a legally 
enforceable obligation. If an arrangement is contingent upon the 
occurrence of an event, in determining whether the arrangement is a 
guarantee, it is assumed that the event has occurred.
    (5) Examples. The rules of this paragraph (e) are illustrated by 
the following examples. In all of the examples, A is a U.S. resident 
and FT is a foreign trust. The examples are as follows:

    Example 1. Foreign lender. X, a foreign corporation, loans 1000X 
of cash to FT in exchange for FT's obligation to repay the loan. A 
guarantees the repayment of 600X of FT's obligation. Under paragraph 
(e)(2) of this section, A is treated as having transferred 600X to 
FT.
    Example 2. Unrelated U.S. lender. The facts are the same as in 
Example 1, except X is a U.S. person that is not a related person 
within the meaning of Sec. 1.679-1(c)(5). The result is the same as 
in Example 1.
    (f) Transfers to entities owned by a foreign trust--(1) General 
rule. If a U.S. person is a related person (as defined in Sec. 1.679-
1(c)(5)) with respect to a foreign trust, any transfer of property by 
the U.S. person to an entity in which the foreign trust holds an 
ownership interest is treated as a transfer of such property by the 
U.S. person to the foreign trust followed by a transfer of the property 
from the foreign trust to the entity owned by the foreign trust, unless 
the U.S. person demonstrates to the satisfaction of the Commissioner 
that the transfer to the entity is properly attributable to the U.S. 
person's ownership interest in the entity.
    (2) Examples. The rules of this paragraph (f) are illustrated by 
the following examples. In all of the examples, A is a U.S. citizen, FT 
is a foreign trust, and FC is a foreign corporation. The examples are 
as follows:
    Example 1. Transfer treated as transfer to trust. A creates and 
funds FT, which is treated as having a U.S. beneficiary under 
Sec. 1.679-2. FT owns all of the outstanding stock of FC. A 
transfers property directly to FC. Because FT is the sole 
shareholder of FC, A is unable to demonstrate to the satisfaction of 
the Commissioner that the transfer is properly attributable to A's 
ownership interest in FC. Accordingly, under this paragraph (f), A 
is treated as having transferred the property to FT, followed by a 
transfer of such property by FT to FC. Under Sec. 1.679-1(a), A is 
treated as the owner of the portion of FT attributable to the 
property treated as transferred directly to FT. Under Sec. 1.367(a)-
1T(c)(4)(ii), the transfer of property by FT to FC is treated as a 
transfer of the property by A to FC.
    Example 2. Transfer treated as transfer to trust. The facts are 
the same as in Example 1, except that FT is not treated as having a 
U.S. beneficiary under Sec. 1.679-2. Under this paragraph (f), A is 
treated as having transferred the property to FT, followed by a 
transfer of such property by FT to FC. A is not treated as the owner 
of FT for purposes of Sec. 1.679-1(a). For rules regarding the 
recognition of gain on the transfer, see section 684.
    Example 3. Transfer not treated as transfer to trust. A creates 
and funds FT. FC has outstanding solely 100 shares of common stock. 
FT owns 50 shares of FC stock, and A owns the remaining 50 shares. 
On July 1, 2001, FT and A each transfer 1000X to FC. A is able to 
demonstrate to the satisfaction of the Commissioner that A's 
transfer to FC is properly attributable to A's ownership interest in 
FC. Accordingly, under this paragraph (f), A's transfer to FC is not 
treated as a transfer to FT.


Sec. 1.679-4  Exceptions to general rule.

    (a) In general. Section 1.679-1 does not apply to--
    (1) Any transfer of property to a foreign trust by reason of the 
death of the transferor;
    (2) Any transfer of property to a foreign trust described in 
sections 402(b), 404(a)(4), or 404A;
    (3) Any transfer of property to a foreign trust described in 
section 501(c)(3) (without regard to the requirements of section 
508(a)); and

[[Page 37895]]

    (4) Any transfer of property to a foreign trust to the extent the 
transfer is for fair market value.
    (b) Transfers for fair market value--(1) In general. For purposes 
of this section, a transfer is for fair market value only to the extent 
of the value of property received from the trust, services rendered by 
the trust, or the right to use property of the trust. For example, 
rents, royalties, interest, and compensation paid to a trust are 
transfers for fair market value only to the extent that the payments 
reflect an arm's length price for the use of the property of, or for 
the services rendered by, the trust. For purposes of this 
determination, an interest in the trust is not property received from 
the trust. For purposes of this section, 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 is considered to be a 
transfer for fair market value.
    (2) Special rule--(i) Transfers for partial consideration. For 
purposes of this section, if a person transfers property to a foreign 
trust in exchange for property having a fair market value that is less 
than the fair market value of the property transferred, the exception 
in paragraph (a)(4) of this section applies only to the extent of the 
fair market value of the property received.
    (ii) Example. This paragraph (b) is illustrated by the following 
example:

    Example. A, a U.S. citizen, transfers property that has a fair 
market value of 1000X to FT, a foreign trust, in exchange for 600X 
of cash. Under this paragraph (b), Sec. 1.679-1 applies with respect 
to the transfer of 400X (1000X less 600X) to FT.

    (c) Certain obligations not taken into account. Solely for purposes 
of this section, in determining whether a transfer by a U.S. transferor 
that is a related person (as defined in Sec. 1.679-1(c)(5)) with 
respect to the foreign trust is for fair market value, any obligation 
(as defined in Sec. 1.679-1(c)(6)) of the trust or a related person (as 
defined in Sec. 1.679-1(c)(5)) that is not a qualified obligation 
within the meaning of paragraph (d)(1) of this section shall not be 
taken into account.
    (d) Qualified obligations--(1) In general. For purposes of this 
section, an obligation is treated as a qualified obligation only if--
    (i) The obligation is reduced to writing by an express written 
agreement;
    (ii) The term of the obligation does not exceed five years (for 
purposes of determining the term of an obligation, the obligation's 
maturity date is the last possible date that the obligation can be 
outstanding under the terms of the obligation);
    (iii) All payments on the obligation are denominated in U.S. 
dollars;
    (iv) The yield to maturity is not less than 100 percent of the 
applicable Federal rate and not greater that 130 percent of the 
applicable Federal rate (the applicable Federal rate for an obligation 
is the applicable Federal rate in effect under section 1274(d) for the 
day on which the obligation is issued, as published in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter));
    (v) The U.S. transferor extends the period for assessment of any 
income or transfer tax attributable to the transfer and any 
consequential income tax changes for each year that the obligation is 
outstanding, to a date not earlier than three years after the maturity 
date of the obligation (this extension is not necessary if the maturity 
date of the obligation does not extend beyond the end of the U.S. 
transferor's taxable year for the year of the transfer and is paid 
within such period); when properly executed and filed, such an 
agreement is deemed to be consented to for purposes of 
Sec. 301.6501(c)-1(d) of this chapter; and
    (vi) The U.S. transferor reports the status of the loan, including 
principal and interest payments, on Form 3520 for every year that the 
loan is outstanding.
    (2) Additional loans. If, while the original obligation is 
outstanding, the U.S. transferor or a person related to the trust 
(within the meaning of Sec. 1.679-1(c)(5)) directly or indirectly 
obtains another obligation issued by the trust, or if the U.S. 
transferor directly or indirectly obtains another obligation issued by 
a person related to the trust, the original obligation is deemed to 
have the maturity date of any such subsequent obligation in determining 
whether the term of the original obligation exceeds the specified 5-
year term. In addition, a series of obligations issued and repaid by 
the trust (or a person related to the trust) is treated as a single 
obligation if the transactions giving rise to the obligations are 
structured with a principal purpose to avoid the application of this 
provision.
    (3) Obligations that cease to be qualified. If an obligation 
treated as a qualified obligation subsequently fails to be a qualified 
obligation (e.g., renegotiation of the terms of the obligation causes 
the term of the obligation to exceed five years), the U.S. transferor 
is treated as making a transfer to the trust in an amount equal to the 
original obligation's adjusted issue price (within the meaning of 
Sec. 1.1275-1(b)) plus any accrued but unpaid qualified stated interest 
(within the meaning of Sec. 1.1273-1(c)) as of the date of the 
subsequent event that causes the obligation to no longer be a qualified 
obligation. If the maturity date is extended beyond five years by 
reason of the issuance of a subsequent obligation by the trust (or 
person related to the trust), the amount of the transfer will not 
exceed the issue price of the subsequent obligation. The subsequent 
obligation is separately tested to determine if it is a qualified 
obligation.
    (4) Transfers resulting from failed qualified obligations. In 
general, a transfer resulting from a failed qualified obligation is 
deemed to occur on the date of the subsequent event that causes the 
obligation to no longer be a qualified obligation. However, based on 
all of the facts and circumstances, the Commissioner may deem a 
transfer to have occurred on any date on or after the issue date of the 
original obligation. For example, if at the time the original 
obligation was issued, the transferor knew or had reason to know that 
the obligation would not be repaid, the Commissioner could deem the 
transfer to have occurred on the issue date of the original obligation.
    (5) Renegotiated loans. Any loan that is renegotiated, extended, or 
revised is treated as a new loan, and any transfer of funds to a 
foreign trust after such renegotiation, extension, or revision under a 
pre-existing loan agreement is treated as a transfer subject to this 
section.
    (6) Principal repayments. The payment of principal with respect to 
any obligation that is not treated as a qualified obligation under this 
paragraph is taken into account on and after the date of the payment in 
determining the portion of the trust attributable to the property 
transferred.
    (7) Examples. The rules of this paragraph (d) are illustrated by 
the following examples. In the examples, A and B are U.S. residents and 
FT is a foreign trust. The examples are as follows:

    Example 1. Demand loan. A transfers 500X to FT in exchange for a 
demand note that permits A to require repayment by FT at any time. A 
is a related person (as defined in Sec. 1.679-1(c)(5)) with respect 
to FT. Because FT's obligation to A could remain outstanding for 
more than five years, the obligation is not a qualified obligation 
within the meaning of paragraph (d) of this section and, pursuant to 
paragraph (c) of this section, it is not taken into account for 
purposes of

[[Page 37896]]

determining whether A's transfer is eligible for the fair market 
value exception of paragraph (a)(4) of this section. Accordingly, 
Sec. 1.679-1 applies with respect to the full 500X transfer to FT.
    Example 2. Private annuity. A transfers 4000X to FT in exchange 
for an annuity from the foreign trust that will pay A 100X per year 
for the rest of A's life. A is a related person (as defined in 
Sec. 1.679-1(c)(5)) with respect to FT. Because FT's obligation to A 
could remain outstanding for more than five years, the obligation is 
not a qualified obligation within the meaning of paragraph (d)(1) of 
this section and, pursuant to paragraph (c) of this section, it is 
not taken into account for purposes of determining whether A's 
transfer is eligible for the fair market value exception of 
paragraph (a)(4) of this section. Accordingly, Sec. 1.679-1 applies 
with respect to the full 4000X transfer to FT.
    Example 3. Loan to unrelated foreign trust. B transfers 1000X to 
FT in exchange for an obligation of the trust. The term of the 
obligation is fifteen years. B is not a related person (as defined 
in Sec. 1.679-1(c)(5)) with respect to FT. Because B is not a 
related person, the fair market value of the obligation received by 
B is taken into account for purposes of determining whether B's 
transfer is eligible for the fair market value exception of 
paragraph (a)(4) of this section, even though the obligation is not 
a qualified obligation within the meaning of paragraph (d)(1) of 
this section.
    Example 4. Transfer for an obligation with term in excess of 5 
years. A transfers property that has a fair market value of 5000X to 
FT in exchange for an obligation of the trust. The term of the 
obligation is ten years. A is a related person (as defined in 
Sec. 1.679-1(c)(5)) with respect to FT. Because the term of the 
obligation is greater than five years, the obligation is not a 
qualified obligation within the meaning of paragraph (d)(1) of this 
section and, pursuant to paragraph (c) of this section, it is not 
taken into account for purposes of determining whether A's transfer 
is eligible for the fair market value exception of paragraph (a)(4) 
of this section. Accordingly, Sec. 1.679-1 applies with respect to 
the full 5000X transfer to FT.
    Example 5. Transfer for a qualified obligation. The facts are 
the same as in Example 4, except that the term of the obligation is 
3 years. Assuming the other requirements of paragraph (d)(1) of this 
section are satisfied, the obligation is a qualified obligation and 
its adjusted issue price is taken into account for purposes of 
determining whether A's transfer is eligible for the fair market 
value exception of paragraph (a)(4) of this section.
    Example 6. Effect of subsequent obligation on original 
obligation. A transfers property that has a fair market value of 
1000X to FT in exchange for an obligation that satisfies the 
requirements of paragraph (d)(1) of this section. A is a related 
person (as defined in Sec. 1.679-1(c)(5)) with respect to FT. Two 
years later, A transfers an additional 2000X to FT and receives 
another obligation from FT that has a maturity date four years from 
the date that the second obligation was issued. Under paragraph 
(d)(2) of this section, the original obligation is deemed to have 
the maturity date of the second obligation. Under paragraph (a) of 
this section, A is treated as having made a transfer in an amount 
equal to the original obligation's adjusted issue price (within the 
meaning of Sec. 1.1275-1(b)) plus any accrued but unpaid qualified 
stated interest (within the meaning of Sec. 1.1273-1(c)) as of the 
date of issuance of the second obligation. The second obligation is 
tested separately to determine whether it is a qualified obligation 
for purposes of applying paragraph (a) of this section to the second 
transfer.


Sec. 1.679-5  Pre-immigration trusts.

    (a) In general. If a nonresident alien individual becomes a U.S. 
person and the individual has a residency starting date (as determined 
under section 7701(b)(2)(A)) within 5 years after directly or 
indirectly transferring property to a foreign trust (the original 
transfer), the individual is treated as having transferred to the trust 
on the residency starting date an amount equal to the portion of the 
trust attributable to the property transferred by the individual in the 
original transfer.
    (b) Special rules--(1) Change in grantor trust status. For purposes 
of paragraph (a) of this section, if a nonresident alien individual who 
is treated as owning any portion of a trust under the provisions of 
subpart E of part I of subchapter J, chapter 1 of the Internal Revenue 
Code, subsequently ceases to be so treated, the individual is treated 
as having made the original transfer to the foreign trust immediately 
before the trust ceases to be treated as owned by the individual.
    (2) Treatment of undistributed income. For purposes of paragraph 
(a) of this section, the property deemed transferred to the foreign 
trust on the residency starting date includes undistributed net income, 
as defined in section 665(a), attributable to the property deemed 
transferred. Undistributed net income for periods before the 
individual's residency starting date is taken into account only for 
purposes of determining the amount of the property deemed transferred.
    (c) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. Nonresident alien becomes resident alien. On January 
1, 2002, A, a nonresident alien individual, transfers property to a 
foreign trust, FT. On January 1, 2006, A becomes a resident of the 
United States within the meaning of section 7701(b)(1)(A) and has a 
residency starting date of January 1, 2006, within the meaning of 
section 7701(b)(2)(A). Under paragraph (a) of this section, A is 
treated as a U.S. transferor and is deemed to transfer the property 
to FT on January 1, 2006. Under paragraph (b)(2) of this section, 
the property deemed transferred to FT on January 1, 2006, includes 
the undistributed net income of the trust, as defined in section 
665(a), attributable to the property originally transferred.
    Example 2. Nonresident alien loses power to revest property. On 
January 1, 2002, A, a nonresident alien individual, transfers 
property to a foreign trust, FT. A has the power to revest 
absolutely in himself the title to such property transferred and is 
treated as the owner of the trust pursuant to sections 676 and 
672(f). On January 1, 2008, the terms of FT are amended to remove 
A's power to revest in himself title to the property transferred, 
and A ceases to be treated as the owner of FT. On January 1, 2010, A 
becomes a resident of the United States. Under paragraph (b)(1) of 
this section, for purposes of paragraph (a) of this section A is 
treated as having originally transferred the property to FT on 
January 1, 2008. Because this date is within five years of A's 
residency starting date, A is deemed to have made a transfer to the 
foreign trust on January 1, 2010, his residency starting date. Under 
paragraph (b)(2) of this section, the property deemed transferred to 
the foreign trust on January 1, 2010, includes the undistributed net 
income of the trust, as defined in section 665(a), attributable to 
the property deemed transferred.


Sec. 1.679-6  Outbound migrations of domestic trusts.

    (a) In general. Subject to the provisions of paragraph (b) of this 
section, if an individual who is a U.S. person transfers property to a 
trust that is not a foreign trust, and such trust becomes a foreign 
trust while the U.S. person is alive, the U.S. individual is treated as 
a U.S. transferor and is deemed to transfer the property to a foreign 
trust on the date the domestic trust becomes a foreign trust.
    (b) Amount deemed transferred. For purposes of paragraph (a) of 
this section, the property deemed transferred to the trust when it 
becomes a foreign trust includes undistributed net income, as defined 
in section 665(a), attributable to the property previously transferred. 
Undistributed net income for periods prior to the migration is taken 
into account only for purposes of determining the portion of the trust 
that is attributable to the property transferred by the U.S. person.
    (c) Example. The following example illustrates the rules of this 
section. For purposes of the example, A is a resident alien, B is A's 
son, who is a resident alien, and DT is a domestic trust. The example 
is as follows:

    Example. Outbound migration of domestic trust. On January 1, 
2002, A transfers property to DT, for the benefit of B. On January 
1, 2003, DT acquires a foreign trustee who has the power to 
determine whether and when distributions will be made to B. Under 
section 7701(a)(30)(E) and Sec. 301.7701-7(d)(ii)(A) of this 
chapter, DT becomes a

[[Page 37897]]

foreign trust on January 1, 2003. Under paragraph (a) of this 
section, A is treated as transferring property to a foreign trust on 
January 1, 2003. Under paragraph (b) of this section, the property 
deemed transferred to the trust when it becomes a foreign trust 
includes undistributed net income, as defined in section 665(a), 
attributable to the property deemed transferred.


Sec. 1.679-7  Effective dates.

    (a) In general. Except as provided in paragraph (b) of this 
section, the rules of Secs. 1.679-1, 1.679-2, 1.679-3, and 1.679-4 
apply with respect to transfers after August 7, 2000.
    (b) Special rules. (1) The rules of Sec. 1.679-4(c) and (d) apply 
to an obligation issued after February 6, 1995, whether or not in 
accordance with a pre-existing arrangement or understanding. For 
purposes of the rules of Sec. 1.679-4(c) and (d), if an obligation 
issued on or before February 6, 1995, is modified after that date, and 
the modification is a significant modification within the meaning of 
Sec. 1.1001-3, the obligation is treated as if it were issued on the 
date of the modification. However, the penalty provided in section 6677 
applies only to a failure to report transfers in exchange for 
obligations issued after August 20, 1996.
    (2) The rules of Sec. 1.679-5 apply to persons whose residency 
starting date is after August 7, 2000.
    (3) The rules of Sec. 1.679-6 apply to trusts that become foreign 
trusts after August 7, 2000.

    Par. 3. In Sec. 1.958-1, the first sentence of paragraph (b) is 
revised to read as follows:


Sec. 1.958-1  Direct and indirect ownership of stock.

* * * * *
    (b) * * * For purposes of paragraph (a)(2) of this section, stock 
owned, directly or indirectly, by or for a foreign corporation, foreign 
partnership, foreign trust (within the meaning of section 7701(a)(31)) 
described in sections 671 through 679, or other foreign trust or 
foreign estate (within the meaning of section 7701(a)(31)) shall be 
considered as being owned proportionately by its shareholders, 
partners, grantors or other persons treated as owners under sections 
671 through 679 of any portion of the trust that includes the stock, or 
beneficiaries, respectively. * * *
* * * * *


Sec. 1.958-2  [Amended]

    Par. 4. In Sec. 1.958-2, paragraph (c)(1)(ii)(b) is amended by 
removing the language ``678'' and adding ``679'' in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: July 9, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 01-17971 Filed 7-19-01; 8:45 am]
BILLING CODE 4830-01-P