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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8956] RIN 1545-AY25

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section 684
of the Internal Revenue Code relating to recognition of gain on
certain transfers to certain foreign trusts and estates. The
regulations affect United States persons who transfer property to
foreign trusts and estates.

DATES: Effective Date: These regulations are effective July 20,
2001. Applicability Date: These regulations are applicable to
transfers of property to foreign trusts and foreign estates after
August 7, 2000.

FOR FURTHER INFORMATION CONTACT: Karen A. Rennie-Quarrie, (202)
622-3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations relating to the Income Tax
Regulations (CFR part 1) under section 684 of the.2 Internal Revenue
Code (Code). On August 7, 2000, Treasury and the IRS published a
notice of proposed rulemaking (REG-108522-00) in the Federal
Register (65 FR 48198) under section 684 of the Code relating to
gain recognition on transfers of property by U.S. persons to foreign
trusts and estates. Comments responding to the notice of proposed
rulemaking were received and a public hearing was held on November
8, 2000. After consideration of all comments, the proposed
regulations are adopted as final regulations as revised by this
Treasury decision. Explanation of Provisions

I. Comments and Changes to §1.684-1: Recognition of Gain on
Transfers to Certain Foreign Trusts and Estates

Under the proposed regulations, a U.S. person who transfers property
to a foreign trust or estate generally must recognize gain
immediately even if deferral might otherwise be permitted under
another provision of the Code.

One commenter questioned the authority for the conclusion in
§1.684-1(d) Example 4 that a U.S. person must recognize gain
immediately upon the transfer of appreciated property to a foreign
trust in exchange for a private annuity. The general rule in section
684(a) provides, in part, that the transfer to the foreign trust is
treated as a sale or exchange for an amount equal to the fair market
value of the property transferred and the transferor must recognize
the gain in the property, except as.3 provided in regulations. The
language of section 684(a) does not provide for any deferral of this
gain. Moreover, the legislative history of former section 1491 (the
predecessor of section 684 regarding transfers of property by U.S.
persons to foreign trusts) makes it clear that Congress did not look
favorably upon deferral in the context of transfers to foreign
trusts in exchange for private annuities: "The committee believes
that any policy in favor of permitting deferral of tax in private
annuity transactions should not apply to a private annuity
transaction with a foreign trust." S. Rep. No. 94-938, at 217, n.5
(1976). Therefore, Treasury and the IRS do not believe it would be
appropriate to adopt regulations that would permit deferral in such
a case. The final regulations retain Example 4 without modification.

II. Comments and Changes to §1.684-2: Transfers

The proposed regulations define the term transfer broadly to mean
any direct, indirect, or constructive transfer. Section 1.684-2(e)
of the proposed regulations provides that if any portion of a
foreign trust is treated as owned by a U.S. person and such portion
ceases to be treated as owned by such U.S. person, the U.S. person
is treated as having transferred the assets of such portion to a
foreign trust immediately before the trust is no longer treated as
owned by the U.S. person. Section 1.684-2(e)(2) Example 2
illustrates this rule in the case of the death of the grantor..4

One commenter questioned the authority for the position that death
is a transfer to which section 684 applies. Section 684(a) expressly
applies to "any transfer of property by a United States person to a
foreign estate or trust" (emphasis added). Section 679 also
generally applies to transfers of property by U.S. persons to
foreign trusts. In the case of section 679, however, section 679(a)
(2)(A) specifically excepts transfers by reason of death from the
application of the general rule of section 679. This exception
implies that Congress believed that, unless otherwise excepted, a
transfer by reason of death would be a transfer to which section 679
applied. Because Congress provided no exception in section 684 for
transfers by reason of death, it follows that section 684 applies to
such transfers. Additional support for this conclusion is found in
the information reporting rules in section 6048(a)(3)(A)(ii), which
provides that a "reportable event" includes "the transfer of any
money or property (directly or indirectly) to a foreign trust by a
United States person, including a transfer by reason of death"
(emphasis added). Although section 684 generally applies to
transfers by reason of death, §1.684-3(c) provides an exception
to the general rule of gain recognition in the case of certain
transfers at death.

One commenter requested guidance concerning a transfer of property
by a domestic trust (that is not treated as owned by another person)
to a foreign trust as a result of the.5 testamentary exercise of a
limited power of appointment with respect to the domestic trust.
Treasury and the IRS believe that, under general principles
regarding limited powers of appointment, the domestic trust, and not
the holder of the limited power of appointment, is the transferor of
the property. Accordingly, the domestic trust must recognize gain
under the general rule of §1.684-1(a) unless an exception
applies. The final regulations do not include any special rules for
such transfers.

One commenter asked about the interaction of §1.684-2(d) and
§1.684-2(e) in the context of an actual transfer of property
from a foreign trust that is treated as owned by a U.S. person to
either a foreign charitable organization or a U.S. charity. Under
§1.684-2(d) of the proposed regulations, 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. Under §1.684-2(e) of the proposed
regulations, if a portion of a foreign trust that is treated as
owned by a U.S. person ceases to be treated as owned by the U.S.
person, the U.S. person is treated as having transferred the assets
of that portion of the trust to a foreign trust immediately before
such portion is no longer treated as owned by the U.S. person.

The commenter noted that §1.684-2(e) of the proposed.6
regulation could be read to apply in situations where a portion of a
foreign trust ceases to be treated as owned by a U.S. person because
of an actual transfer of property from the trust. The final
regulations clarify that §1.684-2(e) does not apply (and that
§1.684-2(d) may apply) when any portion of a trust ceases to be
owned by a U.S. person by reason of an actual transfer of property
from the trust. As a result, the general rule of gain recognition
under §1.684-1(a) would not apply to an actual transfer by a
foreign trust that is treated as owned by a U.S. person to a foreign
charitable trust that meets the requirements of §1.684-3(b), or
to a U.S. charity, even if the transfer causes the portion of the
trust to cease to be owned by the U.S. person.

III. Comments and Changes to §1.684-3: Exceptions to the
General Rule of Gain Recognition

Section 1.684-3(a) of the proposed regulations provides that a U.S.
person who transfers property to a foreign trust is not required to
recognize gain on the transfer to the extent that any person is
treated as the owner of the trust under section 671. One commenter
questioned whether the term any person includes foreign persons.
Although not specifically addressed in the final regulations, it is
understood that the term any person includes foreign as well as U.S.
persons.

Section 1.684-3(b) of the proposed regulations provides an exception
for transfers to a foreign trust that has already received a ruling
or determination letter from the IRS.7 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
U.S. 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 gain recognition does not apply to
any transfer of property to a foreign trust that is described in
section 501(c)(3)(without regard to the requirements of section
508(a)). 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.8 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
and the U.S. transferor will be required to recognize gain as of the
time of the original transfer, and may be subject to interest and
penalties, if applicable.

Section 1.684-3(c) of the proposed regulations provides an exception
for transfers of property by reason of the death of the U.S.
transferor if both of the following requirements are satisfied: (1)
the property is included in the U.S. transferor's gross estate for
Federal estate tax purposes, and (2) the basis of the property in
the hands of the foreign trust is determined under section 1014(a).
One commenter questioned whether section 684 would apply in the case
of an individual who is a U.S. person for income tax purposes, but a
non-domiciliary for estate tax purposes, with the result that the
property of the individual would be entitled to a step-up in basis,
but would not be included in the individual's gross estate. The
final regulations eliminate the requirement that the property be
included in the U.S. transferor's gross estate and allow the
exception to apply as long as the basis of the property in the hands
of the foreign trust is determined under section 1014(a).

Another commenter requested that the final regulations confirm that
section 1032 applies to provide for nonrecognition.9 of gain on
issuer stock transferred to a foreign trust. The commenter noted
that under former section 1491, no excise tax was imposed on a
transfer of stock by a foreign corporation to a foreign trust if the
corporation was not required to recognize gain on the transfer under
section 1032. See Notice 97-18 (1997- 1 C.B. 389, Sec. II.A.1). In
response to this comment, §1.684- 3(e) of the final regulations
provides a new exception for transfers of stock (including treasury
stock) by a domestic corporation to a foreign trust if the domestic
corporation is not required to recognize gain on the transfer under
section 1032. Commenters also suggested that contributions by U.S.
persons to foreign compensatory trusts described in sections 402(b),
404(a)(4), or 404A should be exempt from gain recognition under
section 684. Treasury and the IRS have considered the proposed
exception but do not believe it is consistent with the intended
purpose of section 684. Accordingly, the final regulations do not
include an exception for transfers to foreign compensatory trusts.
However, the exception for transfers of stock to which section 1032
would apply may be available in appropriate cases for transfers of
stock of a domestic parent company to a foreign compensatory trust
set up by a foreign subsidiary.

Another commenter requested an exception for transfers of life
insurance contracts to foreign trusts. The commenter noted that the
proceeds of life insurance contracts do not generally give rise to
any taxable gain if held by a U.S. individual or.10 trust. Congress
has recognized that life insurance contracts might be used to
effectuate inappropriate outbound transfers of property. As part of
the repeal of section 1491 in 1997, Congress enacted section
1035(c), which provides regulatory authority to deny the
nonrecognition treatment given to exchanges of life insurance
contracts under section 1035(a) where the exchange has the effect of
transferring property to any person other than a U.S. person. Public
Law 105-34, §1131(b)[(c)](1). Because of the potential for
abuse and the lack of a compelling reason for creating an exception
for offshore transfers of life insurance contracts, Treasury and the
IRS have concluded that such an exception is not warranted.

IV. Comments and Changes to §1.684-4: Outbound Migration of
Domestic Trusts

Section 1.684-4 of the proposed regulation provides 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
and the domestic trust must immediately recognize gain. The proposed
regulations do, however, incorporate the relief for inadvertent
migrations that is set forth in §301.7701- 7(d)(2).

One commenter suggested that the final regulations should extend the
inadvertent migration rules of §301.7701-7(d)(2) to apply to
§301.7701-7(f), which deals with the election by certain.11
trusts to remain domestic trusts. Under §301.7701-7(d)(2), in
the event of an inadvertent change in any person that has the power
to make a substantial decision of the trust that would cause the
domestic or foreign residency of the trust to change (e.g., an
inadvertent change from a U.S. trustee to a foreign trustee by
reason of the U.S. trustee's death), the trust is allowed 12 months
to make necessary changes to avoid a change in the trust's residency
(e.g., the replacement of the foreign successor trustee with a U.S.
successor trustee). The commenter suggests that a trust with an
election in force under §301.7701-7(d)(2) should be allowed a
similar amount of time to make necessary changes if a U.S. trustee
is inadvertently replaced by a foreign trustee.

The final regulations do not include such a rule. Under
§301.7701-7(f), a trust generally can elect to remain a
domestic trust if it was in existence on August 20, 1996, and it was
treated as a domestic trust on August 19, 1996. Section
301.7701-7(f)(4)(ii) provides that such an election terminates if
subsequent changes are made to the trust that result in the trust no
longer having any reasonable basis for being treated as a domestic
trust under section 7701(a)(30) prior to its amendment by the Small
Business Job Protection Act of 1996 (SBJP Act), Pub. L. 104-188, 110
Stat. 1755. Whereas the "control test" of section 7701(a)(30)(E)
(ii), as enacted by the SBJP Act, contains a relatively bright-line
test for purposes of determining a.12 trust's status, thereby
necessitating the inadvertent migration rule of §301.7701-7(d)
(2), the determination of domestic or foreign status prior to the
SBJP Act was governed by less objective criteria.

Under pre-SBJP Act law, an inadvertent short-term replacement of a
domestic trustee by a foreign trustee would not necessarily cause a
change in the trust's status. Accordingly, a specific inadvertent
migration rule for §301.7701-7(f) is not appropriate. Instead,
as set forth in §301.7701-7(f)(4)(ii), an election under
§301.7701-7(f) will not be terminated unless the trust has no
reasonable basis for being treated as a domestic trust under pre-
SBJP Act law.

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 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.13 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 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. 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 1.684-1 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: §1.684-1 Recognition of gain on transfers to
certain foreign.14 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
§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 §1.684-2) of.15 property to
a foreign trust or foreign estate.

(3) Foreign trust. Section 7701(a)(31)(B) defines foreign trust. See
also §301.7701-7 of this chapter.

(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 §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 §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 §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..16

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. A's
adjusted basis in the property is 100X. FT has no U.S. beneficiary
within the meaning of §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 §1.679-1(c)(5). The obligation is treated as a
qualified obligation within the meaning of §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 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. §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:.17 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
§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
§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 §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
§1.679-3(c)(2)(ii), that I acted independently of A in making
the transfer to FT. Under paragraph (b) of this section and
§1.679- 3(c), A is treated as having transferred the property
to FT. Under paragraph (b) of this section and §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 §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.18 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 §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 §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 §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 §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 §1.684-1, at the time of the transfer by FT1 to
FT2.

(e) Deemed 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 (other than by
reason of an actual transfer of property from the trust to which
§1.684-2(d) applies), the U.S. person shall be treated as
having transferred, immediately before (but on the same date that)
the trust is no.19 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 §1.679- 2, and A is treated as owning FT under section 679.
Under §1.684-3(a), §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 as
defined in §1.679-2(c) and as of that date neither A nor any
other person is treated as owning any portion of FT. Pursuant to
§1.679-2(c)(2), if FT ceases to be treated as having a U.S.
beneficiary, A will cease to be treated as owner of FT beginning on
the first day of the first taxable year following the last taxable
year in which there was a U.S. beneficiary. Thus, on January 1,
2004, A ceases to be treated as owner of FT. On that date, the fair
market value of the property is 1200X and the adjusted basis is
350X. Under paragraph (e)(1) of this section, A is treated as having
transferred the property to FT on January 1, 2004, and must
recognize 850X of gain at that time under §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 §1.684-1.
However, an exception may apply under §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 §1.679-2..20 However, A retains the power to revoke the
trust. A is treated as the owner of the trust under section 676 and,
therefore, under §1.684-3(a), A is not required to recognize
gain under §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. §1.684-3 Exceptions to general
rule of gain recognition.

(a) Transfers to grantor trusts. The general rule of gain
recognition under §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 §1.684-1 shall not apply to any transfer of
property to a foreign trust that is described in section 501(c)(3)
(without regard to the requirements of section 508(a)).

(c) Certain transfers at death. The general rule of gain recognition
under §1.684-1 shall not apply to any transfer of property by
reason of death of the U.S. transferor if the basis.21 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 §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 §1.679-1(c)(5).
Section 1.671-2(e)(2)(ii) defines fair market value.

(e) Transfers to which section 1032 applies. The general rule of
gain recognition under §1.684-1 shall not apply to any transfer
of stock (including treasury stock) by a domestic corporation to a
foreign trust if the domestic corporation is not required to
recognize gain on the transfer under section 1032.

(f) 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
§301.7701-4(c) of this chapter, liquidating trusts described in
§301.7701-4(d) of this chapter, or environmental remediation
trusts described in §301.7701-4(e) of this chapter.

(g) 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.22 U.S. beneficiary within the meaning of
§1.679-2, and A is treated as owning FT under section 679.
Under paragraph (a) of this section, §1.684-1 does not cause A
to recognize gain at the time of the transfer. See §1.684-2(e)
for rules that may require A to recognize gain if the trust is no
longer owned by A.

Example 2. Transfer of property at death: Basis determined under
section 1014(a).

(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
§1.684-1 because the basis of the property in the hands of the
foreign trust is determined under section 1014(a).

Example 3. Transfer of property at death: Basis not determined under
section 1014(a).

(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 retains no power over FT, and FT's basis in the
property transferred is not determined under section 1014(a). Under
§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 §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 §1.679-1(c)(5). FT is not treated
as owned by any person. Pursuant to paragraph (d) of this section, A
is not required to recognize gain under §1.684-1. §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, and neither trust is
treated as owned by any person under subpart E of part I of
subchapter J, chapter 1 of the Internal Revenue.23 Code, 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 §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 §301.7701-7(d)(2) of this chapter, a
trust may avoid the application of this section by complying with
the procedures set forth in §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, and 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 U.S. 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 §301.7701-7(d) of this chapter, T becomes a
foreign trust. T has U.S. beneficiaries within the meaning of
§1.679-2 and A is, therefore, treated as owning FT under
section 679. Pursuant to §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.24 domestic trust for the
benefit of A's mother who is not a citizen or resident of the United
States. T is not treated as owned by another person. 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 §301.7701-7(d) of this chapter, T becomes a
foreign trust, FT. FT has no U.S. beneficiaries within the meaning
of §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..25 §1.684-5
Effective date Sections 1.684-1 through 1.684-4 apply to transfers
of property to foreign trusts and foreign estates after August 7,
2000.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

Approved: July 9, 2001

Mark Weinberger
Assistant Secretary of the Treasury (Tax Policy)

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