[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.643(h)-1]

[Page 63-66]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.643(h)-1  Distributions by certain foreign trusts through intermediaries.

    (a) In general--(1) Principal purpose of tax avoidance. Except as 
provided in paragraph (b) of this section, for purposes of part I of 
subchapter J, chapter 1 of the Internal Revenue Code, and section 6048, 
any property (within the meaning of paragraph (f) of this section) that 
is transferred to a United States person by another person (an 
intermediary) who has received property from a foreign trust will be 
treated as property transferred directly by the foreign trust to the 
United States person if the intermediary received the property from the 
foreign trust pursuant to a plan one of the principal purposes of which 
was the avoidance of United States tax.
    (2) Principal purpose of tax avoidance deemed to exist. For purposes 
of paragraph (a)(1) of this section, a transfer will be deemed to have 
been made pursuant to a plan one of the principal purposes of which was 
the avoidance of United States tax if the United States person--
    (i) Is related (within the meaning of paragraph (e) of this section) 
to a grantor of the foreign trust, or has another relationship with a 
grantor of the foreign trust that establishes a reasonable basis for 
concluding that the grantor of the foreign trust would make a gratuitous 
transfer (within the

[[Page 64]]

meaning of Sec. 1.671-2(e)(2)) to the United States person;
    (ii) Receives from the intermediary, within the period beginning 
twenty-four months before and ending twenty-four months after the 
intermediary's receipt of property from the foreign trust, either the 
property the intermediary received from the foreign trust, proceeds from 
such property, or property in substitution for such property; and
    (iii) Cannot demonstrate to the satisfaction of the Commissioner 
that--
    (A) The intermediary has a relationship with the United States 
person that establishes a reasonable basis for concluding that the 
intermediary would make a gratuitous transfer to the United States 
person;
    (B) The intermediary acted independently of the grantor and the 
trustee of the foreign trust;
    (C) The intermediary is not an agent of the United States person 
under generally applicable United States agency principles; and
    (D) The United States person timely complied with the reporting 
requirements of section 6039F, if applicable, if the intermediary is a 
foreign person.
    (b) Exceptions--(1) Nongratuitous transfers. Paragraph (a) of this 
section does not apply to the extent that either the transfer from the 
foreign trust to the intermediary or the transfer from the intermediary 
to the United States person is a transfer that is not a gratuitous 
transfer within the meaning of Sec. 1.671-2(e)(2).
    (2) Grantor as intermediary. Paragraph (a) of this section does not 
apply if the intermediary is the grantor of the portion of the trust 
from which the property that is transferred is derived. For the 
definition of grantor, see Sec. 1.671-2(e).
    (c) Effect of disregarding intermediary--(1) General rule. Except as 
provided in paragraph (c)(2) of this section, the intermediary is 
treated as an agent of the foreign trust, and the property is treated as 
transferred to the United States person in the year the property is 
transferred, or made available, by the intermediary to the United States 
person. The fair market value of the property transferred is determined 
as of the date of the transfer by the intermediary to the United States 
person. For purposes of section 665(d)(2), the term taxes imposed on the 
trust includes any income, war profits, and excess profits taxes imposed 
by any foreign country or possession of the United States on the 
intermediary with respect to the property transferred.
    (2) Exception. If the Commissioner determines, or if the taxpayer 
can demonstrate to the satisfaction of the Commissioner, that the 
intermediary is an agent of the United States person under generally 
applicable United States agency principles, the property will be treated 
as transferred to the United States person in the year the intermediary 
receives the property from the foreign trust. The fair market value of 
the property transferred will be determined as of the date of the 
transfer by the foreign trust to the intermediary. For purposes of 
section 901(b), any income, war profits, and excess profits taxes 
imposed by any foreign country or possession of the United States on the 
intermediary with respect to the property transferred will be treated as 
having been imposed on the United States person.
    (3) Computation of gross income of intermediary. If property is 
treated as transferred directly by the foreign trust to a United States 
person pursuant to this section, the fair market value of such property 
is not taken into account in computing the gross income of the 
intermediary (if otherwise required to be taken into account by the 
intermediary but for paragraph (a) of this section).
    (d) Transfers not in excess of $10,000. This section does not apply 
if, during the taxable year of the United States person, the aggregate 
fair market value of all property transferred to such person from all 
foreign trusts either directly or through one or more intermediaries 
does not exceed $10,000.
    (e) Related parties. For purposes of this section, a United States 
person is treated as related to a grantor of a foreign trust if the 
United States person and the grantor are related for purposes of section 
643(i)(2)(B), with the following modifications--
    (1) For purposes of applying section 267 (other than section 267(f)) 
and section 707(b)(1), ``at least 10 percent'' is

[[Page 65]]

used instead of ``more than 50 percent'' each place it appears; and
    (2) 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.
    (f) Definition of property. For purposes of this section, the term 
property includes cash.
    (g) Examples. The following examples illustrate the rules of this 
section. In each example, FT is an irrevocable foreign trust that is not 
treated as owned by any other person and the fair market value of the 
property that is transferred exceeds $10,000. The examples are as 
follows:

    Example 1. Principal purpose of tax avoidance. FT was created in 
1980 by A, a nonresident alien, for the benefit of his children and 
their descendants. FT's trustee, T, determines that 1000X of accumulated 
income should be distributed to A's granddaughter, B, who is a resident 
alien. Pursuant to a plan with a principal purpose of avoiding the 
interest charge that would be imposed by section 668, T causes FT to 
make a gratuitous transfer (within the meaning of Sec. 1.671-2(e)(2)) 
of 1000X to I, a foreign person. I subsequently makes a gratuitous 
transfer of 1000X to B. Under paragraph (a)(1) of this section, FT is 
deemed to have made an accumulation distribution of 1000X directly to B.
    Example 2. United States person unable to demonstrate that 
intermediary acted independently. GM and her daughter, M, are both 
nonresident aliens. M's daughter, D, is a resident alien. GM creates and 
funds FT for the benefit of her children. On July 1, 2001, FT makes a 
gratuitous transfer of XYZ stock to M. M immediately sells the XYZ stock 
and uses the proceeds to purchase ABC stock. On January 1, 2002, M makes 
a gratuitous transfer of the ABC stock to D. D is unable to demonstrate 
that M acted independently of GM and the trustee of FT in making the 
transfer to D. Under paragraph (a)(2) of this section, FT is deemed to 
have distributed the ABC stock to D. Under paragraph (c)(1) of this 
section, M is treated as an agent of FT, and the distribution is deemed 
to have been made on January 1, 2002.
    Example 3. United States person demonstrates that specified 
conditions are satisfied. Assume the same facts as in Example 2, except 
that M receives 1000X cash from FT instead of XYZ stock. M gives 1000X 
cash to D on January 1, 2002. Also assume that M receives annual income 
of 5000X from her own investments and that M has given D 1000X at the 
beginning of each year for the past ten years. Based on this and 
additional information provided by D, D demonstrates to the satisfaction 
of the Commissioner that M has a relationship with D that establishes a 
reasonable basis for concluding that M would make a gratuitous transfer 
to D, that M acted independently of GM and the trustee of FT, that M is 
not an agent of D under generally applicable United States agency 
principles, and that D timely complied with the reporting requirements 
of section 6039F. FT will not be deemed under paragraph (a)(2) of this 
section to have made a distribution to D.
    Example 4. Transfer to United States person less than 24 months 
before transfer to intermediary. Several years ago, A, a nonresident 
alien, created and funded FT for the benefit of his children and their 
descendants. A has a close friend, C, who also is a nonresident alien. 
A's granddaughter, B, is a resident alien. On December 31, 2001, C makes 
a gratuitous transfer of 1000X to B. On January 15, 2002, FT makes a 
gratuitous transfer of 1000X to C. B is unable to demonstrate that C has 
a relationship with B that would establish a reasonable basis for 
concluding that C would make a gratuitous transfer to B or that C acted 
independently of A and the trustee of FT in making the transfer to B. 
Under paragraph (a)(2) of this section, FT is deemed to have distributed 
1000X directly to B. Under paragraph (c)(1) of this section, C is 
treated as an agent of FT, and the distribution is deemed to have been 
made on December 31, 2001.
    Example 5. United States person receives property in substitution 
for property transferred to intermediary. GM and her son, S, are both 
nonresident aliens. S's daughter, GD, is a resident alien. GM creates 
and funds FT for the benefit of her children and their descendants. On 
July 1, 2001, FT makes a gratuitous transfer of ABC stock with a fair 
market value of approximately 1000X to S. On January 1, 2002, S makes a 
gratuitous transfer of DEF stock with a fair market value of 
approximately 1000X to GD. GD is unable to demonstrate that S acted 
independently of GM and the trustee of FT in transferring the DEF stock 
to GD. Under paragraph (a)(2) of this section, FT is deemed to have 
distributed the DEF stock to GD. Under paragraph (c)(1) of this section, 
S is treated as an agent of FT, and the distribution is deemed to have 
been made on January 1, 2002.
    Example 6. United States person receives indirect loan from foreign 
trust. Several years ago, A, a nonresident alien, created and funded FT 
for the benefit of her children and their descendants. A's daughter, B, 
is a resident alien. B needs funds temporarily while she is starting up 
her own business. If FT were to loan money directly to B, section 643(i) 
would apply. FT deposits 500X with FB, a foreign bank, on June 30, 2001. 
On July 1, 2001, FB loans 400X to B. Repayment of the loan is guaranteed 
by FT's 500X deposit. B is

[[Page 66]]

unable to demonstrate to the satisfaction of the Commissioner that FB 
has a relationship with B that establishes a reasonable basis for 
concluding that FB would make a loan to B or that FB acted independently 
of A and the trustee of FT in making the loan. Under paragraph (a)(2) of 
this section, FT is deemed to have loaned 400X directly to B on July 1, 
2001. Under paragraph (c)(1) of this section, FB is treated as an agent 
of FT. For the treatment of loans from foreign trusts, see section 
643(i).
    Example 7. United States person demonstrates that specified 
conditions are satisfied. GM, a nonresident alien, created and funded FT 
for the benefit of her children and their descendants. One of GM's 
children is M, who is a resident alien. During the year 2001, FT makes a 
gratuitous transfer of 500X to M. M reports the 500X on Form 3520 as a 
distribution received from a foreign trust. During the year 2002, M 
makes a gratuitous transfer of 400X to her son, S, who also is a 
resident alien. M files a Form 709 treating the gratuitous transfer to S 
as a gift. Based on this and additional information provided by S, S 
demonstrates to the satisfaction of the Commissioner that M has a 
relationship with S that establishes a reasonable basis for concluding 
that M would make a gratuitous transfer to S, that M acted independently 
of GM and the trustee of FT, and that M is not an agent of S under 
generally applicable United States agency principles. FT will not be 
deemed under paragraph (a)(2) of this section to have made a 
distribution to S.M
    Example 8. Intermediary as agent of trust; increase in FMV. A, a 
nonresident alien, created and funded FT for the benefit of his children 
and their descendants. On December 1, 2001, FT makes a gratuitous 
transfer of XYZ stock with a fair market value of 85X to B, a 
nonresident alien. On November 1, 2002, B sells the XYZ stock to a third 
party in an arm's length transaction for 100X in cash. On November 1, 
2002, B makes a gratuitous transfer of 98X to A's grandson, C, a 
resident alien. C is unable to demonstrate to the satisfaction of the 
Commissioner that B acted independently of A and the trustee of FT in 
making the transfer. Under paragraph (a)(2) of this section, FT is 
deemed to have made a distribution directly to C. Under paragraph (c)(1) 
of this section, B is treated as an agent of FT, and FT is deemed to 
have distributed 98X to C on November 1, 2002.
    Example 9. Intermediary as agent of United States person; increase 
in FMV. Assume the same facts as in Example 8, except that the 
Commissioner determines that B is an agent of C under generally 
applicable United States agency principles. Under paragraph (c)(2) of 
this section, FT is deemed to have distributed 85X to C on December 1, 
2001. C must take the gain of 15X into account in the year 2002.
    Example 10. Intermediary as agent of trust; decrease in FMV. Assume 
the same facts as in Example 8, except that the value of the XYZ stock 
on November 1, 2002, is only 80X. Instead of selling the XYZ stock to a 
third party and transferring cash to C, B transfers the XYZ stock to C 
in a gratuitous transfer. Under paragraph (c)(1) of this section, FT is 
deemed to have distributed XYZ stock with a value of 80X to C on 
November 1, 2002.
    Example 11. Intermediary as agent of United States person; decrease 
in FMV. Assume the same facts as in Example 10, except that the 
Commissioner determines that B is an agent of C under generally 
applicable United States agency principles. Under paragraph (c)(2) of 
this section, FT is deemed to have distributed XYZ stock with a value of 
85X to C on December 1, 2001.

    (h) Effective date. The rules of this section are applicable to 
transfers made to United States persons after August 10, 1999.

[T.D. 8831, 64 FR 43272, Aug. 10, 1999, as amended by T.D. 8890, 65 FR 
41332, July 5, 2000]

    pooled income fund actuarial tables applicable before may 1, 1999