[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: 26CFR1.672(f)-2]

[Page 286-287]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.672(f)-2  Certain foreign corporations.

    (a) Application of general rule. Subject to the provisions of 
paragraph (b) of this section, if the owner of any portion of a trust 
upon application of the grantor trust rules without regard to section 
672(f) is a controlled foreign corporation (as defined in section 957), 
a passive foreign investment company (as defined in section 1297), or a 
foreign personal holding company (as defined in section 552), the 
corporation will be treated as a domestic corporation for purposes of 
applying the rules of Sec. 1.672(f)-1.
    (b) Gratuitous transfers to United States persons--(1) Transfer from 
trust to which corporation made a gratuitous transfer. If a trust (or 
portion of a trust) to which a controlled foreign corporation, passive 
foreign investment company, or foreign personal holding company has made 
a gratuitous transfer (within the meaning of

[[Page 287]]

Sec. 1.671-2(e)(2)), makes a gratuitous transfer to a United States 
person, the controlled foreign corporation, passive foreign investment 
company, or foreign personal holding company, as the case may be, is 
treated as a foreign corporation for purposes of Sec. 1.672(f)-4(c), 
relating to gratuitous transfers from trusts (or portions of trusts) to 
which a partnership or foreign corporation has made a gratuitous 
transfer.
    (2) Transfer from trust over which corporation has a section 678 
power. If a trust (or portion of a trust) that a controlled foreign 
corporation, passive foreign investment company, or foreign personal 
holding company is treated as owning under section 678 makes a 
gratuitous transfer to a United States person, the controlled foreign 
corporation, passive foreign investment company, or foreign personal 
holding company, as the case may be, is treated as a foreign corporation 
that had made a gratuitous transfer to the trust (or portion of a trust) 
and the rules of Sec. 1.672(f)-4(c) apply.
    (c) Special rules for passive foreign investment companies--(1) 
Application of section 1297. For purposes of determining whether a 
foreign corporation is a passive foreign investment company as defined 
in section 1297, the grantor trust rules apply as if section 672(f) had 
not come into effect.
    (2) References to renumbered Internal Revenue Code section. For 
taxable years of shareholders beginning on or before December 31, 1997, 
and taxable years of passive foreign investment companies ending with or 
within such taxable years of the shareholders, all references in this 
Sec. 1.672(f)-2 to section 1297 are deemed to be references to section 
1296.
    (d) Examples. The following examples illustrate the rules of this 
section. In each example, FT is an irrevocable foreign trust, and CFC is 
a controlled foreign corporation. The examples are as follows:

    Example 1. Application of general rule. CFC creates and funds FT. 
CFC is the grantor of FT within the meaning of Sec. 1.671-2(e). CFC has 
a reversionary interest in FT within the meaning of section 673 that 
would cause CFC to be treated as the owner of FT upon application of the 
grantor trust rules without regard to section 672(f). Under paragraph 
(a) of this section, CFC is treated as a domestic corporation for 
purposes of applying the general rule of Sec. 1.672(f)-1. Thus, Sec. 
1.672(f)-1 does not prevent CFC from being treated as the owner of FT 
under section 673.
    Example 2. Distribution from trust to which CFC made gratuitous 
transfer. A, a nonresident alien, owns 40 percent of the stock of CFC. 
A's brother B, a resident alien, owns the other 60 percent of the stock 
of CFC. CFC makes a gratuitous transfer to FT. FT makes a gratuitous 
transfer to A's daughter, C, who is a resident alien. Under paragraph 
(b)(1) of this section, CFC will be treated as a foreign corporation for 
purposes of Sec. 1.672(f)-4(c). For further guidance, see Sec. 
1.672(f)-4(g) Example 2 through Example 4.

    (e) Effective date. The rules of this section are generally 
applicable to taxable years of shareholders of controlled foreign 
corporations, passive foreign investment companies, and foreign personal 
holding companies beginning after August 10, 1999, and taxable years of 
controlled foreign corporations, passive foreign investment companies, 
and foreign personal holding companies ending with or within such 
taxable years of the shareholders.

[T.D. 8831, 64 FR 43276, Aug. 10, 1999, as amended by T.D. 8890, 65 FR 
41334, July 5, 2000]