[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: 26CFR1.684-1]

[Page 327-328]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.684-1  Recognition of gain on transfers to certain foreign 
trusts and estates.

    (a) Immediate recognition of gain--(1) In general. Any U.S. person 
who transfers property to a foreign trust or foreign estate shall be 
required to recognize gain at the time of the transfer equal to the 
excess of the fair market value of the property transferred over the 
adjusted basis (for purposes of determining gain) of such property in 
the hands of the U.S. transferor unless an exception applies under the 
provisions of Sec. 1.684-3. The amount of gain recognized is determined 
on an asset-by-asset basis.
    (2) No recognition of loss. Under this section a U.S. person may not 
recognize loss on the transfer of an asset to a foreign trust or foreign 
estate. A U.S. person may not offset gain realized on the transfer of an 
appreciated asset to a foreign trust or foreign estate by a loss 
realized on the transfer of a depreciated asset to the foreign trust or 
foreign estate.

[[Page 328]]

    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) U.S. person. The term U.S. person means a United States person 
as defined in section 7701(a)(30), and includes a nonresident alien 
individual who elects under section 6013(g) to be treated as a resident 
of the United States.
    (2) U.S. transferor. The term U.S. transferor means any U.S. person 
who makes a transfer (as defined in Sec. 1.684-2) of property to a 
foreign trust or foreign estate.
    (3) Foreign trust. Section 7701(a)(31)(B) defines foreign trust. See 
also Sec. 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 Sec. 1.679-2, 
and no person is treated as owning any portion of FT. Under paragraph 
(a)(1) of this section, A recognizes gain at the time of the transfer 
equal to 600X.
    Example 2. Transfer of multiple properties. A transfers property Q, 
with a fair market value of 1000X, and property R, with a fair market 
value of 2000X, to FT. At the time of the transfer, A's adjusted basis 
in property Q is 700X, and A's adjusted basis in property R is 2200X. FT 
has no U.S. beneficiary within the meaning of Sec. 1.679-2, and no 
person is treated as owning any portion of FT. Under paragraph (a)(1) of 
this section, A recognizes the 300X of gain attributable to property Q. 
Under paragraph (a)(2) of this section, A does not recognize the 200X of 
loss attributable to property R, and may not offset that loss against 
the gain attributable to property Q.
    Example 3. Transfer for less than fair market value. A transfers 
property that has a fair market value of 1000X to FT in exchange for 
400X of cash. A's adjusted basis in the property is 200X. FT has no U.S. 
beneficiary within the meaning of Sec. 1.679-2, and no person is 
treated as owning any portion of FT. Under paragraph (a)(1) of this 
section, A recognizes gain at the time of the transfer equal to 800X.
    Example 4. Exchange of property for private annuity. A transfers 
property that has a fair market value of 1000X to FT in exchange for 
FT's obligation to pay A 50X per year for the rest of A's life. A's 
adjusted basis in the property is 100X. FT has no U.S. beneficiary 
within the meaning of Sec. 1.679-2, and no person is treated as owning 
any portion of FT. A is required to recognize gain equal to 900X 
immediately upon transfer of the property to the trust. This result 
applies even though A might otherwise have been allowed to defer 
recognition of gain under another provision of the Internal Revenue 
Code.
    Example 5. Transfer of property to related foreign trust in exchange 
for qualified obligation. A transfers property that has a fair market 
value of 1000X to FT in exchange for FT's obligation to make payments to 
A during the next four years. FT is related to A as defined in Sec. 
1.679-1(c)(5). The obligation is treated as a qualified obligation 
within the meaning of Sec. 1.679-4(d), and no person is treated as 
owning any portion of FT. A's adjusted basis in the property is 100X. A 
is required to 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.

[T.D. 8956, 66 FR 37899, July 20, 2001]