[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: 26CFR1.684-2]

[Page 328-330]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 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:

    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 Sec. 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.

[[Page 329]]

Under paragraph (b) of this section and Sec. 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 
Sec. 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 Sec. 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 Sec. 1.679-3(c), A is treated as having transferred 
the property to FT. Under paragraph (b) of this section and Sec. 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 Sec. 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 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 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 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 Sec. 1.679-2, and A is treated 
as owning FT under section 679. Under Sec. 1.684-3(a), Sec. 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 Sec. 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 Sec. 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 
Sec. 1.684-1.

[[Page 330]]

    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 Sec. 1.684-1. However, an 
exception may apply under Sec. 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 Sec. 1.679-2. However, A retains the 
power to revoke the trust. A is treated as the owner of the trust under 
section 676 and, therefore, under Sec. 1.684-3(a), A is not required to 
recognize gain under Sec. 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.

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