[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: 26CFR1.684-3]

[Page 330-331]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.684-3  Exceptions to general rule of gain recognition.

    (a) Transfers to grantor trusts. The general rule of gain 
recognition under Sec. 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 Sec. 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 Sec. 1.684-1 shall not apply to any transfer of property by 
reason of death of the U.S. transferor if the basis 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 Sec. 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 Sec. 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 Sec. 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 Sec. 301.7701-4(c) 
of this chapter, liquidating trusts described in Sec. 301.7701-4(d) of 
this chapter, or environmental remediation trusts described in Sec. 
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 U.S. beneficiary 
within the meaning of Sec. 1.679-2, and A is treated as owning FT under 
section 679. Under paragraph (a) of this section, Sec. 1.684-1 does not 
cause A to recognize gain at the time of the transfer. See Sec. 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

[[Page 331]]

paragraph (c) of this section, A is not required to recognize gain under 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 1.684-1.

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