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[Federal Register: August 7, 2000 (Volume 65, Number 152)]
[Proposed Rules]               
[Page 48185-48198]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au00-22]                         

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209038-89]
RIN 1545-A075

 
Foreign Trusts That Have U.S. Beneficiaries

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations under section 679 
of the Internal Revenue Code relating to transfers of property by U.S. 
persons to foreign trusts having one or more United States 
beneficiaries. The proposed regulations affect United States persons 
who transfer property to foreign trusts. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by November 6, 
2000. Requests to speak (with outlines of oral comments) to be 
discussed at the public hearing scheduled for November 8, 2000, at 10 
a.m. must be submitted by October 18, 2000.

ADDRESSES: Send submissions to: CC:MSP:RU (REG-209038-89), room 5226, 
Internal Revenue Service, POB

[[Page 48186]]

7604, Ben Franklin Station, Washington, DC 20044. Submissions may be 
hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:MSP:RU 
(REG-209038-89), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the Internet by selecting the ``Tax 
Regs'' option on the IRS Home Page, or by submitting comments directly 
to the IRS Internet site at http://www.irs.ustreas.gov/tax_regs/
regslist.html. The public hearing will be held in room 3313, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Willard W. 
Yates at (202) 622-3880; concerning submissions and the hearing, Sonya 
M. Cruse, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 679 was added to the Internal Revenue Code (Code) by the 
Tax Reform Act of 1976 (1976 Act), Public Law 94-445, Sec. 1013(a), (90 
Stat. 1614). Section 679 was amended significantly by the Small 
Business Job Protection Act of 1996 (1996 Act), Public Law 104-188, 
Secs. 1903(a)(1), 1903(a)(2), 1903(b), 1903(c) and 1903(f) (110 Stat. 
1755).

1. Law Prior to 1976

    Sections 671 through 678 (the grantor trust rules) treat grantors 
and other persons who hold certain powers or interests over a domestic 
or foreign trust as owners of the portion of the trust with respect to 
which they hold the powers or interests. If the grantor or other person 
is a U.S. citizen or resident, the grantor trust rules result in the 
taxation of the worldwide income of the trust (or portion thereof) to 
the grantor or other person.
    Prior to the enactment of section 679, if a trust was not subject 
to the grantor trust rules (nongrantor trust), the income of the 
domestic or foreign trust generally was taxed to the trust to the 
extent the income was not currently distributed or required to be 
distributed to the beneficiaries of the trust. The income of a foreign 
nongrantor trust was taxed in basically the same manner as the income 
of a nonresident alien individual. Foreign trusts were subject to U.S. 
tax only on their U.S.-source income (other than capital gains) and on 
any income effectively connected with a U.S. trade or business (or 
treated as effectively connected with a U.S. trade or business). Like 
nonresident alien individuals, foreign nongrantor trusts were generally 
not subject to U.S. tax on foreign-source income.
    Prior to the enactment of section 679, U.S. persons often 
established foreign nongrantor trusts that invested in assets that 
generated foreign-source income only. These foreign trusts avoided all 
U.S. tax on their income. In addition, these trusts generally invested 
in countries that did not tax interest or dividends paid to foreign 
investors, and the trusts generally were formed and administered in 
countries that did not tax trusts. Accordingly, in many cases these 
trusts paid no income tax anywhere in the world. Although U.S. 
beneficiaries were subject to U.S. tax when a foreign nongrantor trust 
distributed income to them, the use of foreign nongrantor trusts 
permitted tax-free accumulations of income, giving foreign trusts a 
significant advantage over domestic trusts.

2. Overview of 1976 Changes

    Congress believed that allowing tax-free accumulation of income was 
inappropriate and provided an unwarranted advantage to foreign trusts 
over domestic trusts. Congress enacted section 679 as part of the 1976 
Act to provide generally that where a U.S. person directly or 
indirectly transfers property to a foreign trust, the income of the 
foreign trust is taxable to the transferor if the trust has a U.S. 
beneficiary. Accordingly, the trust is treated as a grantor trust 
whether or not the transferor retains any power or interest with 
respect to the trust. Congress enacted exceptions for certain transfers 
for fair market value, for transfers by reason of death, and for 
transfers to certain employee benefit trusts.

3. Overview of 1996 Changes

    Section 1903 of the 1996 Act made several changes to section 679. 
These changes focused primarily on areas where taxpayers could 
improperly avoid the application of section 679. For example, Congress 
was concerned that certain taxpayers attempted to come within the fair 
market value exception of section 679(a)(2), thereby avoiding the 
application of section 679(a)(1), by issuing trust obligations that 
might not be repaid. H.R. Rep. No. 542, 104th Cong., 2d Sess., pt. 2 at 
25 (1996). Accordingly, the 1996 Act added new section 679(a)(3), which 
generally provides that obligations issued by the trust, by any grantor 
or beneficiary of the trust, or by any person related to any grantor or 
beneficiary are not taken into account in applying the fair market 
value exception except as provided in regulations.
    The 1996 Act also added new sections 679(a)(4) and (5) to prevent 
taxpayers from improperly avoiding the application of section 679. 
Section 679(a)(4) ensures that certain foreign persons who transfer 
property to a foreign trust in anticipation of becoming U.S. persons 
(pre-immigration trusts) cannot avoid the rules of section 679 by 
transferring property, directly or indirectly, to a foreign trust and 
then becoming a resident of the United States within 5 years after the 
transfer. Section 679(a)(5) prevents U.S. individuals from 
circumventing section 679 by transferring property to a domestic trust 
and then causing the domestic trust to become a foreign trust.
    In addition to the anti-avoidance measures, Congress added a new 
exception to the general rule of section 679(a)(1) for transfers of 
property to certain charitable trusts. Congress also enacted new 
section 679(c)(3), which provides that beneficiaries who first become 
U.S. persons more than 5 years after the date of a transfer are 
disregarded for purposes of applying section 679 with respect to that 
transfer.
    The 1996 Act also amended section 6048 to expand the reporting 
requirements that apply to (i) a U.S. person who transfers property to 
a foreign trust, and (ii) a foreign trust that is treated as owned by a 
U.S. person under the grantor trust rules. The penalties under section 
6677 for a failure to comply with these reporting requirements were 
also significantly increased. See Notice 97-34 (1997-2 C.B. 422) and 
Forms 3520 and 3520A.
    In addition, a transfer of appreciated property by a U.S. person to 
a foreign trust may trigger the immediate recognition of any gain in 
the property under section 684. A transfer to a foreign trust that is 
treated as owned by a U.S. person under section 679 generally is exempt 
from this requirement at the time of the transfer. However, if the 
trust subsequently ceases to be treated as owned by the U.S. person, 
the change in the status of the trust may trigger gain at the time of 
the change.
    Section 679 applies only for income tax purposes. The estate and 
gift tax provisions of the Code determine whether a transfer to a 
foreign trust is subject to the federal gift tax, or whether the corpus 
of a foreign trust is included in the gross estate of the U.S. 
transferor.

[[Page 48187]]

Explanation of Provisions

Section 1.679-1  U.S. Transferor Treated as Owner of Foreign Trust

    Section 1.679-1(a) of the proposed regulations provides that a U.S. 
transferor who transfers property to a foreign trust is treated as the 
owner of the portion of the trust attributable to the property 
transferred during each taxable year that the trust is treated as 
having a U.S. beneficiary. This rule applies without regard to whether 
the U.S. transferor retains any power described in sections 673 through 
677. If the U.S. transferor is treated as the owner of a portion of a 
trust, under section 671 all income, deductions, and credits 
attributable to that portion must be taken into account by the U.S. 
transferor in determining the U.S. transferor's tax liability.
    The determination of whether a foreign trust is treated as having a 
U.S. beneficiary is made under the rules set forth in Sec. 1.679-2. 
Section 1.679-3 defines the term transfer. Section 1.679-4 provides 
exceptions to the general rule of Sec. 1.679-1. Section 1.679-5 
provides special rules for pre-immigration trusts, and Sec. 1.679-6 
describes the treatment of a domestic trust that becomes a foreign 
trust. Section 1.679-7 provides effective dates.
    Congress intended section 679 to override section 678. H.R. Rep. 
No. 658, 94th Cong., 1st Sess., at 209 (1975). Accordingly, Sec. 1.679-
1(b) provides that a U.S. transferor will be treated as the owner of 
the portion of a trust attributable to the property transferred to the 
trust by the U.S. transferor whether or not another person would be 
treated as the owner of the same portion of the trust under section 
678.
    Section 1.679-1(c)(1) defines the term U.S. transferor to mean any 
U.S. person who directly, indirectly, or constructively transfers 
property to a foreign trust.
    Section 1.679-1(c)(2) defines the term U.S. person by reference to 
section 7701(a)(30). Accordingly, section 679 can apply not only to 
individuals, but also to entities. Section 1.679-1(c)(2) also provides 
that a U.S. person includes an individual who elects under section 
6013(g) to be treated as a U.S. resident and an individual who is a 
dual resident taxpayer within the meaning of Sec. 301.7701(b)-7(a).
    Sections 1.679-1(c)(3), (4), (5), and (6) define the terms foreign 
trust, property, related person, and obligation, respectively.
    The proposed regulations do not provide specific guidance on the 
treatment of joint owners that transfer property to a foreign trust. 
Treasury and the IRS invite comments with specific examples of areas 
that may need comments with specific examples of areas that may need 
clarification, such as, for example, the treatment of community 
property or the joint ownership of property by non-citizen spouses.
    The rules of this section apply with respect to transfers to 
foreign trusts after November 6, 2000.

Section 1.679-2:  Trusts Treated as Having a U.S. Beneficiary

    The proposed regulations employ a broad approach in determining 
whether a foreign trust is treated as having a U.S. beneficiary. This 
broad approach is consistent with the legislative history of the 1976 
Act. H.R. Rep. No. 658, 94th Cong., 1st Sess., at 210 (1975).
    Under Sec. 1.679-2(a)(1), a foreign trust that has received 
property from a U.S. transferor is treated as having a U.S. beneficiary 
unless during the taxable year of the U.S. transferor: (i) No part of 
the income or corpus of the trust may be paid or accumulated to or for 
the benefit of, either directly or indirectly, a U.S. person; and (ii) 
if the trust is terminated at any time during the taxable year, no part 
of the income or corpus of the trust could be paid to or for the 
benefit of, either directly or indirectly, a U.S. person. For purposes 
of section 679, foreign trusts generally are treated as having a U.S. 
beneficiary unless both of these requirements are satisfied.
    Section 1.679-2(a)(2)(i) provides that, for purposes of applying 
these tests, income or corpus is considered to be paid or accumulated 
to or for the benefit of a U.S. person during a taxable year of the 
U.S. transferor if during that year, directly or indirectly, income may 
be distributed to, or accumulated for the benefit of a U.S. person, or 
corpus may be distributed to, or held for the future benefit of, a U.S. 
person. This determination is made without regard to whether income or 
corpus is actually distributed to a U.S. person during that year, and 
without regard to whether a U.S. person's interest in the trust income 
or corpus is contingent on a future event.
    The proposed regulations recognize that it may be possible for a 
U.S. person to obtain a future benefit from the trust under certain 
unexpected circumstances and that the possibility of such circumstances 
should not necessarily cause the foreign trust to be treated as having 
a U.S. beneficiary. Accordingly, Sec. 1.679-2(a)(2)(ii) provides a 
narrow exception to the general determination of whether a U.S. person 
can obtain a benefit under the foreign trust. Persons who are not named 
as possible beneficiaries and are not members of a class of 
beneficiaries as defined in the trust instrument (or other relevant 
agreements, understandings, records and documents, as described below) 
are not taken into consideration for purposes of applying the general 
rule of Sec. 1.679-2(a)(1) if the U.S. transferor demonstrates to the 
satisfaction of the Commissioner that their contingent interest in the 
trust is so remote as to be negligible. This exception does not apply 
with respect to persons to whom distributions could be made pursuant to 
a grant of discretion to the trustee or another person. For example, if 
the trust instrument provides that the trustee can distribute corpus to 
any of a large class of persons that could include U.S. persons, this 
exception would not apply.
    The proposed regulations require an annual determination of whether 
a foreign trust is treated as having a U.S. beneficiary. Under 
Sec. 1.679-2(a)(3), the possibility that a beneficiary who is not a 
U.S. person could become a U.S. person will not cause that beneficiary 
to be treated as a U.S. person for purposes of determining whether 
there is a U.S. beneficiary until the year in which the beneficiary 
actually becomes a U.S. person. However, if that non-U.S. beneficiary 
becomes a U.S. person for the first time more than 5 years after the 
date of the transfer, that beneficiary is not treated as a U.S. person 
for purposes of the U.S.-beneficiary determination even after the 
beneficiary actually becomes a U.S. person.
    Section 1.679-2(a)(4) makes it clear that a trust may be treated as 
having a U.S. beneficiary not only by reference to the trust 
instrument, but also by reference to all other written and oral 
agreements and understandings relating to the trust. Also, a trust may 
be treated as having a U.S. beneficiary based on possible amendments to 
the trust instrument, possible application of local law that would 
require a U.S. beneficiary (unless the law is not reasonably expected 
to be applied under the facts and circumstances), or actual or 
reasonably expected disregard of the terms of the trust instrument by 
the parties to the trust.
    A foreign trust is treated as having a U.S. beneficiary if it can 
benefit a U.S. person indirectly. Section 1.679-2(b) provides that an 
amount is treated as paid or accumulated to or for the benefit of a 
U.S. person if it can be paid to or accumulated for the benefit of a 
controlled foreign corporation (as defined in section 957(a)); a 
foreign partnership, if a U.S. person is a partner of such partnership; 
or a foreign trust or

[[Page 48188]]

estate, if such trust or estate has a U.S. beneficiary. In addition, a 
foreign trust is treated as having a U.S. beneficiary if a U.S. person 
can benefit indirectly from the foreign trust by receiving 
distributions from the trust through an intermediary, such as an agent 
or nominee, through the use of a debit or credit card, or any other 
means where a U.S. person may obtain an actual or constructive benefit 
from the trust.
    The proposed regulations anticipate situations where a foreign 
trust's status as having a U.S. beneficiary changes. Section 1.679-
2(c)(1) provides that if a foreign trust does not have a U.S. 
beneficiary initially, but subsequently acquires a U.S. beneficiary, 
the U.S. transferor is treated as having additional income in the first 
taxable year of the U.S. transferor in which the trust is treated as 
having a U.S. beneficiary. The amount of the additional income is equal 
to the trust's undistributed net income, as defined in section 665(a), 
at the end of the U.S. transferor's immediately preceding taxable year 
and is subject to the rules of section 668, providing for an interest 
charge on accumulation distributions from foreign trusts.
    Section 1.679-2(c)(2) provides that if a trust to which a U.S. 
transferor transferred property is initially treated as having a U.S. 
beneficiary, but subsequently ceases to be treated as having a U.S. 
beneficiary, the U.S. transferor is no longer treated as the owner 
beginning in the following taxable year (unless the U.S. transferor is 
otherwise treated as the owner under the grantor trust rules). The U.S. 
transferor is treated as making a transfer to the foreign trust that 
may be subject to the gain recognition rules of section 684.
    The rules of this section apply with respect to transfers to 
foreign trusts after November 6, 2000.

Section 1.679-3  Transfers

    Section 1.679-3(a) of the proposed regulations broadly defines the 
term transfer as any direct, indirect, or constructive transfer by a 
U.S. person to a foreign trust. The rules are generally consistent with 
the rules for determining whether a person is considered to be a 
grantor of a trust under Sec. 1.671-2(e).
    Section 1.679-3(b) provides that a transfer of property to a 
foreign trust from either a domestic or foreign trust that is owned by 
a U.S. person under sections 673 through 679 is treated as a transfer 
from the owner of the transferor trust. For example, if a U.S. person 
is treated as the owner of a domestic trust under section 676, and that 
domestic trust transfers property to a foreign trust, the U.S. person 
is treated as having transferred the property to the foreign trust.
    Section 1.679-3(c) provides rules for determining when there is an 
indirect transfer. Under Sec. 1.679-3(c)(1), a transfer to a foreign 
trust by any person to whom a U.S. person transfers property (referred 
to as an intermediary) is treated as an indirect transfer by a U.S. 
person if the transfer is made pursuant to a plan one of the principal 
purposes of which is the avoidance of U.S. tax. Section 1.679-3(c)(2) 
deems a transfer to have been made pursuant to such a plan if the U.S. 
transferor is related to a U.S. beneficiary of the foreign trust, or 
has another relationship with the foreign trust that establishes a 
reasonable basis for concluding that the U.S. transferor would make a 
transfer to the foreign trust, and the U.S. person cannot demonstrate 
to the satisfaction of the Commissioner that: (i) The intermediary has 
a relationship with a U.S. beneficiary of the foreign trust that 
establishes a reasonable basis for concluding that the intermediary 
would make a transfer to the foreign trust, (ii) the intermediary acted 
independently of the U.S. transferor, (iii) the intermediary is not an 
agent of the U.S. transferor under generally applicable United States 
agency principles, and (iv) that the intermediary timely complied with 
the reporting requirements of section 6048 (including Notice 97-34), if 
applicable. This test is consistent with the legislative history of the 
1976 Act. H.R. Rep. No. 658, 94th Cong., 1st Sess., at 209 (1975). This 
test is also similar to the test in Sec. 1.643(h)-1(a), although the 
presumption in the proposed regulations applies without regard to the 
period of time between the transfer from the U.S. person to the 
intermediary and from the intermediary to the foreign trust.
    Section 1.679-3(c)(3) explains that if a transfer is treated as an 
indirect transfer, the intermediary generally is treated as an agent of 
the U.S. transferor, and the property is treated as transferred to the 
foreign trust by the U.S. transferor in the year the property is 
transferred, or made available, by the intermediary to the foreign 
trust. The fair market value of the property transferred generally is 
determined as of the date of the transfer by the intermediary to the 
foreign trust. Although the intermediary is not treated as having 
transferred that property to the foreign trust for purposes of section 
679, the intermediary must comply with the reporting requirements of 
section 6048, if applicable.
    Section 1.679-3(d) provides that a constructive transfer includes 
any assumption or satisfaction of a foreign trust's obligation. For 
example, a U.S. transferor's payment of a foreign trust's obligation to 
a third party is treated as a constructive transfer.
    Congress anticipated that guarantees of a trust obligation would be 
treated as transfers. H.R. Rep. No. 658, 94th Cong., 1st Sess., at 209 
(1975). Section 1.679-3(e) provides rules regarding the treatment of 
guarantees as transfers. If a foreign trust borrows money or other 
property from either a U.S. or non-U.S. person who is not a related 
person with respect to the trust (referred to as the lender), and a 
U.S. person who is a related person with respect to the trust (referred 
to as the U.S. guarantor) guarantees the foreign trust's obligation, 
the U.S. guarantor is treated as having made a transfer to the foreign 
trust. The amount deemed transferred is the guaranteed portion of the 
adjusted issue price of the obligation plus any accrued but unpaid 
stated interest. Payments of principal by the trust with respect to the 
obligation are taken into account on and after the date of the payment 
in determining the portion of the trust attributable to the property 
deemed transferred.
    Section 1.679-3(f) provides specific rules regarding transfers by a 
U.S. person to an entity owned by a foreign trust if the U.S. person is 
related to the foreign trust. The transfer is treated as a transfer 
from the U.S. person to the foreign trust, followed by a transfer from 
the foreign trust to the entity owned by the foreign trust, unless the 
U.S. person demonstrates to the satisfaction of the Commissioner that 
the transfer to the entity is properly attributable to the U.S. 
person's ownership interest in the entity.
    Sections 1.679-3 applies to transfers after November 6, 2000.

Section 1.679-4  Exceptions to General Rule

    Pursuant to sections 679(a)(1) and (a)(2), Sec. 1.679-4(a) provides 
the following four exceptions to the general rule of Sec. 1.679-1: (i) 
transfers to a foreign trust by reason of the death of the transferor; 
(ii) transfers to a foreign trust described in sections 402(b), 
404(a)(4), or 404A; (iii) transfers to a foreign trust that has 
received a ruling or determination letter, which has been neither 
revoked nor modified, from the Internal Revenue Service recognizing the 
trust's tax exempt status under section 501(c)(3); and (iv) transfers 
to the extent they are for fair market value.
    Section 1.679-4(b) provides rules for determining whether a 
transfer to a

[[Page 48189]]

foreign trust is for fair market value. The rules generally follow the 
rules for determining fair market value under Sec. 1.671-2(e). For 
purposes of this determination, an interest in the trust is not 
considered to be property received from the trust. A distribution to a 
foreign trust with respect to an interest held by such trust in an 
entity other than a trust or in a trust described in Sec. 301.7701-
4(c), (d), or (e) is considered to be a transfer for fair market value. 
For example, a dividend paid by a U.S. corporation to a foreign trust 
with respect to the foreign trust's stock ownership in the corporation 
is not a transfer that is subject to the general rule of section 
Sec. 1.679-1.
    Section 679(a)(3) provides that in determining whether a transfer 
is for fair market value, obligations received from the trust or 
certain related persons are not taken into account, except to the 
extent provided in regulations. As noted above, this provision reflects 
Congress' concern that certain taxpayers may have attempted to take 
advantage of the fair market value exception to section 679 by 
transferring property to a foreign trust in exchange for obligations 
issued by the trust (or related persons) that might not be repaid. 
Congress intended Treasury and the IRS to exercise their regulatory 
authority to consider whether there is a reasonable expectation that an 
obligation of the trust would be repaid. H.R. Conf. Rep. No. 737, 104th 
Cong., 2d Sess. 335 (1996).
    The proposed regulations, in exercising this authority, follow the 
approach in Notice 97-34 (1997-2 C.B. 422). The proposed regulations 
describe the circumstances under which an obligation of a foreign trust 
(or a person related to that trust) will be treated as a qualified 
obligation that is taken into account for purposes of determining 
whether a U.S. transferor received fair market value from a trust in 
exchange for a transfer by the U.S. transferor. If the U.S. transferor, 
in exchange for the property transferred, receives an obligation of the 
trust (or a related person) that is not a qualified obligation, the 
obligation is considered to have no value for purposes of determining 
whether the transferor received fair market value.
    The term obligation is defined in Sec. 1.679-1(c)(6). Section 
1.679-4(d) provides that to be treated as a qualified obligation, an 
obligation must be reduced to writing by an express written agreement. 
The obligation must have a term not in excess of five years. For 
purposes of determining an obligation's term, the obligation's maturity 
date is the last possible date it can be outstanding under the terms of 
the obligation. Accordingly, demand loans and private annuity 
transactions do not constitute qualified obligations. In addition, all 
payments on a qualified obligation must be denominated in U.S. dollars. 
The yield to maturity cannot be less than 100 percent of the applicable 
Federal rate and cannot be greater than 130 percent of the applicable 
Federal rate. The U.S. transferor must extend the period for assessment 
of any income or transfer tax attributable to the transfer and any 
consequential income tax changes for each year that the obligation is 
outstanding, to a date not earlier than three years after the maturity 
date of the obligation. The extension is not necessary if the maturity 
date of the obligation does not extend beyond the end of the U.S. 
transferor's taxable year and is paid within such period. Finally, the 
U.S. transferor must report the status of the loan, including principal 
and interest payments, on Form 3520 for every year that the loan is 
outstanding.
    Section 1.679-4(d) also incorporates other rules regarding 
qualified obligations from Notice 97-34. For example, under certain 
circumstances, the issuance of additional obligations by the foreign 
trust or a person related to the foreign trust may cause an obligation 
that had been a qualified obligation to lose such status. Renegotiation 
of the terms of the loan is treated as a new loan. If an obligation 
loses its status as a qualified obligation, the U.S. transferor is 
treated as making a transfer to the trust that may be subject to 
Sec. 1.679-1. Principal repayments with respect to obligations that are 
not qualified obligations are taken into account on and after the date 
of the payment in determining the portion of the trust attributable to 
the property originally transferred.
    The rules of this section generally apply with respect to transfers 
to foreign trusts after November 6, 2000. Special effective dates, 
based on the guidance set forth in Notice 97-34, are provided for the 
rules that apply to obligations.

Section 1.679-5  Pre-immigration Trusts

    The 1996 Act added section 679(a)(4) to address the potential abuse 
of nonresident aliens establishing foreign trusts shortly before 
becoming U.S. persons. Section 1.679-5 provides that if a nonresident 
alien individual becomes a U.S. person and the individual has a 
residency starting date (as determined under section 7701(b)(2)(A)) 
within 5 years after directly or indirectly transferring property to a 
foreign trust, the individual is deemed to transfer the property to the 
trust on the residency starting date. The amount deemed transferred is 
the portion of the trust attributable to the property transferred by 
the individual in the original transfer. Section 1.679-5(b) provides 
that if the nonresident alien individual is treated under the grantor 
trust rules as the owner of any portion of the trust and the individual 
ceases to be so treated, the 5-year period begins on the date the 
individual ceases to be so treated.
    The property deemed transferred to the foreign trust on the 
residency starting date includes undistributed net income, as defined 
in section 665(a), attributable to the property transferred. 
Undistributed net income for periods before the individual's residency 
starting date is taken into account only for purposes of determining 
the portion of the trust that is attributable to property transferred.
    If an individual is treated as making a deemed transfer pursuant to 
this provision, the reporting requirements of section 6048 apply to the 
deemed transfer as of the residency starting date.
    The rules of this section apply to persons whose residency starting 
date is after November 6, 2000.

Section 1.679-6  Outbound Migrations of Domestic Trusts

    The proposed regulations implement section 679(a)(5), which 
addresses the situation where a trust that is a domestic trust becomes 
a foreign trust. If an individual who is a U.S. person transfers 
property to a trust that is not a foreign trust, and the trust becomes 
a foreign trust while the U.S. person is alive, the U.S. individual is 
treated as a U.S. transferor and is deemed to transfer the property to 
a foreign trust on the date the domestic trust becomes a foreign trust. 
The property deemed transferred to the trust when it becomes a foreign 
trust includes undistributed net income, as defined in section 665(a), 
attributable to the property previously transferred. Undistributed net 
income for periods prior to the trust migration is taken into account 
only for purposes of determining the portion of the trust that is 
attributable to the property transferred by the U.S. person.
    If a U.S. person is treated as making a deemed transfer pursuant to 
this provision, the reporting requirements of section 6048 apply to the 
deemed transfer as of the date of the deemed transfer.
    The rules of this section apply to trusts that become foreign 
trusts after November 6, 2000.

[[Page 48190]]

Section 1.679-7  Effective Dates

    This section of the proposed regulations provides effective dates 
with respect to Secs. 1.679-1 through 1.679-6. These effective dates 
are discussed above in the context of each respective section. 
Notwithstanding the effective dates in the proposed regulations, the 
Internal Revenue Service may apply the effective dates that are 
applicable to section 679 of the Internal Revenue Code. In addition, 
the Internal Revenue Service is not restricted from applying general 
income tax principles to transactions prior to the effective dates of 
the proposed regulations to determine, for example, that a U.S. person 
has made a transfer to a foreign trust.

Certain Clarifications Regarding Section 958

    The proposed regulations clarify that, under Sec. 1.958-1(b), a 
person who is treated as the owner of any portion of a trust under 
section 679 and the other grantor trust rules is treated as the owner 
of the stock owned by the trust with respect to that portion. This 
change is merely intended as a clarification of existing law.
    Existing Sec. 1.958-2(c)(1)(ii)(b) provides that a person who is 
treated as the owner of any portion of a trust under sections 671 
through 678 is treated as the owner of the stock owned by or for that 
portion of the trust for purposes of the constructive ownership rules 
of section 958(b). Because section 679 was not enacted until 1976, it 
is not referred to in the existing regulations, which were issued in 
1966. The proposed regulations clarify that this treatment also applies 
to persons treated as the owner of any portion of a trust under section 
679. This change is merely intended as a clarification of existing law.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. The IRS and 
Treasury specifically request comments on the clarity of the proposed 
regulations and how they can be made easier to understand. All comments 
will be available for public inspection and copying.
    A public hearing has been scheduled for November 8, 2000, at 10 
a.m. in room 3313, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington DC. Because of access restrictions, visitors will not 
be admitted beyond the Internal Revenue Building lobby more than 15 
minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by November 6, 2000, and submit an outline of 
the topics to be discussed and the time to be devoted to each topic 
(signed original and eight (8) copies) by October 18, 2000.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.
    Drafting Information: The principal author of these proposed 
regulations is Willard W. Yates of the Office of Associate Chief 
Counsel (International). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

Section 1.679-1 also issued under 26 U.S.C. 643(a)(7) and 679(d).
Section 1.679-2 also issued under 26 U.S.C. 643(a)(7) and 679(d).,
Section 1.679-3 also issued under 26 U.S.C. 643(a)(7) and 679(d).
Section 1.679-4 also issued under 26 U.S.C. 643(a)(7), 679(a)(3) and 
679(d).
Section 1.679-5 also issued under 26 U.S.C. 643(a)(7) and 679(d).
Section 1.679-6 also issued under 26 U.S.C. 643(a)(7) and 679(d). * 
* *

    Par. 2. Sections 1.679-1, 1.679-2, 1.679-3, 1.679-4, 1.679-5, 
1.679-6, and 1.679-7 are added under the undesignated center heading 
``Grantors and Others Treated as Substantial Owners'' to read as 
follows:

Sec. 1.679-1  U.S. Transferor Treated as Owner of Foreign Trust

    (a) In general. A U.S. transferor who transfers property to a 
foreign trust is treated as the owner of the portion of the trust 
attributable to the property transferred if there is a U.S. beneficiary 
of any portion of the trust, unless an exception in Sec. 1.679-4 
applies to the transfer.
    (b) Interaction with sections 673 through 678. The rules of this 
section apply without regard to whether the U.S. transferor retains any 
power or interest described in sections 673 through 677. If a U.S. 
transferor would be treated as the owner of a portion of a foreign 
trust pursuant to the rules of this section and another person would be 
treated as the owner of the same portion of the trust pursuant to 
section 678, then the U.S. transferor is treated as the owner and the 
other person is not treated as the owner.
    (c) Definitions. The following definitions apply for purposes of 
this section and Secs. 1.679-2 through 1.679-7:
    (1) U.S. transferor. The term U.S. transferor means any U.S. person 
who makes a transfer (as defined in Sec. 1.679-3) of property to a 
foreign trust.
    (2) U.S. person. The term U.S. person means a United States person 
as defined in section 7701(a)(30), a nonresident alien individual who 
elects under section 6013(g) to be treated as resident of the United 
States, and an individual who is a dual resident taxpayer within the 
meaning of Sec. 301.7701(b)-7(a) of this chapter.
    (3) Foreign trust. Section 7701(a)(31)(B) defines the term foreign 
trust.
    (4) Property. The term property means any property including cash.
    (5) Related person. A person is a related person if, without regard 
to the transfer at issue, the person is--
    (i) A grantor of any portion of the trust (within the meaning of 
Sec. 1.671-2(e)(1));
    (ii) An owner of any portion of the trust under sections 671 
through 679;
    (iii) A beneficiary of the trust; or
    (iv) A person who is related (within the meaning of section 
643(i)(2)(B)) to

[[Page 48191]]

any grantor, owner or beneficiary of the trust.
    (6) Obligation. The term obligation means any bond, note, 
debenture, certificate, bill receivable, account receivable, note 
receivable, open account, or other evidence of indebtedness, and, to 
the extent not previously described, any annuity contract.
    (d) Examples. The following examples illustrate the rules of 
paragraph (a) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's father, who is a 
resident alien, D is A's uncle, who is a nonresident alien, and FT is a 
foreign trust. The examples are as follows:

    Example 1.  Interaction with section 678. A creates and funds 
FT. FT may provide for the education of B by paying for books, 
tuition, room and board. In addition, C has the power to vest the 
trust corpus or income in himself within the meaning of section 
678(a)(1). Under paragraph (b) of this section, A is treated as the 
owner of the portion of FT attributable to the property transferred 
to FT by A and C is not treated as the owner thereof.
    Example 2.  U.S. person treated as owner of a portion of FT. D 
creates and funds FT for the benefit of B. D retains a power 
described in section 676 and Sec. 1.672(f)-3(a)(1). A transfers 
property to FT. Under sections 676 and 672(f), D is treated as the 
owner of the portion of FT attributable to the property transferred 
by D. Under paragraph (a) of this section, A is treated as the owner 
of the portion of FT attributable to the property transferred by A.


Sec. 1.679-2  Trusts treated as having a U.S. beneficiary

    (a) Existence of U.S. beneficiary--(1) In general. The 
determination of whether a foreign trust has a U.S. beneficiary is made 
on an annual basis. A foreign trust is treated as having a U.S. 
beneficiary unless during the taxable year of the U.S. transferor--
    (i) No part of the income or corpus of the trust may be paid or 
accumulated to or for the benefit of, directly or indirectly, a U.S. 
person; and
    (ii) If the trust is terminated at any time during the taxable 
year, no part of the income or corpus of the trust could be paid to or 
for the benefit of, directly or indirectly, a U.S. person.
    (2) Benefit to a U.S. person--(i) In general. For purposes of 
paragraph (a)(1) of this section, income or corpus may be paid or 
accumulated to or for the benefit of a U.S. person during a taxable 
year of the U.S. transferor if during that year, directly or 
indirectly, income may be distributed to, or accumulated for the 
benefit of, a U.S. person, or corpus may be distributed to, or held for 
the future benefit of, a U.S. person. This determination is made 
without regard to whether income or corpus is actually distributed to a 
U.S. person during that year, and without regard to whether a U.S. 
person's interest in the trust income or corpus is contingent on a 
future event.
    (ii) Certain unexpected beneficiaries. Notwithstanding paragraph 
(a)(2)(i) of this section, for purposes of paragraph (a)(1) of this 
section, a person who is not named as a beneficiary and is not a member 
of a class of beneficiaries as defined under the trust instrument is 
not taken into consideration if the U.S. transferor demonstrates to the 
satisfaction of the Commissioner that the person's contingent interest 
in the trust is so remote as to be negligible. The preceding sentence 
does not apply with respect to persons to whom distributions could be 
made pursuant to a grant of discretion to the trustee or any other 
person. A class of beneficiaries generally does not include heirs who 
will benefit from the trust under the laws of intestate succession in 
the event that the named beneficiaries (or members of the named class) 
have all deceased (whether or not stated as a named class in the trust 
instrument).
    (iii) Examples. The following examples illustrate the rules of 
paragraphs (a)(1) and (a)(2) of this section. In these examples, A is a 
resident alien, B is A's son, who is a resident alien, C is A's 
daughter, who is a nonresident alien, and FT is a foreign trust. The 
examples are as follows:

    Example 1. Distribution of income to U.S. person. A transfers 
property to FT. The trust instrument provides that all trust income 
is to be distributed currently to B. Under paragraph (a)(1) of this 
section, FT is treated as having a U.S. beneficiary.
    Example 2. Income accumulation for the benefit of a U.S. person. 
In 2001, A transfers property to FT. The trust instrument provides 
that from 2001 through 2010, the trustee of FT may distribute trust 
income to C or may accumulate the trust income. The trust instrument 
further provides that in 2011, the trust will terminate and the 
trustee may distribute the trust assets to either or both of B and 
C, in the trustee's discretion. If the trust terminates unexpectedly 
prior to 2011, all trust assets must be distributed to C. Because it 
is possible that income may be accumulated in each year, and that 
the accumulated income ultimately may be distributed to B, a U.S. 
person, under paragraph (a)(1) of this section FT is treated as 
having a U.S. beneficiary during each of A's tax years from 2001 
through 2011. This result applies even though no U.S. person may 
receive distributions from the trust during the tax years 2001 
through 2010.
    Example 3. Corpus held for the benefit of a U.S. person. The 
facts are the same as in Example 2, except that from 2001 through 
2011, all trust income must be distributed to C. In 2011, the trust 
will terminate and the trustee may distribute the trust corpus to 
either or both of B and C, in the trustee's discretion. If the trust 
terminates unexpectedly prior to 2011, all trust corpus must be 
distributed to C. Because during each of A's tax years from 2001 
through 2011 trust corpus is held for possible future distribution 
to B, a U.S. person, under paragraph (a)(1) of this section FT is 
treated as having a U.S. beneficiary during each of those years. 
This result applies even though no U.S. person may receive 
distributions from the trust during the tax years 2001 through 2010.
    Example 4. Distribution upon U.S. transferor's death. A 
transfers property to FT. The trust instrument provides that all 
trust income must be distributed currently to C and, upon A's death, 
the trust will terminate and the trustee may distribute the trust 
corpus to either or both of B and C. Because B may receive a 
distribution of corpus upon the termination of FT, and FT could 
terminate in any year, FT is treated as having a U.S. beneficiary in 
the year of the transfer and in subsequent years.
    Example 5. Distribution after U.S. transferor's death. The facts 
are the same as in Example 4, except the trust instrument provides 
that the trust will not terminate until the year following A's 
death. Upon termination, the trustee may distribute the trust assets 
to either or both of B and C, in the trustee's discretion. All trust 
assets are invested in the stock of X, a foreign corporation, and X 
makes no distributions to FT. Although no U.S. person may receive a 
distribution until the year after A's death, and FT has no realized 
income during any year of its existence, during each year in which A 
is living corpus may be held for future distribution to B, a U.S. 
person. Thus, under paragraph (a)(1) of this section FT is treated 
as having a U.S. beneficiary during each of A's tax years from 2001 
through the year of A's death.
    Example 6. Constructive benefit to U.S. person. A transfers 
property to FT. The trust instrument provides that no income or 
corpus may be paid directly to a U.S. person. However, the trust 
instrument provides that trust corpus may be used to satisfy B's 
legal obligations to a third party by making a payment directly to 
the third party. Under paragraphs (a)(1) and (2) of this section, FT 
is treated as having a U.S. beneficiary.
    Example 7. U.S. person with negligible contingent interest. A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to C, and upon C's death, all 
corpus is to be distributed to whomever of C's three children is 
then living. All of C's children are nonresident aliens. Under the 
laws of intestate succession that would apply to FT, if all of C's 
children are deceased at the time of C's death, the corpus would be 
distributed to A's heirs. A's living relatives at the time of the 
transfer consist solely of two brothers and two nieces, all of whom 
are nonresident aliens, and two first cousins, one of whom, E, is a 
U.S. citizen. Although it is possible under certain circumstances 
that E could receive a corpus distribution under the applicable laws 
of intestate succession, for each year the trust is in existence A 
is able to demonstrate to the satisfaction of the

[[Page 48192]]

Commissioner under paragraph (a)(2)(ii) of this section that E's 
contingent interest in FT is so remote as to be negligible. Provided 
that paragraph (a)(4) of this section does not require a different 
result, FT is not treated as having a U.S. beneficiary.
    Example 8. U.S. person with non-negligible contingent interest. 
A transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to D, A's uncle, who is a 
nonresident alien, and upon A's death, the corpus is to be 
distributed to D if he is then living. Under the laws of intestate 
succession that would apply to FT, B and C would share equally in 
the trust corpus if D is not living at the time of A's death. A is 
unable to demonstrate to the satisfaction of the Commissioner that 
B's contingent interest in the trust is so remote as to be 
negligible. Under paragraph (a)(2)(ii) of this section, FT is 
treated as having a U.S. beneficiary as of the year of the transfer.
    Example 9. U.S. person as member of class of beneficiaries. A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to D, A's uncle, who is a 
nonresident alien, and upon A's death, the corpus is to be 
distributed to D if he is then living. If D is not then living, the 
corpus is to be distributed to D's descendants. D's grandson, E, is 
a resident alien. Under paragraph (a)(2)(ii) of this section, FT is 
treated as having a U.S. beneficiary as of the year of the transfer.
    Example 10. Trustee's discretion in choosing beneficiaries. A 
transfers property to FT. The trust instrument provides that the 
trustee may distribute income and corpus to, or accumulate income 
for the benefit of, any person who is pursuing the academic study of 
ancient Greek, in the trustee's discretion. Because it is possible 
that a U.S. person will receive distributions of income or corpus, 
or will have income accumulated for his benefit, FT is treated as 
having a U.S. beneficiary. This result applies even if, during a tax 
year, no distributions or accumulations are actually made to or for 
the benefit of a U.S. person. A may not invoke paragraph (a)(2)(ii) 
of this section because a U.S. person could benefit pursuant to a 
grant of discretion in the trust instrument.
    Example 11. Appointment of remainder beneficiary. A transfers 
property to FT. The trust instrument provides that the trustee may 
distribute current income to C, or may accumulate income, and, upon 
termination of the trust, trust assets are to be distributed to C. 
However, the trust instrument further provides that D, A's uncle, 
may appoint a different remainder beneficiary. Because it is 
possible that a U.S. person could be named as the remainder 
beneficiary, and because corpus could be held in each year for the 
future benefit of that U.S. person, FT is treated as having a U.S. 
beneficiary for each year.
    Example 12. Trust not treated as having a U.S. beneficiary. A 
transfers property to FT. The trust instrument provides that the 
trustee may distribute income and corpus to, or accumulate income 
for the benefit of C. Upon termination of the trust, all income and 
corpus must be distributed to C. Assume that paragraph (a)(4) of 
this section is not applicable under the facts and circumstances and 
that A establishes to the satisfaction of the Commissioner under 
paragraph (a)(2)(ii) of this section that no U.S. persons are 
reasonably expected to benefit from the trust. Because no part of 
the income or corpus of the trust may be paid or accumulated to or 
for the benefit of, either directly or indirectly, a U.S. person, 
and if the trust is terminated no part of the income or corpus of 
the trust could be paid to or for the benefit of, either directly or 
indirectly, a U.S. person, FT is not treated as having a U.S. 
beneficiary.
    Example 13. U.S. beneficiary becomes non-U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that, as 
long as B remains a U.S. resident, no distributions of income or 
corpus may be made from the trust to B. The trust instrument further 
provides that if B becomes a nonresident alien, distributions of 
income (including previously accumulated income) and corpus may be 
made to him. If B remains a U.S. resident at the time of FT's 
termination, all accumulated income and corpus is to be distributed 
to C. In 2007, B becomes a nonresident alien and remains so 
thereafter. Because income may be accumulated during the years 2001 
through 2007 for the benefit of a person who is a U.S. person during 
those years, FT is treated as having a U.S. beneficiary under 
paragraph (a)(1) of this section during each of those years. This 
result applies even though B cannot receive distributions from FT 
during the years he is a resident alien and even though B might 
remain a resident alien who is not entitled to any distribution from 
FT. Provided that paragraph (a)(4) of this section does not require 
a different result and that A establishes to the satisfaction of the 
Commissioner under paragraph (a)(2)(ii) of this section that no 
other U.S. persons are reasonably expected to benefit from the 
trust, FT is not treated as having a U.S. beneficiary under 
paragraph (a)(1) of this section during tax years after 2007.

    (3) Changes in beneficiary's status--(i) In general. For purposes 
of paragraph (a)(1) of this section, the possibility that a person that 
is not a U.S. person could become a U.S. person will not cause that 
person to be treated as a U.S. person for purposes of paragraph (a)(1) 
of this section until the tax year of the U.S. transferor in which that 
individual actually becomes a U.S. person. However, if a person who is 
not a U.S. person becomes a U.S. person for the first time more than 5 
years after the date of a transfer to the foreign trust by a U.S. 
transferor, that person is not treated as a U.S. person for purposes of 
applying paragraph (a)(1) of this section with respect to that 
transfer.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (a)(3) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Non-U.S. beneficiary becomes U.S. person. In 2001, A 
transfers property to FT. The trust instrument provides that all 
income is to be distributed currently to C and that, upon the 
termination of FT, all corpus is to be distributed to C. Assume that 
paragraph (a)(4) of this section is not applicable under the facts 
and circumstances and that A establishes to the satisfaction of the 
Commissioner under paragraph (a)(2)(ii) of this section that no U.S. 
persons are reasonably expected to benefit from the trust. Under 
paragraph (a)(3)(i) of this section, FT is not treated as having a 
U.S. beneficiary during the tax years of A in which C remains a 
nonresident alien. If C first becomes a resident alien in 2004, FT 
is treated as having a U.S. beneficiary commencing in that year 
under paragraph (a)(3) of this section. See paragraph (c) of this 
section regarding the treatment of A upon FT's acquisition of a U.S. 
beneficiary.
    Example 2. Non-U.S. beneficiary becomes U.S. person more than 5 
years after transfer. The facts are the same as in Example 1, except 
C first becomes a resident alien in 2007. FT is treated as not 
having a U.S. beneficiary under paragraph (a)(3)(i) of this section 
with respect to the property transfer. However, if C had previously 
been a U.S. person during any prior period, the 5-year exception in 
paragraph (a)(3)(i) of this section would not apply in 2007 because 
it would not have been the first time C became a U.S. person.

    (4) General rules--(i) Records and documents. Even if, based on the 
terms of the trust instrument, a foreign trust is not treated as having 
a U.S. beneficiary within the meaning of paragraph (a)(1) of this 
section, the trust may nevertheless be treated as having a U.S. 
beneficiary pursuant to paragraph (a)(1) of this section based on the 
following--
    (A) All written and oral agreements and understandings relating to 
the trust;
    (B) Memoranda or letters of wishes;
    (C) All records that relate to the actual distribution of income 
and corpus; and
    (D) All other documents that relate to the trust, whether or not of 
any purported legal effect.
    (ii) Additional factors. For purposes of determining whether a 
foreign trust is treated as having a U.S. beneficiary within the 
meaning of paragraph (a)(1) of this section, the following additional 
factors are taken into account--
    (A) If the terms of the trust instrument allow the trust to be 
amended to benefit a U.S. person, all potential benefits that could be 
provided to a U.S. person pursuant to an amendment must be taken into 
account;
    (B) If the terms of the trust instrument do not allow the trust to 
be amended to benefit a U.S. person, but the law applicable to a 
foreign trust may require payments or accumulations of income or corpus 
to or for the benefit of a U.S. person (by judicial reformation or 
otherwise), all potential benefits that

[[Page 48193]]

could be provided to a U.S. person pursuant to the law must be taken 
into account, unless the U.S. transferor demonstrates to the 
satisfaction of the Commissioner that the law is not reasonably 
expected to be applied or invoked under the facts and circumstances; 
and
    (C) If the parties to the trust ignore the terms of the trust 
instrument, or if it is reasonably expected that they will do so, all 
benefits that have been, or are reasonably expected to be, provided to 
a U.S. person must be taken into account.
    (iii) Examples. The following examples illustrate the rules of 
paragraph (a)(4) of this section. In these examples, A is a resident 
alien, B is A's son, who is a resident alien, C is A's daughter, who is 
a nonresident alien, and FT is a foreign trust. The examples are as 
follows:

    Example 1. Amendment pursuant to local law. A creates and funds 
FT for the benefit of C. The terms of FT (which, according to the 
trust instrument, cannot be amended) provide that no part of the 
income or corpus of FT may be paid or accumulated during the taxable 
year to or for the benefit of any U.S. person, either during the 
existence of FT or at the time of its termination. However, pursuant 
to the applicable foreign law, FT can be amended to provide for 
additional beneficiaries, and there is an oral understanding between 
A and the trustee that B can be added as a beneficiary. Under 
paragraphs (a)(1) and (a)(4)(ii)(B) of this section, FT is treated 
as having a U.S. beneficiary.
    Example 2. Actions in violation of the terms of the trust. A 
transfers property to FT. The trust instrument provides that no U.S. 
person can receive income or corpus from FT during the term of the 
trust or at the termination of FT. Notwithstanding the terms of the 
trust instrument, a letter of wishes directs the trustee of FT to 
provide for the educational needs of B, who is about to begin 
college. The letter of wishes contains a disclaimer to the effect 
that its contents are only suggestions and recommendations and that 
the trustee is at all times bound by the terms of the trust as set 
forth in the trust instrument. Under paragraphs (a)(1) and 
(a)(4)(ii)(C) of this section, FT is treated as having a U.S. 
beneficiary.

    (b) Indirect U.S. beneficiaries--(1) Certain foreign entities. For 
purposes of paragraph (a)(1) of this section, an amount is treated as 
paid or accumulated to or for the benefit of a U.S. person if the 
amount is paid to or accumulated for the benefit of--
    (i) A controlled foreign corporation, as defined in section 957(a);
    (ii) A foreign partnership, if a U.S. person is a partner of such 
partnership; or
    (iii) A foreign trust or estate, if such trust or estate has a U.S. 
beneficiary (within the meaning of paragraph (a)(1) of this section).
    (2) Other indirect beneficiaries. For purposes of paragraph (a)(1) 
of this section, an amount is treated as paid or accumulated to or for 
the benefit of a U.S. person if the amount is paid to or accumulated 
for the benefit of a U.S. person through an intermediary, such as an 
agent or nominee, or by any other means where a U.S. person may obtain 
an actual or constructive benefit.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b). Unless otherwise noted, A is a U.S. resident alien. B is 
A's son and is a resident alien. FT is a foreign trust. The examples 
are as follows:

    Example 1. Trust benefitting foreign corporation. A transfers 
property to FT. The beneficiary of FT is FC, a foreign corporation. 
FC has outstanding solely 100 shares of common stock. B owns 49 
shares of the FC stock and FC2, also a foreign corporation, owns the 
remaining 51 shares. FC2 has outstanding solely 100 shares of common 
stock. B owns 49 shares of FC2 and nonresident alien individuals own 
the remaining 51 FC2 shares. FC is a controlled foreign corporation 
(as defined in section 957(a), after the application of section 
958(a)(2)). Under paragraphs (a)(1) and (b)(1)(i) of this section, 
FT is treated as having a U.S. beneficiary.
    Example 2. Trust benefitting another trust. A transfers property 
to FT. The terms of FT permit current distributions of income to B. 
A transfers property to another foreign trust, FT2. The terms of FT2 
provide that no U.S. person can benefit either as to income or 
corpus, but permit current distributions of income to FT. Under 
paragraph (a)(1) of this section, FT is treated as having a U.S. 
beneficiary and, under paragraphs (a)(1) and (b)(1)(iii) of this 
section, FT2 is treated as having a U.S. beneficiary.
    Example 3. Trust benefitting another trust after transferor's 
death. A transfers property to FT. The terms of FT require that all 
income from FT be accumulated during A's lifetime. In the year 
following A's death, a share of FT is to be distributed to FT2, 
another foreign trust, for the benefit of B. Under paragraphs (a)(1) 
and (b)(1)(iii) of this section, FT is treated as having a U.S. 
beneficiary beginning with the year of A's transfer of property to 
FT.
    Example 4. Indirect benefit through use of debit card. A 
transfers property to FT. The trust instrument provides that no U.S. 
person can benefit either as to income or corpus. However, FT 
maintains an account with FB, a foreign bank, and FB issues a debit 
card to B against the account maintained by FT and B is allowed to 
make withdrawals. Under paragraphs (a)(1) and (b)(2) of this 
section, FT is treated as having a U.S. beneficiary.
    Example 5. Other indirect benefit. A transfers property to FT. 
FT is administered by FTC, a foreign trust company. FTC forms IBC, 
an international business corporation formed under the laws of a 
foreign jurisdiction. IBC is the beneficiary of FT. IBC maintains an 
account with FB, a foreign bank. FB issues a debit card to B against 
the account maintained by IBC and B is allowed to make withdrawals. 
Under paragraphs (a)(1) and (b)(2) of this section, FT is treated as 
having a U.S. beneficiary.
    (c) Treatment of U.S. transferor upon foreign trust's acquisition 
or loss of U.S. beneficiary--(1) Trusts acquiring a U.S. beneficiary. 
If a foreign trust to which a U.S. transferor has transferred property 
is not treated as having a U.S. beneficiary (within the meaning of 
paragraph (a) of this section) for any taxable year of the U.S. 
transferor, but the trust is treated as having a U.S. beneficiary 
(within the meaning of paragraph (a) of this section) in any subsequent 
taxable year, the U.S. transferor is treated as having additional 
income in the first such taxable year of the U.S. transferor in which 
the trust is treated as having a U.S. beneficiary. The amount of the 
additional income is equal to the trust's undistributed net income, as 
defined in section 665(a), at the end of the U.S. transferor's 
immediately preceding taxable year and is subject to the rules of 
section 668, providing for an interest charge on accumulation 
distributions from foreign trusts.
    (2) Trusts ceasing to have a U.S. beneficiary. If, for any taxable 
year of a U.S. transferor, a foreign trust that has received a transfer 
of property from the U.S. transferor ceases to be treated as having a 
U.S. beneficiary, the U.S. transferor ceases to be treated as the owner 
of the portion of the trust attributable to the transfer beginning in 
the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary (unless the U.S. transferor is treated as an owner thereof 
pursuant to sections 673 through 677). The U.S. transferor is treated 
as making a transfer of property to the foreign trust on the first day 
of the first taxable year following the last taxable year of the U.S. 
transferor during which the trust was treated as having a U.S. 
beneficiary. The amount of the property deemed to be transferred to the 
trust is the portion of the trust attributable to the prior transfer to 
which paragraph (a)(1) of this section applied. For rules regarding the 
recognition of gain on transfers to foreign trusts, see section 684.
    (3) Examples. The rules of this paragraph (c) are illustrated by 
the following examples. A is a U.S. resident alien, B is A's son, and 
FT is a foreign trust. The examples are as follows:

    Example 1. Trust acquiring U.S. beneficiary. (i) In 2001, A 
transfers stock with a fair market value of $100,000 to FT. The 
stock has an adjusted basis of $50,000 at the time of the transfer. 
The trust instrument

[[Page 48194]]

provides that income may be paid currently to, or accumulated for 
the benefit of, B and that, upon the termination of the trust, all 
income and corpus is to be distributed to B. At the time of the 
transfer, B is a nonresident alien. A is not treated as the owner of 
any portion of FT under sections 671 through 677. FT accumulates a 
total of $30,000 of income during the taxable years 2001 through 
2003. In 2004, B moves to the United States and becomes a resident 
alien. Assume paragraph (a)(4) of this section is not applicable 
under the facts and circumstances.
    (ii) Under paragraph (c)(1) of this section, A is treated as 
receiving an accumulation distribution in the amount of $30,000 in 
2004 and immediately transferring that amount back to the trust. The 
accumulation distribution is subject to the rules of section 668, 
providing for an interest charge on accumulation distributions.
    (iii) Under paragraphs (a) (1) and (3) of this section, 
beginning in 2005, A is treated as the owner of the portion of FT 
attributable to the stock transferred by A to FT in 2001 (which 
includes the portion attributable to the accumulated income deemed 
to be retransferred in 2004).
    Example 2. Trust ceasing to have U.S. beneficiary. (i) The facts 
are the same as in Example 1. In 2008, B becomes a nonresident 
alien. On the date B becomes a nonresident alien, the stock 
transferred by A to FT in 2001 has a fair market value of $125,000 
and an adjusted basis of $50,000.
    (ii) Under paragraph (c)(2) of this section, beginning in 2009, 
FT is not treated as having a U.S. beneficiary, and A is not treated 
as the owner of the portion of the trust attributable to the prior 
transfer of stock. For rules regarding the recognition of gain on 
the termination of ownership status, see section 684.


Sec. 1.679-3  Transfers.

    (a) In general. A transfer means a direct, indirect, or 
constructive transfer.
    (b) 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) Example. The following example illustrates this paragraph (b):

    Example. In 2001, A, a U.S. citizen, creates and funds DT, a 
domestic trust. A has the power to revest absolutely in himself the 
title to the property in DT and is treated as the owner of DT 
pursuant to section 676. In 2004, DT transfers property to FT, a 
foreign trust. A is treated as having transferred the property to FT 
in 2004 for purposes of this section.

    (c) Indirect transfers--(1) Principal purpose of tax avoidance. A 
transfer to a foreign trust by any person (intermediary) to whom a U.S. 
person transfers property is treated as an indirect transfer by a U.S. 
person to the foreign trust if such transfer is made pursuant to a plan 
one of the principal purposes of which is the avoidance of United 
States tax.
    (2) Principal purpose of tax avoidance deemed to exist. For 
purposes of paragraph (c)(1) of this section, a transfer is deemed to 
have been made pursuant to a plan one of the principal purposes of 
which was the avoidance of United States tax if--
    (i) The U.S. person is related (within the meaning of paragraph 
(c)(4) of this section) to a beneficiary of the foreign trust, or has 
another relationship with a beneficiary of the foreign trust that 
establishes a reasonable basis for concluding that the U.S. transferor 
would make a transfer to the foreign trust; and
    (ii) The U.S. person cannot demonstrate to the satisfaction of the 
Commissioner that--
    (A) The intermediary has a relationship with a beneficiary of the 
foreign trust that establishes a reasonable basis for concluding that 
the intermediary would make a transfer to the foreign trust;
    (B) The intermediary acted independently of the U.S. person;
    (C) The intermediary is not an agent of the U.S. person under 
generally applicable United States agency principles; and
    (D) The intermediary timely complied with the reporting 
requirements of section 6048, if applicable.
    (3) Effect of disregarding intermediary--(i) In general. Except as 
provided in paragraph (c)(3)(ii) of this section, if a transfer is 
treated as an indirect transfer pursuant to paragraph (c)(1) of this 
section, then the intermediary is treated as an agent of the U.S. 
person, and the property is treated as transferred to the foreign trust 
by the U.S. person in the year the property is transferred, or made 
available, by the intermediary to the foreign trust. The fair market 
value of the property transferred is determined as of the date of the 
transfer by the intermediary to the foreign trust.
    (ii) Special rule. If the Commissioner determines, or if the 
taxpayer can demonstrate to the satisfaction of the Commissioner, that 
the intermediary is an agent of the foreign trust under generally 
applicable United States agency principles, the property will be 
treated as transferred to the foreign trust in the year the U.S. person 
transfers the property to the intermediary. The fair market value of 
the property transferred will be determined as of the date of the 
transfer by the U.S. person to the intermediary.
    (iii) Effect on intermediary. If a transfer of property is treated 
as an indirect transfer under paragraph (c)(1) of this section, the 
intermediary is not treated as having transferred the property to the 
foreign trust.
    (4) Related parties. For purposes of this paragraph (c), a U.S. 
transferor is treated as related to a U.S. beneficiary of a foreign 
trust if the U.S. transferor and the beneficiary are related for 
purposes of section 643(i)(2)(B), with the following modifications--
    (i) For purposes of applying section 267 (other than section 
267(f)) and section 707(b)(1), ``at least 10 percent'' is used instead 
of ``more than 50 percent'' each place it appears; and
    (ii) 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.
    (5) Examples. The rules of this paragraph (c) are illustrated by 
the following examples:

    Example 1. Principal purpose of tax avoidance. A, a U.S. 
citizen, creates and funds FT, a foreign trust, for the benefit of 
A's children, who are U.S. citizens. In 2004, A decides to transfer 
an additional 1000X to the foreign trust. Pursuant to a plan with a 
principal purpose of avoiding the application of section 679, A 
transfers 1000X to I, a foreign person. I subsequently transfers 
1000X to FT. Under paragraph (c)(1) of this section, A is treated as 
having made a transfer of 1000X to FT.
    Example 2. U.S. person unable to demonstrate that intermediary 
acted independently. A, a U.S. citizen, creates and funds FT, a 
foreign trust, for the benefit of A's children, who are U.S. 
citizens. On July 1, 2004, A transfers XYZ stock to D, A's uncle, 
who is a nonresident alien. D immediately sells the XYZ stock and 
uses the proceeds to purchase ABC stock. On January 1, 2007, D 
transfers the ABC stock to FT. A is unable to demonstrate to the 
satisfaction of the Commissioner, pursuant to paragraph (c)(2) of 
this section, that D acted independently of A in making the transfer 
to FT. Under paragraph (c)(1) of this section, A is treated as 
having transferred the ABC stock to FT. Under paragraph (c)(3) of 
this section, D is treated as an agent of A, and the transfer is 
deemed to have been made on January 1, 2007.
    Example 3. Indirect loan to foreign trust. A, a U.S. citizen, 
previously created and funded FT, a foreign trust, for the benefit 
of A's children, who are U.S. citizens. On July 1, 2004, A deposits 
500X with FB, a foreign bank. On January 1, 2005, FB loans 450X to 
FT. A is unable to demonstrate to the satisfaction of the 
Commissioner, pursuant to paragraph (c)(2) of this section, that FB 
has a relationship with FT that establishes a reasonable basis for 
concluding that FB would make a loan to FT or that FB acted 
independently of A in making the loan. Under paragraph (c)(1) of 
this section, A is deemed to have transferred 450X directly to FT on 
January 1, 2005. Under paragraph (c)(3) of this section, FB is 
treated as an agent of A. For possible exceptions with respect to

[[Page 48195]]

qualified obligations of the trust, see Sec. 1.679-4.
    Example 4. Loan to foreign trust prior to deposit of funds in 
foreign bank. The facts are the same as in Example 3, except that A 
makes the 500X deposit with FB on January 2, 2005, the day after FB 
makes the loan to FT. The result is the same as in Example 3.

    (d) Constructive transfers--(1) In general. For purposes of 
paragraph (a) of this section, a constructive transfer includes any 
assumption or satisfaction of a foreign trust's obligation to a third 
party.
    (2) Examples. The rules of this paragraph (d) are illustrated by 
the following examples. In each example, A is a U.S. citizen and FT is 
a foreign trust. The examples are as follows:

    Example 1. Payment of debt of foreign trust. FT owes 1000X to Y, 
an unrelated foreign corporation, for the performance of services by 
Y for FT. In satisfaction of FT's liability to Y, A transfers to Y 
property with a fair market value of 1000X. Under paragraph (d)(1) 
of this section, A is treated as having made a constructive transfer 
of the property to FT.
    Example 2. Assumption of liability of foreign trust. FT owes 
1000X to Y, an unrelated foreign corporation, for the performance of 
services by Y for FT. A assumes FT's liability to pay Y. Under 
paragraph (d)(1) of this section, A is treated as having made a 
constructive transfer of property with a fair market value of 1000X 
to FT.

    (e) Guarantee of trust obligations--(1) In general. If a foreign 
trust borrows money or other property from any person who is not a 
related person (within the meaning of Sec. 1.679-1(c)(5)) with respect 
to the trust (lender) and a U.S. person (U.S. guarantor) that is a 
related person with respect to the trust guarantees (within the meaning 
of paragraph (e)(4) of this section) the foreign trust's obligation, 
the U.S. guarantor is treated for purposes of this section as a U.S. 
transferor that has made a transfer to the trust on the date of the 
guarantee in an amount determined under paragraph (e)(2) of this 
section. To the extent this paragraph causes the U.S. guarantor to be 
treated as having made a transfer to the trust, a lender that is a U.S. 
person shall not be treated as having transferred that amount to the 
foreign trust.
    (2) Amount transferred. The amount deemed transferred by a U.S. 
guarantor described in paragraph (e)(1) of this section is the 
guaranteed portion of the adjusted issue price of the obligation 
(within the meaning of Sec. 1.1275-1(b)) plus any accrued but unpaid 
qualified stated interest (within the meaning of Sec. 1.1273-1(c)).
    (3) Principal repayments. If a U.S. person is treated under this 
paragraph (d) as having made a transfer by reason of the guarantee of 
an obligation, payments of principal to the lender by the foreign trust 
with respect to the obligation are taken into account on and after the 
date of the payment in determining the portion of the trust 
attributable to the property deemed transferred by the U.S. guarantor.
    (4) Guarantee. For purposes of this section, the term guarantee--
    (i) Includes any arrangement under which a person, directly or 
indirectly, assures, on a conditional or unconditional basis, the 
payment of another's obligation;
    (ii) Encompasses any form of credit support, and includes a 
commitment to make a capital contribution to the debtor or otherwise 
maintain its financial viability; and
    (iii) Includes an arrangement reflected in a comfort letter, 
regardless of whether the arrangement gives rise to a legally 
enforceable obligation. If an arrangement is contingent upon the 
occurrence of an event, in determining whether the arrangement is a 
guarantee, it is assumed that the event has occurred.
    (5) Examples. The rules of this paragraph (e) are illustrated by 
the following examples. In all of the examples, A is a U.S. resident 
and FT is a foreign trust. The examples are as follows:

    Example 1. Foreign lender. X, a foreign corporation, loans 1000X 
of cash to FT in exchange for FT's obligation to repay the loan. A 
guarantees the repayment of 600X of FT's obligation. Under paragraph 
(e)(2) of this section, A is treated as having transferred 600X to 
FT.
    Example 2. Unrelated U.S. lender. The facts are the same as in 
Example 1, except X is a U.S. person that is not a related person 
within the meaning of Sec. 1.679-1(c)(5). The result is the same as 
in Example 1.

    (f) Transfers to entities owned by a foreign trust--(1) General 
rule. If a U.S. person is a related person (as defined in Sec. 1.679-
1(c)(5)) with respect to a foreign trust, any transfer of property by 
the U.S. person to an entity in which the foreign trust holds an 
ownership interest is treated as a transfer of such property by the 
U.S. person to the foreign trust followed by a transfer of the property 
from the foreign trust to the entity owned by the foreign trust, unless 
the U.S. person demonstrates to the satisfaction of the Commissioner 
that the transfer to the entity is properly attributable to the U.S. 
person's ownership interest in the entity.
    (2) Examples. The rules of this paragraph (f) are illustrated by 
the following examples. In all of the examples, A is a U.S. citizen, FT 
is a foreign trust, and FC is a foreign corporation. The examples are 
as follows:

    Example 1. A creates and funds FT. which is treated as having a 
U.S. beneficiary under Sec. 1.679-2. FT owns all of the outstanding 
stock of FC. A transfers property directly to FC. Because FT is the 
sole shareholder of FC, A is unable to demonstrate to the 
satisfaction of the Commissioner that the transfer is properly 
attributable to A's ownership interest in FC. Accordingly, under 
this paragraph (f), A is treated as having transferred the property 
to FT, followed by a transfer of such property by FT to FC. Under 
Sec. 1.679-1(a), A is treated as the owner of the portion of FT 
attributable to the property treated as transferred directly to FT. 
Under Sec. 1.367(a)-1T(c)(4)(ii), the transfer of property by FT to 
FC is treated as a transfer of the property by A to FC.
    Example 2. The facts are the same as in Example 1, except that 
FT is not treated as having a U.S. beneficiary under Sec. 1.679-2. 
Under this paragraph (f), A is treated as having transferred the 
property to FT, followed by a transfer of such property by FT to FC. 
A is not treated as the owner of FT for purposes of Sec. 1.679-1(a). 
For rules regarding the recognition of gain on the transfer, see 
section 684.
    Example 3. A creates and funds FT. FC has outstanding solely 100 
shares of common stock. FT owns 50 shares of FC stock, and A owns 
the remaining 50 shares. On July 1, 2001, FT and A each transfer 
1000X to FC. A is able to demonstrate to the satisfaction of the 
Commissioner that A's transfer to FC is properly attributable to A's 
ownership interest in FC. Accordingly, under this paragraph (f), A's 
transfer to FC is not treated as a transfer to FT.


Sec. 1.679-4  Exceptions to general rule.

    (a) In general. Section 1.679-1 does not apply to--
    (1) Any transfer of property to a foreign trust by reason of the 
death of the transferor;
    (2) Any transfer of property to a foreign trust described in 
sections 402(b), 404(a)(4), or 404A;
    (3) Any transfer of property to a foreign trust that has received a 
ruling or determination letter, which has been neither revoked nor 
modified, from the Internal Revenue Service recognizing the trust's tax 
exempt status under section 501(c)(3); and
    (4) Any transfer of property to a foreign trust to the extent the 
transfer is for fair market value.
    (b) Transfers for fair market value--(1) In general. For purposes 
of this section, a transfer is for fair market value only to the extent 
of the value of property received from the trust, services rendered by 
the trust, or the right to use property of the trust. For example, 
rents, royalties, interest, and compensation paid to a trust are 
transfers for fair market value only to

[[Page 48196]]

the extent that the payments reflect an arm's length price for the use 
of the property of, or for the services rendered by, the trust. For 
purposes of this determination, an interest in the trust is not 
property received from the trust. For purposes of this section, 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 is considered to be a transfer for fair market value.
    (2) Special rule--(i) Transfers for partial consideration. For 
purposes of this section, if a person transfers property to a foreign 
trust in exchange for property having a fair market value that is less 
than the fair market value of the property transferred, the exception 
in paragraph (a)(4) of this section applies only to the extent of the 
fair market value of the property received.
    (ii) Example. This paragraph (b) is illustrated by the following 
example:

    Example. A, a U.S. citizen, transfers property that has a fair 
market value of 1000X to FT, a foreign trust, in exchange for 600X 
of cash. Under this paragraph (b), Sec. 1.679-1 applies with respect 
to the transfer of 400X (1000X less 600X) to FT.

    (c) Certain obligations not taken into account. Solely for purposes 
of this section, in determining whether a transfer by a U.S. transferor 
that is a related person (as defined in Sec. 1.679-1(c)(5)) with 
respect to the foreign trust is for fair market value, any obligation 
(as defined in Sec. 1.679-1(c)(6)) of the trust or a related person (as 
defined in Sec. 1.679-1(c)(5)) that is not a qualified obligation 
within the meaning of paragraph (d)(1) of this section shall not be 
taken into account.
    (d) Qualified obligations--(1) In general. For purposes of this 
section, an obligation is treated as a qualified obligation only if--
    (i) The obligation is reduced to writing by an express written 
agreement;
    (ii) The term of the obligation does not exceed five years (for 
purposes of determining the term of an obligation, the obligation's 
maturity date is the last possible date that the obligation can be 
outstanding under the terms of the obligation);
    (iii) All payments on the obligation are denominated in U.S. 
dollars;
    (iv) The yield to maturity is not less than 100 percent of the 
applicable Federal rate and not greater that 130 percent of the 
applicable Federal rate (the applicable Federal rate for an obligation 
is the applicable Federal rate in effect under section 1274(d) for the 
day on which the obligation is issued, as published in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter));
    (v) The U.S. transferor extends the period for assessment of any 
income or transfer tax attributable to the transfer and any 
consequential income tax changes for each year that the obligation is 
outstanding, to a date not earlier than three years after the maturity 
date of the obligation (this extension is not necessary if the maturity 
date of the obligation does not extend beyond the end of the U.S. 
transferor's taxable year and is paid within such period); when 
properly executed and filed, such an agreement is deemed to be 
consented to for purposes of Sec. 301.6501(c)-1(d) of this chapter; and
    (vi) The U.S. transferor reports the status of the loan, including 
principal and interest payments, on Form 3520 for every year that the 
loan is outstanding.
    (2) Additional loans. If, while the original obligation is 
outstanding, the U.S. transferor or a person related to the trust 
(within the meaning of Sec. 1.679-1(c)(5)) directly or indirectly 
obtains another obligation issued by the trust, or if the U.S. 
transferor directly or indirectly obtains another obligation issued by 
a person related to the trust, the original obligation is deemed to 
have the maturity date of any such subsequent obligation in determining 
whether the term of the original obligation exceeds the specified 5-
year term. In addition, a series of obligations issued and repaid by 
the trust (or a person related to the trust) is treated as a single 
obligation if the transactions giving rise to the obligations are 
structured with a principal purpose to avoid the application of this 
provision.
    (3) Obligations that cease to be qualified. If an obligation 
treated as a qualified obligation subsequently fails to be a qualified 
obligation (e.g., renegotiation of the terms of the obligation causes 
the term of the obligation to exceed five years), the U.S. transferor 
is treated as making a transfer to the trust in an amount equal to the 
original obligation's adjusted issue price (within the meaning of 
Sec. 1.1275-1(b)) plus any accrued but unpaid qualified stated interest 
(within the meaning of Sec. 1.1273-1(c)) as of the date of the 
subsequent event that causes the obligation to no longer be a qualified 
obligation. If the maturity date is extended beyond five years by 
reason of the issuance of a subsequent obligation by the trust (or 
person related to the trust), the amount of the transfer will not 
exceed the issue price of the subsequent obligation. The subsequent 
obligation is separately tested to determine if it is a qualified 
obligation.
    (4) Transfers resulting from failed qualified obligations. In 
general, a transfer resulting from a failed qualified obligation is 
deemed to occur on the date of the subsequent event that causes the 
obligation to no longer be a qualified obligation. However, based on 
all of the facts and circumstances, the Commissioner may deem a 
transfer to have occurred on any date on or after the issue date of the 
original obligation. For example, if at the time the original 
obligation was issued, the transferor knew or had reason to know that 
the obligation would not be repaid, the Commissioner could deem the 
transfer to have occurred on the issue date of the original obligation.
    (5) Renegotiated loans. Any loan that is renegotiated, extended, or 
revised is treated as a new loan, and any distribution of funds after 
such renegotiation, extension, or revision under a pre-existing loan 
agreement is treated as a transfer subject to this section.
    (6) Principal repayments. The payment of principal with respect to 
any obligation that is not treated as a qualified obligation under this 
paragraph is taken into account on and after the date of the payment in 
determining the portion of the trust attributable to the property 
transferred.
    (7) Examples. The rules of this paragraph (d) are illustrated by 
the following examples. In all of the examples, A is a U.S. resident 
and FT is a foreign trust. The examples are as follows:

    Example 1. Demand loan. A transfers 500X to FT in exchange for a 
demand note that permits A to require repayment by FT at any time. A 
is a related person (as defined in Sec. 1.679-1(c)(5)) with respect 
to FT. Because FT's obligation to A could remain outstanding for 
more than five years, the obligation is not a qualified obligation 
within the meaning of paragraph (d) of this section and, pursuant to 
paragraph (c) of this section, it is not taken into account for 
purposes of determining whether A's transfer is eligible for the 
fair market value exception of paragraph (a)(4) of this section. 
Accordingly, Sec. 1.679-1 applies with respect to the full 500X 
transfer to FT.
    Example 2. Private annuity. A transfers 4000X to FT in exchange 
for an annuity from the foreign trust that will pay A 100X per year 
for the rest of A's life. A is a related person (as defined in 
Sec. 1.679-1(c)(5)) with respect to FT. Because FT's obligation to A 
could remain outstanding for more than five years, the obligation is 
not a qualified obligation within the meaning of paragraph (d)(1) of 
this section and, pursuant to paragraph (c) of this section, it is 
not taken

[[Page 48197]]

into account for purposes of determining whether A's transfer is 
eligible for the fair market value exception of paragraph (a)(4) of 
this section. Accordingly, Sec. 1.679-1 applies with respect to the 
full 4000X transfer to FT.
    Example 3. Loan to unrelated foreign trust. B transfers 1000X to 
FT in exchange for an obligation of the trust. The term of the 
obligation is fifteen years. B is not a related person (as defined 
in Sec. 1.679-1(c)(5)) with respect to FT. Because B is not a 
related person, the adjusted issue price of the obligation received 
by B is taken into account for purposes of determining whether B's 
transfer is eligible for the fair market value exception of 
paragraph (a)(4) of this section, even though the obligation is not 
a qualified obligation within the meaning of paragraph (d)(1) of 
this section.
    Example 4. Transfer for an obligation with term in excess of 5 
years. A transfers property that has a fair market value of 5000X to 
FT in exchange for an obligation of the trust. The term of the 
obligation is ten years. A is a related person (as defined in 
Sec. 1.679-1(c)(5)) with respect to FT. Because the term of the 
obligation is greater than five years, the obligation is not a 
qualified obligation within the meaning of paragraph (d)(1) of this 
section and, pursuant to paragraph (c) of this section, it is not 
taken into account for purposes of determining whether A's transfer 
is eligible for the fair market value exception of paragraph (a)(4) 
of this section. Accordingly, Sec. 1.679-1 applies with respect to 
the full 5000X transfer to FT.
    Example 5. Transfer for a qualified obligation. The facts are 
the same as in Example 4, except that the term of the obligation is 
3 years. Assuming the other requirements of paragraph (d)(1) of this 
section are satisfied, the obligation is a qualified obligation and 
its adjusted issue price is taken into account for purposes of 
determining whether A's transfer is eligible for the fair market 
value exception of paragraph (a)(4) of this section.
    Example 6. Effect of subsequent obligation on original 
obligation. A transfers property that has a fair market value of 
1000X to FT in exchange for an obligation that satisfies the 
requirements of paragraph (d)(1) of this section. A is a related 
person (as defined in Sec. 1.679-1(c)(5)) with respect to FT. Two 
years later, A transfers an additional 2000X to FT and receives 
another obligation from FT that has a maturity date four years from 
the date that the second obligation was issued. Under paragraph 
(d)(2) of this section, the original obligation is deemed to have 
the maturity date of the second obligation. Under paragraph (a) of 
this section, A is treated as having made a transfer in an amount 
equal to the original obligation's adjusted issue price (within the 
meaning of Sec. 1.1275-1(b)) plus any accrued but unpaid qualified 
stated interest (within the meaning of Sec. 1.1273-1(c)) as of the 
date of issuance of the second obligation. The second obligation is 
tested separately to determine whether it is a qualified obligation 
for purposes of applying paragraph (a) of this section to the second 
transfer.


Sec. 1.679-5  Pre-immigration trusts.

    (a) In general. If a nonresident alien individual becomes a U.S. 
person and the individual has a residency starting date (as determined 
under section 7701(b)(2)(A)) within 5 years after transferring property 
to a foreign trust (the original transfer), the individual is treated 
as having transferred to the trust on the residency starting date an 
amount equal to the portion of the trust attributable to the property 
transferred by the individual in the original transfer.
    (b) Special rules--(1) Change in grantor trust status. For purposes 
of paragraph (a) of this section, if a nonresident alien individual who 
is treated as owning any portion of a trust under the provisions of 
subpart E of part I of subchapter J, chapter 1 of the Internal Revenue 
Code, subsequently ceases to be so treated, the individual is treated 
as having made the original transfer to the foreign trust immediately 
before the trust ceases to be treated as owned by the individual.
    (2) Treatment of undistributed income. For purposes of paragraph 
(a) of this section, the property deemed transferred to the foreign 
trust on the residency starting date includes undistributed net income, 
as defined in section 665(a), attributable to the property deemed 
transferred. Undistributed net income for periods before the 
individual's residency starting date is taken into account only for 
purposes of determining the amount of the property deemed transferred.
    (c) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. Nonresident alien becomes resident alien. On January 
1, 2002, A, a nonresident alien individual, transfers property to a 
foreign trust, FT. On January 1, 2006, A becomes a resident of the 
United States within the meaning of section 7701(b)(1)(A) and has a 
residency starting date of January 1, 2006, within the meaning of 
section 7701(b)(2)(A). Under paragraph (a) of this section, A is 
treated as a U.S. transferor and is deemed to transfer the property 
to FT on January 1, 2006. Under paragraph (b)(2) of this section, 
the property deemed transferred to FT on January 1, 2006, includes 
the undistributed net income of the trust, as defined in section 
665(a), attributable to the property originally transferred.
    Example 2. Nonresident alien loses power to revest property. On 
January 1, 2002, A, a nonresident alien individual, transfers 
property to a foreign trust, FT. A has the power to revest 
absolutely in himself the title to such property transferred and is 
treated as the owner of the trust pursuant to sections 676 and 
672(f). On January 1, 2008, the terms of FT are amended to remove 
A's power to revest in himself title to the property transferred, 
and A ceases to be treated as the owner of FT. On January 1, 2010, A 
becomes a resident of the United States. Under paragraph (b)(1) of 
this section, for purposes of paragraph (a) of this section A is 
treated as having originally transferred the property to FT on 
January 1, 2008. Because this date is within five year's of A's 
residency starting date, A is deemed to have made a transfer to the 
foreign trust on January 1, 2010, his residency starting date. Under 
paragraph (b)(2) of this section, the property deemed transferred to 
the foreign trust on January 1, 2010, includes the undistributed net 
income of the trust, as defined in section 665(a), attributable to 
the property deemed transferred.


Sec. 1.679-6  Outbound migrations of domestic trusts.

    (a) In general. Subject to the provisions of paragraph (b) of this 
section, if an individual who is a U.S. person transfers property to a 
trust that is not a foreign trust, and such trust becomes a foreign 
trust while the U.S. person is alive, the U.S. individual is treated as 
a U.S. transferor and is deemed to transfer the property to a foreign 
trust on the date the domestic trust becomes a foreign trust.
    (b) Amount deemed transferred. For purposes of paragraph (a) of 
this section, the property deemed transferred to the trust when it 
becomes a foreign trust includes undistributed net income, as defined 
in section 665(a), attributable to the property previously transferred. 
Undistributed net income for periods prior to the migration is taken 
into account only for purposes of determining the portion of the trust 
that is attributable to the property transferred by the U.S. person.
    (c) Example. The following example illustrates the rules of this 
section. For purposes of the example, A is a U.S. resident alien, B is 
A's son, who is a resident alien, and DT is a domestic trust. The 
example is as follows:

    Example. Outbound migration of domestic trust. On January 1, 
2002, A transfers property to DT, for the benefit of B. On January 
1, 2003, DT acquires a foreign trustee who has the power to 
determine whether and when distributions will be made to B. Under 
section 7701(a)(3)(B) and Sec. 301.7701-7(d)(ii)(A), DT becomes a 
foreign trust on January 1, 2003. Under paragraph (a) of this 
section, A is treated as transferring property to a foreign trust on 
January 1, 2003. Under paragraph (b) of this section, the property 
deemed transferred to the trust when it becomes a foreign trust 
includes undistributed net income, as defined in section 665(a), 
attributable to the property deemed transferred.


Sec. 1.679-7  Effective dates.

    (a) In general. Except as provided in paragraph (b) of this 
section, the rules of Secs. 1.679-1, 1.679-2, 1.679-3, and 1.679-4 
apply with respect to transfers after August 7, 2000.
    (b) Special rules. (1) The rules of Sec. 1.679-4 (c) and (d) apply 
to an

[[Page 48198]]

obligation issued after February 6, 1995, whether or not in accordance 
with a pre-existing arrangement or understanding. For purposes of the 
rules of Sec. 1.679-4 (c) and (d), if an obligation issued on or before 
February 6, 1995, is modified after that date, and the modification is 
a significant modification within the meaning of Sec. 1.1001-3, the 
obligation is treated as if it were issued on the date of the 
modification. However, the penalty provided in section 6677 applies 
only to a failure to report transfers in exchange for obligations 
issued after August 20, 1996.
    (2) The rules of Sec. 1.679-5 apply to persons whose residency 
starting date is after August 7, 2000.
    (3) The rules of Sec. 1.679-6 apply to trusts that become foreign 
trusts after August 7, 2000.
    Par. 3. In Sec. 1.958-1, paragraph (b) is amended by adding a new 
sentence after the first sentence to read as follows:


Sec. 1.958-1  Direct and indirect ownership of stock.

* * * * *
    (b) * * * For purposes of the preceding sentence, any person that 
is treated as the owner of any portion of a trust pursuant to sections 
671 through 679 shall be treated as a beneficiary of the trust and 
shall be considered to own all of the stock owned directly or 
indirectly by or for such portion. * * *
* * * * *


Sec. 1.958-2  [Amended]

    Par. 4. In Sec. 1.958-2, paragraph (c)(1)(ii)(b) is amended by 
removing the language ``678'' and adding ``679'' in its place.

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 00-19897 Filed 8-2-00; 1:04 pm]
BILLING CODE 4830-01-P




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