Foreign Trusts That Have U.S. Beneficiaries

DEPARTMENT OF THE TREASURY 
Internal Revenue Service 26 CFR Part 1 [TD 8955] RIN 1545-A075

TITLE: Foreign Trusts That Have U.S. Beneficiaries

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final 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 final regulations affect United States persons
who transfer property to foreign trusts.

DATES: Effective Date: These regulations are effective July 20,
2001.

Applicability Date: For dates of applicability, see §1.679- 7.

FOR FURTHER INFORMATION CONTACT: Willard W. Yates at (202) 622- 3880
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On August 7, 2000, the IRS and Treasury published a notice of
proposed rulemaking (REG-209038-89) in the Federal Register (65 FR
48185) inviting comments relating to the treatment of U.S. persons
who transfer property to foreign trusts that have one or more U.S.
beneficiaries. Comments responding to the notice of proposed
rulemaking were received and a public hearing was held on November
8, 2000. After consideration of all of the comments, the proposed
regulations are adopted as revised by this Treasury decision. The
revisions are discussed below.

Explanation of Provisions

Comments Relating to §1.679-2: Trusts Treated as Having a U.S.
Beneficiary

A. Benefit to a U.S. Person

Under §1.679-2(a)(1) of the proposed regulations, 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 both of the following tests are satisfied: (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.

Section 1.679-2(a)(2)(i) of the proposed regulations 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 provide a
narrow exception with respect to certain contingent beneficiaries
whose interests in the trust are so remote as to be negligible. One
commenter suggests that §1.679-2(a)(2) of the proposed
regulations (specifically, Example 5 of §1.679-2(a)(2)(iii)) is
overly broad. The commenter suggests that a foreign trust should not
be treated as having a U.S. beneficiary where the trust's only asset
consists of stock of a foreign corporation, the trust will terminate
one year after the death of a U.S. transferor, whereupon
distributions of corpus or income may be made to a U.S. person, and
the trust receives no income from the corporation during the term of
its existence. The commenter argues that because the foreign trust
receives no income from the foreign corporation during the trust's
existence, the U.S. person's status as a beneficiary provides the
U.S. person with nothing of value and, therefore, the foreign trust
should not be treated as having a U.S. beneficiary.

The commenter's argument overlooks the clear legislative intent
underlying section 679 that a foreign trust will be treated as
having a U.S. beneficiary even in situations where there exists only
the possibility of distribution of income or corpus to or the
accumulation of corpus for the benefit of a U.S. person. H.R. Rep.
No. 658, 94th Cong., 1st Sess., at 210 (1975). The fact that a
foreign trust holds an asset, such as the stock of a foreign
corporation, that produces no income during the term of the trust's
existence is of no import for purposes of determining whether the
trust will be treated as having a U.S. beneficiary. The determining
factor in such a situation is that the trust holds corpus for the
future benefit of a U.S. person, regardless of whether the corpus
consists of stock with respect to which no dividends have been paid
or some other asset that produces no current income. Accordingly,
the final regulations adopt the rule of the proposed regulations.

B. Records and Documents

Section 1.679-2(a)(4) of the proposed regulations provides that a
trust may be treated as having a U.S. beneficiary by reference,
inter alia, to written and oral agreements and understandings not
contained in the trust document, and to whether the terms of the
trust instrument are actually or reasonably expected to be
disregarded by the parties to the trust. A commenter states that
this rule creates new and unclear rules for purposes of determining
whether an arrangement constitutes a trust for Federal income tax
purposes.

The determination as to whether an arrangement will be treated as a
trust is made pursuant to the rules set forth in §301.7701-4 of
the regulations. The regulations under section 679 address only the
determination of whether a foreign trust will be treated as having a
U.S. beneficiary. The final regulations are not intended to provide
factors in addition to the rules of §301.7701-4 for purposes of
determining whether an arrangement constitutes a trust for Federal
income tax purposes.

C. Trusts Acquiring a U.S. Beneficiary

The proposed regulations anticipate situations where the beneficiary
of a foreign trust may change. Section 1.679-2(c)(1) of the proposed
regulations provides that if a foreign trust is not treated as
having a U.S. beneficiary (within the meaning of §1.679-2(a))
but subsequently is treated as having 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.

A commenter suggests that the rule treating the U.S. transferor as
having additional income in the first year the foreign trust
acquires the U.S. beneficiary exceeds the authority of section 679,
noting that in most cases the transferor will not have received any
income from the trust.

Section 1.679-2(c)(1) of the proposed regulations follows closely
the legislative history underlying section 679 regarding the U.S.
transferor's recognition of additional income. The legislative
history provides that the amount of the additional income shall be
the foreign trust's undistributed net income, i.e., accumulated
income that would be taxable to a beneficiary upon distribution, as
of the close of the immediately preceding taxable year. H.R. Rep.
No. 658, 94th Cong., 1st Sess., at 211, Fn. 13 (1975). In short, the
legislative history provides that the U.S. transferor's additional
income shall receive the same treatment as accumulation
distributions to beneficiaries of a foreign trust. Accumulated
income distributions to beneficiaries of foreign trusts are subject
to the interest charge provided for in section 668. Accordingly, the
provision for additional income in §1.679-2(c)(1) of the final
regulations, as well as the application of the interest charge
provided for in section 668, are necessary to carry out the
legislative purpose of section 679. The rule of the proposed
regulations is adopted by the final regulations without change.

Comments Relating to §1.679-3: Transfers

A. Indirect Transfers - Principal Purpose of Tax Avoidance 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. Section 1.679-3(c) of the proposed
regulations provides rules for determining when there is an indirect
transfer. Under §1.679- 3(c)(1) of the proposed regulations, 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) of the proposed regulations deems a
transfer to have been made pursuant to such a plan if certain
conditions are present.

The deemed-principal-purpose test of §1.679-3(c)(2) of the
proposed regulations is similar to the deemed-principal-purpose test
in §1.643(h)-1(a) of the regulations, which concerns
distributions from foreign trusts to U.S. persons through
intermediaries, except that 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. In contrast, the deemed-
principal- purpose test of §1.643(h)-1(a)(2)(ii) applies only
if property is distributed to the U.S. person during the period
beginning 24 months before and ending 24 months after the
intermediary's receipt of property from the foreign trust. A
commenter suggests that a similar time limit should be provided in
§1.679-3(c)(2) with respect to outbound transfers.

In the context of section 643(h), Treasury and the IRS weighed the
potential for abuse in that area against the possible adverse effect
that the deemed-principal-purpose test could have on legitimate
transactions, and concluded that a time limitation in
§1.643(h)-1(a)(2) was appropriate. However, Treasury and the
IRS believe the potential for abuse is greater in the case of
outbound transfers to foreign trusts than in the case of inbound
trust distributions to U.S. beneficiaries. Congress enacted section
679 in order to prevent the tax-free accumulation of income earned
by foreign trusts over long periods of time that provided foreign
trusts with an unwarranted advantage over domestic trusts. H.R. Rep.
No. 658, 94th Cong., 1st Sess., at 207 (1975). Providing for a time
limitation to the application of §1.679-3(c) could allow for
easy circumvention of Congress' purpose in enacting section 679.
Treasury and the IRS recognize that some transfers that were not
intended to avoid U.S. tax may come within the presumption in the
absence of a specific time limit. However, under such circumstances
§1.679-3(c)(2)(ii) provides taxpayers with a way to rebut the
application of the deemed-principal-purpose test. Therefore, the
final regulations do not include a time limitation to the
application of §1.679- 3(c)(2)(i).

B. Indirect Transfers - Corporate Distributions

One commenter asked about the application of the indirect transfer
rules set forth in §1.679-3(c) of the proposed regulations to
successive corporate distributions up a chain of wholly-owned
corporations to an ultimate shareholder that is a foreign trust. The
commenter expressed concern that, if one of the lower-tier
corporations were a domestic corporation, §1.679- 3(c) of the
proposed regulations could potentially treat the distributions as an
indirect transfer from the domestic corporation to the foreign trust
that would be subject to the general rule of §1.679-1.

Even if the distributions were characterized as an indirect transfer
from a domestic corporation to a foreign trust under
§1.679-3(c), the indirect transfer would generally be treated
as a transfer for fair market value under the final sentence of
§1.679-4(b)(1) and would therefore be excepted from the general
rule of §1.679-1 pursuant to §1.679-4(a)(4). Therefore, no
special rules have been added to the final regulations to address
this situation.

C. Transfers to Entities Owned by Foreign Trusts

Section 1.679-3(f) of the proposed regulations 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. A commenter noted potential
conflicts with this rule and judicial doctrines concerning
constructive corporate distributions.

Section 1.679-3(f) is not intended to override judicial doctrines
concerning constructive corporate distributions. For example, if
judicial doctrines would recharacterize a direct transfer of
property by a domestic corporation to an entity owned by a foreign
trust as a constructive dividend of the property to the domestic
corporation's shareholder followed by a constructive transfer of the
property by that shareholder to the foreign trust and a constructive
contribution by the foreign trust to the entity owned by the foreign
trust, then those judicial doctrines would apply (and
§1.679-3(f) would not apply) to the transaction.

Comments Relating to §1.679-4: Exceptions to General Rule -
Transfers to Trusts Described in Section 501(c)(3)

Section 1.679-4(a)(3) of the proposed regulations provides an
exception to the general rule of §1.679-1 for transfers to a
foreign trust that has already received a ruling or determination
letter from the IRS recognizing the trust's tax exempt status under
section 501(c)(3), provided that the letter has been neither revoked
nor modified. Commenters questioned the requirement that a foreign
trust obtain a ruling or determination letter from the IRS
recognizing the trust's tax exempt status under section 501(c)(3).
They assert that the requirement may interfere with a U.S. person's
ability to make contributions to a foreign charitable entity that
may not be familiar with U.S. tax laws and may not have any reason
to obtain a determination letter from the IRS. They suggest that the
final regulations require only that the U.S. transferor disclose to
the IRS, at such time and in such manner as the IRS may provide,
that the transfer has been made and that the transferor believes the
transferee is an organization described in section 501(c)(3).

In response to commenters' concerns, the final regulations eliminate
the requirement that the foreign trust receive a ruling or
determination letter from the IRS recognizing the trust's tax-
exempt status under section 501(c)(3). The final regulations.
provide instead that the general rule of §1.679-1 does not
apply to any transfer of property to a foreign trust that is
described in section 501(c)(3). However, taxpayers should be aware
that, under Notice 97-34 (1997-1 C.B. 422), the U.S. transferor has
a reporting obligation on Form 3520 with respect to such a transfer,
unless the foreign trust has received a ruling or determination
letter from the IRS recognizing the trust's tax exempt status under
section 501(c)(3). Moreover, if the IRS subsequently determines that
the foreign trust is not described in section 501(c)(3), the
exception will not apply for any taxable year of the U.S.
transferor, and the U.S. transferor may be subject to interest and
penalties, if applicable.

Clarification Regarding Section 958

The final regulations clarify the language of §1.958-1(b) of
the proposed regulations with respect to persons who are treated as
owners under sections 671 through 679 of any portion of a foreign
trust that includes the stock of a foreign corporation.

Special Analyses

It has been determined that this Treasury decision 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. Therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.

Drafting Information

The principal author of these final 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. Adoption of Amendments to
the Regulations

Accordingly, 26 CFR part 1 is 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 1.679-0, 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:

§1.679-0 Outline of major topics.
This section lists the major paragraphs contained in
§§1.679-1 through 1.679-7 as follows:
§1.679-1 U.S. transferor treated as owner of foreign trust.

(a) In general.

(b) Interaction with sections 673 through 678.

(c) Definitions.

(1) U.S. transferor.

(2) U.S. person.

(3) Foreign trust.

(4) Property.

(5) Related person.

(6) Obligation.

(d) Examples.
§1.679-2 Trusts treated as having a U.S. beneficiary.

(a) Existence of U.S. beneficiary.

(1) In general.

(2) Benefit to a U.S. person
(i) In general.

(ii) Certain unexpected beneficiaries.

(iii) Examples.

(3) Changes in beneficiary's status.

(i) In general.

(ii) Examples.

(4) General rules.

(i) Records and documents.

(ii) Additional factors.

(iii) Examples.

(b) Indirect U.S. beneficiaries.

(1) Certain foreign entities.

(2) Other indirect beneficiaries.

(3) Examples.

(c) Treatment of U.S. transferor upon foreign trust's acquisition
or loss of U.S. beneficiary.

(1) Trusts acquiring a U.S. beneficiary.

(2) Trusts ceasing to have a U.S. beneficiary.

(3) Examples.
§1.679-3 Transfers.

(a) In general..14
(b) Transfers by certain trusts.

(1) In general.

(2) Example.

(c) Indirect transfers.

(1) Principal purpose of tax avoidance.

(2) Principal purpose of tax avoidance deemed to exist.

(3) Effect of disregarding intermediary.

(i) In general.

(ii) Special rule.

(iii) Effect on intermediary.

(4) Related parties.

(5) Examples.

(d) Constructive transfers.

(1) In general.

(2) Examples.

(e) Guarantee of trust obligations.

(1) In general.

(2) Amount transferred.

(3) Principal repayments.

(4) Guarantee.

(5) Examples.

(f) Transfers to entities owned by a foreign trust.

(1) General rule.

(2) Examples.
§1.679-4 Exceptions to general rule.

(a) In general.

(b) Transfers for fair market value.

(1) In general.

(2) Special rule.

(i) Transfers for partial consideration.

(ii) Example.

(c) Certain obligations not taken into account.

(d) Qualified obligations.

(1) In general.

(2) Additional loans.

(3) Obligations that cease to be qualified.

(4) Transfers resulting from failed qualified obligations.

(5) Renegotiated loans.

(6) Principal repayments.

(7) Examples.
§1.679-5 Pre-immigration trusts.

(a) In general.

(b) Special rules.

(1) Change in grantor trust status.

(2) Treatment of undistributed income.

(c) Examples.
§1.679-6 Outbound migrations of domestic trusts.

(a) In general.

(b) Amount deemed transferred.

(c) Example.
§1.679-7 Effective dates.

(a) In general.

(b) Special rules.
§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
§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 §§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 §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 §301.7701(b)-7(a) of this chapter.

(3) Foreign trust. Section 7701(a)(31)(B) defines the term foreign
trust. See also §301.7701-7 of this chapter.

(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
§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 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 §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.
§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 (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 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 by A. 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 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 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 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 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 673 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. §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..31

(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
qualified obligations of the trust, and the treatment of principal
repayments with respect to obligations of the trust that are not
qualified obligations, see §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
§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 §1.1275-1(b)) plus any accrued but
unpaid qualified stated interest (within the meaning of
§1.1273-1(c)).

(3) Principal repayments. If a U.S. person is treated under this
paragraph (e) 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 §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
§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. Transfer treated as transfer to trust. A
creates and funds FT, which is treated as having a U.S. beneficiary
under §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 §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
§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. Transfer treated as transfer to trust. The facts are the
same as in Example 1, except that FT is not treated as having a U.S.
beneficiary under §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 §1.679-1(a). For rules regarding the
recognition of gain on the transfer, see section 684.

Example 3. Transfer not treated as transfer to trust. 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. §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 described in section
501(c)(3) (without regard to the requirements of section 508(a));
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 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 §301.7701-4(c) of this
chapter, liquidating trusts described in §301.7701-4(d) of this
chapter, or environmental remediation trusts described in
§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), §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 §1.679- 1(c)
(5)) with respect to the foreign trust is for fair market value, any
obligation (as defined in §1.679-1(c)(6)) of the trust or a
related person (as defined in §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 §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 for the year of the transfer
and is paid within such period); when properly executed and filed,
such an agreement is deemed to be consented to for purposes of
§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 §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 §1.1275-1(b)) plus any accrued but unpaid qualified
stated interest (within the meaning of §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 transfer of funds to a
foreign trust 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 the examples, A and B are U.S. residents 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 §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, §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
§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 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, §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 §1.679-1(c)(5)) with respect to FT. Because B is not a
related person, the fair market value 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
§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, §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 §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
§1.1275-1(b)) plus any accrued but unpaid qualified stated
interest (within the meaning of §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. §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
directly or indirectly 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 years 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. §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 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)(30)(E) and §301.7701-7(d)(ii)
(A) of this chapter, 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. §1.679-7 Effective dates.

(a) In general. Except as provided in paragraph (b) of this section,
the rules of §§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 §1.679-4(c) and (d) apply
to an obligation issued after February 6, 1995, whether or not in
accordance with a pre-existing arrangement or understanding. For
purposes of the rules of §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 §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 §1.679-5 apply to persons whose residency
starting date is after August 7, 2000.

(3) The rules of §1.679-6 apply to trusts that become foreign
trusts after August 7, 2000. Par. 3. In §1.958-1, the first
sentence of paragraph (b) is revised to read as follows:
§1.958-1 Direct and indirect ownership of stock. 

* * * * *

(b) * * * For purposes of paragraph (a)(2) of this section, stock
owned, directly or indirectly, by or for a foreign corporation,
foreign partnership, foreign trust (within the meaning of section
7701(a)(31)) described in sections 671 through 679, or other foreign
trust or foreign estate (within the meaning of section 7701(a)(31))
shall be considered as being owned proportionately by its
shareholders, partners, grantors or other persons treated as owners
under sections 671 through 679 of any portion of the trust that
includes the stock, or beneficiaries, respectively. 

* * * * * * * *

§1.958-2 [Amended].Par. 4. In §1.958-2, paragraph (c)(1)
(ii)(b) is amended by removing the language "678" and adding "679"
in its place.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

Approved: July 9, 2001

Mark Weinberger
Assistant Secretary of the Treasury (Tax Policy)

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