Sec. 1.684-2 Transfers.

Example 1. Principal purpose of tax avoidance. A creates and funds FT for the benefit of A's cousin, who is a nonresident alien. FT has no U.S. beneficiary within the meaning of section 1.679-2, and no person is treated as owning any portion of FT. In 2004, A decides to transfer additional property with a fair market value of 1000X and an adjusted basis of 600X to FT. Pursuant to a plan with a principal purpose of avoiding the application of section 684, A transfers the property to I. I subsequently transfers the property to FT. Under paragraph (b) of this section and section 1.679-3(c), A is treated as having transferred the property to FT.

Example 2. U.S. person unable to demonstrate that intermediary acted independently. A creates and funds FT for the benefit of A's cousin, who is a nonresident alien. FT has no U.S. beneficiary within the meaning of section 1.679-2, and no person is treated as owning any portion of FT. On July 1, 2004, A transfers property with a fair market value of 1000X and an adjusted basis of 300X to I, a foreign person. On January 1, 2007, at a time when the fair market value of the property is 1100X, I transfers the property to FT. A is unable to demonstrate to the satisfaction of the Commissioner, under section 1.679-3(c)(2)(ii), that I acted independently of A in making the transfer to FT. Under paragraph (b) of this section and section 1.679-3(c), A is treated as having transferred the property to FT. Under paragraph (b) of this section and section 1.679-3(c)(3), I is treated as an agent of A, and the transfer is deemed to have been made on January 1, 2007. Under section 1.684-1(a), A recognizes gain equal to 800X on that date.

Example 1. Transfer by a domestic trust. On January 1, 2001, A transfers property which has a fair market value of 1000X and an adjusted basis of 200X to DT. A retains the power to revoke DT. On January 1, 2003, DT transfers property which has a fair market value of 500X and an adjusted basis of 100X to FT. At the time of the transfer, FT has no U.S. beneficiary as defined in section 1.679-2 and no person is treated as owning any portion of FT. A is treated as having transferred the property to FT and is required to recognize gain of 400X, under section 1.684-1, at the time of the transfer by DT to FT.

Example 2. Transfer by a foreign trust. On January 1, 2001, A transfers property which has a fair market value of 1000X and an adjusted basis of 200X to FT1. At the time of the transfer, FT1 has a U.S. beneficiary as defined in section 1.679-2 and A is treated as the owner of FT1 under section 679. On January 1, 2003, FT1 transfers property which has a fair market value of 500X and an adjusted basis of 100X to FT2. At the time of the transfer, FT2 has no U.S. beneficiary as defined in section 1.679-2 and no person is treated as owning any portion of FT2. A is treated as having transferred the property to FT2 and is required to recognize gain of 400X, under section 1.684-1, at the time of the transfer by FT1 to FT2.

Example 1. Loss of U.S. beneficiary. (i) On January 1, 2001, A transfers property, which has a fair market value of 1000X and an adjusted basis of 400X, to FT. At the time of the transfer, FT has a U.S. beneficiary within the meaning of section 1.679-2, and A is treated as owning FT under section 679. Under section 1.684-3(a), section 1.684-1 does not cause A to recognize gain at the time of the transfer.

(ii) On July 1, 2003, FT ceases to have a U.S. beneficiary as defined in section 1.679-2(c) and as of that date neither A nor any other person is treated as owning any portion of FT. Pursuant to section 1.679-2(c)(2), if FT ceases to be treated as having a U.S. beneficiary, A will cease to be treated as owner of FT beginning on the first day of the first taxable year following the last taxable year in which there was a U.S. beneficiary. Thus, on January 1, 2004, A ceases to be treated as owner of FT. On that date, the fair market value of the property is 1200X and the adjusted basis is 350X. Under paragraph (e)(1) of this section, A is treated as having transferred the property to FT on January 1, 2004, and must recognize 850X of gain at that time under section 1.684-1.

Example 2. Death of grantor. (i) The initial facts are the same as in paragraph (i) of Example 1.

(ii) On July 1, 2003, A dies, and as of that date no other person is treated as the owner of FT. On that date, the fair market value of the property is 1200X, and its adjusted basis equals 350X. Under paragraph (e)(1) of this section, A is treated as having transferred the property to FT immediately before his death, and generally is required to recognize 850X of gain at that time under section 1.684-1. However, an exception may apply under section 1.684-3(c).

Example 3. Release of a power. (i) On January 1, 2001, A transfers property that has a fair market value of 500X and an adjusted basis of 200X to FT. At the time of the transfer, FT does not have a U.S. beneficiary within the meaning of section 1.679-2. However, A retains the power to revoke the trust. A is treated as the owner of the trust under section 676 and, therefore, under section 1.684-3(a), A is not required to recognize gain under section 1.684-1 at the time of the transfer.

(ii) On January 1, 2007, A releases the power to revoke the trust and, as of that date, neither A nor any other person is treated as owning any portion of FT. On that date, the fair market value of the property is 900X, and its adjusted basis is 200X. Under paragraph (e)(1) of this section, A is treated as having transferred the property to FT on January 1, 2007, and must recognize 700X of gain at that time.