Sec. 1.684-3 Exceptions to general rule of gain recognition.
(a) Transfers to grantor trusts. The general rule of gain recognition under section 1.684-1 shall not apply to any transfer of property by a U.S. person to a foreign trust to the extent that any person is treated as the owner of the trust under section 671. Section 1.684-2(e) provides rules regarding a subsequent change in the status of the trust.
(b) Transfers to charitable trusts. The general rule of gain recognition under section 1.684-1 shall not apply to any transfer of property to a foreign trust that is described in section 501(c)(3) (without regard to the requirements of section 508(a)).
(c) Certain transfers at death.
(1) Section 1014 basis. The general rule of gain recognition under §1.684-1 shall not apply to any transfer of property to a foreign trust or foreign estate or, in the case of a transfer of property by a U.S. transferor decedent dying in 2010, to a foreign trust, foreign estate, or a nonresident alien, by reason of death of the U.S. transferor, if the basis of the property in the hands of the transferee is determined under section 1014(a).
(2) Section 1022 basis election. For U.S. transferor decedents dying in 2010, the general rule of gain recognition under §1.684-1 shall apply to any transfer of property by reason of death of the U.S. transferor if the basis of the property in the hands of the foreign trust, foreign estate, or the nonresident alien individual is determined under section 1022. The gain on the transfer shall be calculated as set out under §1.684-1(a), except that adjusted basis will reflect any increases allocated to such property under section 1022.
(d) Transfers for fair market value to unrelated trusts. The general rule of gain recognition under section 1.684-1 shall not apply to any transfer of property for fair market value to a foreign trust that is not a related foreign trust as defined in section 1.679-1(c)(5). Section 1.671-2(e)(2)(ii) defines fair market value.
(e) Transfers to which section 1032 applies. The general rule of gain recognition under section 1.684-1 shall not apply to any transfer of stock (including treasury stock) by a domestic corporation to a foreign trust if the domestic corporation is not required to recognize gain on the transfer under section 1032.
(f) Certain distributions to trusts. For purposes of this section, a transfer does not include a distribution to a trust with respect to an interest held by such trust in an entity other than a trust or an interest in certain investment trusts described in section 301.7701-4(c) of this chapter, liquidating trusts described in section 301.7701-4(d) of this chapter, or environmental remediation trusts described in section 301.7701-4(e) of this chapter.
(g) Examples. The following examples illustrate the rules of this section. In all examples, A is a U.S. citizen and FT is a foreign trust. The examples are as follows:
Example 1. Transfer to owner trust. In 2001, A transfers property which has a fair market value of 1000X and an adjusted basis equal to 400X to FT. At the time of the transfer, FT has a U.S. beneficiary within the meaning of section 1.679-2, and A is treated as owning FT under section 679. Under paragraph (a) of this section, section 1.684-1 does not cause A to recognize gain at the time of the transfer. See section 1.684-2(e) for rules that may require A to recognize gain if the trust is no longer owned by A.
Example 2. Transfer of property at death: Basis determined under section 1014(a).
(i) The initial facts are the same as Example 1.
(ii) A dies on July 1, 2004. The fair market value at A's death of all property transferred to FT by A is 1500X. The basis in the property is 400X. A retained the power to revoke FT, thus, the value of all property owned by FT at A's death is includible in A's gross estate for U.S. estate tax purposes. Pursuant to paragraph (c) of this section, A is not required to recognize gain under section 1.684-1 because the basis of the property in the hands of the foreign trust is determined under section 1014(a).
Example 3. Transfer of property at death: Basis not determined under section 1014(a).
(i) The initial facts are the same as Example 1.
(ii) A dies on July 1, 2004. The fair market value at A's death of all property transferred to FT by A is 1500X. The basis in the property is 400X. A retains no power over FT, and FT's basis in the property transferred is not determined under section 1014(a). Under section 1.684-2(e)(1), A is treated as having transferred the property to FT immediately before his death, and must recognize 1100X of gain at that time under section 1.684-1.
Example 4. Transfer of property for fair market value to an unrelated foreign trust. A sells a house with a fair market value of 1000X to FT in exchange for a 30-year note issued by FT. A is not related to FT as defined in section 1.679-1(c)(5). FT is not treated as owned by any person. Pursuant to paragraph (d) of this section, A is not required to recognize gain under section 1.684-1.
[Added by T.D. 8956, 66 FR 37897-38902, July 20, 2001; amended by T.D. 9811, 82 FR 6235-6243, Jan. 19, 2017.]
