26 U.S.C. § 679 — Foreign trusts having one or more United

Page 1851 TITLE 26—INTERNAL REVENUE CODE § 679 1969—Subsec. (a)(1) to (3). Pub. L. 91–172, § 332(a)(1), in- serted ‘‘or the grantor’s spouse’’ after ‘‘the grantor’’ in pars. (1), (2), and (3). Subsec. (b). Pub. L. 91–172, § 332(a)(2), inserted ‘‘(other than the grantor’s spouse)’’ after ‘‘beneficiary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable with respect to transfers in trust made after Mar. 1, 1986, except for transfers pursuant to a certain binding property settle- ment agreement, see section 1402(c) of Pub. L. 99–514, set out as a note under section 673 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Pub. L. 91–172, title III, § 332(b), Dec. 30, 1969, 83 Stat. 599, provided that: ‘‘The amendments made by sub- section (a) [amending this section] shall apply in re- spect of property transferred in trust after October 9, 1969.’’ § 678. Person other than grantor treated as sub- stantial owner (a) General rule A person other than the grantor shall be treat- ed as the owner of any portion of a trust with re- spect to which: (1) such person has a power exercisable sole- ly by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially re- leased or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sec- tions 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof. (b) Exception where grantor is taxable Subsection (a) shall not apply with respect to a power over income, as originally granted or thereafter modified, if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provi- sions of this subpart other than this section. (c) Obligations of support Subsection (a) shall not apply to a power which enables such person, in the capacity of trustee or cotrustee, merely to apply the income of the trust to the support or maintenance of a person whom the holder of the power is obli- gated to support or maintain except to the ex- tent that such income is so applied. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income of the taxable year, such amounts shall be con- sidered to be an amount paid or credited within the meaning of paragraph (2) of section 661(a) and shall be taxed to the holder of the power under section 662. (d) Effect of renunciation or disclaimer Subsection (a) shall not apply with respect to a power which has been renounced or disclaimed within a reasonable time after the holder of the power first became aware of its existence. (e) Cross reference For provision under which beneficiary of trust is treated as owner of the portion of the trust which consists of stock in an S corporation, see section 1361(d). (Aug. 16, 1954, ch. 736, 68A Stat. 231; Pub. L. 94–455, title X, § 1013(b), Oct. 4, 1976, 90 Stat. 1615; Pub. L. 97–448, title I, § 102(i)(2), Jan. 12, 1983, 96 Stat. 2373; Pub. L. 106–554, § 1(a)(7) [title III, § 319(8)(A)], Dec. 21, 2000, 114 Stat. 2763, 2763A–646.) Editorial Notes AMENDMENTS 2000—Subsec. (e). Pub. L. 106–554 substituted ‘‘an S corporation’’ for ‘‘an electing small business corpora- tion’’. 1983—Subsec. (e). Pub. L. 97–448 added subsec. (e). 1976—Subsec. (b). Pub. L. 94–455 substituted ‘‘if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of this subpart other than this section’’ for ‘‘if the grantor of the trust is otherwise treated as the owner under sections 671 to 677, inclusive’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1983 AMENDMENT Amendment by Pub. L. 97–448 effective, except as oth- erwise provided, as if it had been included in the provi- sion of the Economic Recovery Tax Act of 1981, Pub. L. 97–34, to which such amendment relates, see section 109 of Pub. L. 97–448, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment by Pub. L. 94–455, see section 1013(f)(1) of Pub. L. 94–455, set out as an Ef- fective Date note under section 679 of this title. § 679. Foreign trusts having one or more United States beneficiaries (a) Transferor treated as owner (1) In general A United States person who directly or indi- rectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)) shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust. (2) Exceptions Paragraph (1) shall not apply— (A) Transfers by reason of death To any transfer by reason of the death of the transferor. (B) Transfers at fair market value To any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred prop- erty. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value. (3) Certain obligations not taken into account under fair market value exception (A) In general In determining whether paragraph (2)(B) applies to any transfer by a person described in clause (ii) or (iii) of subparagraph (C), there shall not be taken into account— (i) except as provided in regulations, any obligation of a person described in sub- paragraph (C), and (ii) to the extent provided in regulations, any obligation which is guaranteed by a person described in subparagraph (C). Page 1852 TITLE 26—INTERNAL REVENUE CODE § 679 (B) Treatment of principal payments on obli- gation Principal payments by the trust on any obligation referred to in subparagraph (A) shall be taken into account on and after the date of the payment in determining the por- tion of the trust attributable to the property transferred. (C) Persons described The persons described in this subparagraph are— (i) the trust, (ii) any grantor, owner, or beneficiary of the trust, and (iii) any person who is related (within the meaning of section 643(i)(2)(B)) to any grantor, owner, or beneficiary of the trust. (4) Special rules applicable to foreign grantor who later becomes a United States person (A) In general If a nonresident alien individual has a resi- dency starting date within 5 years after di- rectly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual trans- ferred to such trust on the residency start- ing date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer. (B) Treatment of undistributed income For purposes of this section, undistributed net income for periods before such individ- ual’s residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into ac- count. (C) Residency starting date For purposes of this paragraph, an individ- ual’s residency starting date is the residency starting date determined under section 7701(b)(2)(A). (5) Outbound trust migrations If— (A) an individual who is a citizen or resi- dent of the United States transferred prop- erty to a trust which was not a foreign trust, and (B) such trust becomes a foreign trust while such individual is alive, then this section and section 6048 shall be ap- plied as if such individual transferred to such trust on the date such trust becomes a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to such trust. A rule similar to the rule of paragraph (4)(B) shall apply for purposes of this paragraph. (b) Trusts acquiring United States beneficiaries If— (1) subsection (a) applies to a trust for the transferor’s taxable year, and (2) subsection (a) would have applied to the trust for his immediately preceding taxable year but for the fact that for such preceding taxable year there was no United States bene- ficiary for any portion of the trust, then, for purposes of this subtitle, the transferor shall be treated as having income for the tax- able year (in addition to his other income for such year) equal to the undistributed net in- come (at the close of such immediately pre- ceding taxable year) attributable to the portion of the trust referred to in subsection (a). (c) Trusts treated as having a United States ben- eficiary (1) In general For purposes of this section, a trust shall be treated as having a United States beneficiary for the taxable year unless— (A) under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States per- son, and (B) if the trust were terminated at any time during the taxable year, no part of the income or corpus of such trust could be paid to or for the benefit of a United States per- son. For purposes of subparagraph (A), an amount shall be treated as accumulated for the benefit of a United States person even if the United States person’s interest in the trust is contin- gent on a future event. (2) Attribution of ownership For purposes of paragraph (1), an amount shall be treated as paid or accumulated to or for the benefit of a United States person if such amount is paid to or accumulated for a foreign corporation, foreign partnership, or foreign trust or estate, and— (A) in the case of a foreign corporation, such corporation is a controlled foreign cor- poration (as defined in section 957(a)), (B) in the case of a foreign partnership, a United States person is a partner of such partnership, or (C) in the case of a foreign trust or estate, such trust or estate has a United States ben- eficiary (within the meaning of paragraph (1)). (3) Certain United States beneficiaries dis- regarded A beneficiary shall not be treated as a United States person in applying this section with respect to any transfer of property to for- eign trust if such beneficiary first became a United States person more than 5 years after the date of such transfer. (4) Special rule in case of discretion to identify beneficiaries For purposes of paragraph (1)(A), if any per- son has the discretion (by authority given in the trust agreement, by power of appointment, or otherwise) of making a distribution from the trust to, or for the benefit of, any person, such trust shall be treated as having a bene- ficiary who is a United States person unless— (A) the terms of the trust specifically iden- tify the class of persons to whom such dis- tributions may be made, and Page 1853 TITLE 26—INTERNAL REVENUE CODE § 679 (B) none of those persons are United States persons during the taxable year. (5) Certain agreements and understandings treated as terms of the trust For purposes of paragraph (1)(A), if any United States person who directly or indi- rectly transfers property to the trust is di- rectly or indirectly involved in any agreement or understanding (whether written, oral, or otherwise) that may result in the income or corpus of the trust being paid or accumulated to or for the benefit of a United States person, such agreement or understanding shall be treated as a term of the trust. (6) Uncompensated use of trust property treat- ed as a payment For purposes of this subsection, a loan of cash or marketable securities (or the use of any other trust property) directly or indi- rectly to or by any United States person (whether or not a beneficiary under the terms of the trust) shall be treated as paid or accu- mulated for the benefit of a United States per- son. The preceding sentence shall not apply to the extent that the United States person re- pays the loan at a market rate of interest (or pays the fair market value of the use of such property) within a reasonable period of time. (d) Presumption that foreign trust has United States beneficiary If a United States person directly or indirectly transfers property to a foreign trust (other than a trust described in section 6048(a)(3)(B)(ii)), the Secretary may treat such trust as having a United States beneficiary for purposes of apply- ing this section to such transfer unless such per- son— (1) submits such information to the Sec- retary as the Secretary may require with re- spect to such transfer, and (2) demonstrates to the satisfaction of the Secretary that such trust satisfies the require- ments of subparagraphs (A) and (B) of sub- section (c)(1). (e) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 94–455, title X, § 1013(a), Oct. 4, 1976, 90 Stat. 1614; amended Pub. L. 96–603, § 2(b), Dec. 28, 1980, 94 Stat. 3509; Pub. L. 104–188, title I, § 1903(a)–(f), Aug. 20, 1996, 110 Stat. 1909, 1910; Pub. L. 105–34, title XVI, § 1601(i)(2), Aug. 5, 1997, 111 Stat. 1093; Pub. L. 105–206, title VI, § 6018(g), July 22, 1998, 112 Stat. 823; Pub. L. 111–147, title V, §§ 531, 532(a), 533(c), Mar. 18, 2010, 124 Stat. 113, 114.) Editorial Notes AMENDMENTS 2010—Subsec. (c)(1). Pub. L. 111–147, § 531(a), inserted concluding provisions. Subsec. (c)(4), (5). Pub. L. 111–147, § 531(b), (c), added pars. (4) and (5). Subsec. (c)(6). Pub. L. 111–147, § 533(c), added par. (6). Subsecs. (d), (e). Pub. L. 111–147, § 532(a), added subsec. (d) and redesignated former subsec. (d) as (e). 1998—Subsec. (a)(1). Pub. L. 105–206 provided that the amendment made by section 1903(b) of Pub. L. 104–188 shall be applied as if ‘‘or’’ in the material proposed to be stricken were capitalized. See 1996 Amendment note below. 1997—Subsec. (a)(3)(C)(ii), (iii). Pub. L. 105–34 inserted ‘‘, owner,’’ after ‘‘grantor’’. 1996—Subsec. (a)(1). Pub. L. 104–188, § 1903(b), which di- rected that subsec. (a) of this section be amended by substituting ‘‘section 6048(a)(3)(B)(ii)’’ for ‘‘section 404(a)(4) or 404A’’, was executed to par. (1) by making the substitution for ‘‘section 404(a)(4) Or section 404A’’ to reflect the probable intent of Congress. See 1998 Amendment note above. Subsec. (a)(2)(B). Pub. L. 104–188, § 1903(a)(1), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘TRANSFERS WHERE GAIN IS RECOGNIZED TO TRANSFEROR.—To any sale or exchange of the prop- erty at its fair market value in a transaction in which all of the gain to the transferor is realized at the time of the transfer and is recognized either at such time or is returned as provided in section 453.’’ Subsec. (a)(3). Pub. L. 104–188, § 1903(a)(2), added par. (3). Subsec. (a)(4), (5). Pub. L. 104–188, § 1903(c), added pars. (4) and (5). Subsec. (c)(2)(A). Pub. L. 104–188, § 1903(e), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘in the case of a foreign corporation, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of such corporation is owned (within the meaning of section 958(a)) or is considered to be owned (within the meaning of section 958(b)) by United States shareholders (as de- fined in section 951(b)),’’. Subsec. (c)(3). Pub. L. 104–188, § 1903(d), added par. (3). Subsec. (d). Pub. L. 104–188, § 1903(f), added subsec. (d). 1980—Subsec. (a)(1). Pub. L. 96–603 inserted ‘‘Or sec- tion 404A’’ after ‘‘section 404(a)(4)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2010 AMENDMENT Pub. L. 111–147, title V, § 532(b), Mar. 18, 2010, 124 Stat. 114, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply to transfers of property after the date of the enactment of this Act [Mar. 18, 2010].’’ Amendment by section 533(c) of Pub. L. 111–147 appli- cable to loans made, and uses of property, after Mar. 18, 2010, see section 533(e) of Pub. L. 111–147, set out as a note under section 643 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by section 6018 of Pub. L. 105–206 effec- tive as if included in the provisions of the Small Busi- ness Job Protection Act of 1996, Pub. L. 104–188, to which such amendment relates, see section 6018(h) of Pub. L. 105–206, set out as a note under section 23 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which it relates, see sec- tion 1601(j) of Pub. L. 105–34, set out as a note under section 23 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title I, § 1903(g), Aug. 20, 1996, 110 Stat. 1910, provided that: ‘‘The amendments made by this section [amending this section] shall apply to transfers of property after February 6, 1995.’’ EFFECTIVE DATE OF 1980 AMENDMENT Amendment by Pub. L. 96–603 applicable with respect to employer contributions or accruals for taxable years beginning after Dec. 31, 1979, election to apply amend- ments retroactively with respect to foreign subsidi- aries, allowance or prior deductions in case of certain Page 1854 TITLE 26—INTERNAL REVENUE CODE § 681 funded branch plans, and time and manner for making elections, see section 2(e) of Pub. L. 96–603, set out as an Effective Date note under section 404A of this title. EFFECTIVE DATE Pub. L. 94–455, title X, § 1013(f)(1), Oct. 4, 1976, 90 Stat. 1616, provided that: ‘‘The amendments made by this section (other than subsection (c)) [enacting this sec- tion and amending sections 643, 678, 6048, and 6678 of this title] shall apply to taxable years ending after De- cember 31, 1975, but only in the case of— ‘‘(A) foreign trusts created after May 21, 1974, and ‘‘(B) transfers of property to foreign trusts after May 21, 1974.’’ SUBPART F—MISCELLANEOUS Sec. 681. Limitation on charitable deduction. [682. Repealed.] 683. Use of trust as an exchange fund. 684. Recognition of gain on certain transfers to certain foreign trusts and estates. 685. Treatment of funeral trusts. Editorial Notes AMENDMENTS 2017—Pub. L. 115–97, title I, § 11051(b)(1)(C), Dec. 22, 2017, 131 Stat. 2089, struck out item 682 ‘‘Income of an estate or trust in case of divorce, etc.’’ 2010—Pub. L. 111–312, title III, § 301(a), Dec. 17, 2010, 124 Stat. 3300, amended analysis to read as if amend- ment by Pub. L. 107–16, § 542(e)(1)(D), had never been en- acted. See 2001 Amendment note below. 2001—Pub. L. 107–16, title V, § 542(e)(1)(D), June 7, 2001, 115 Stat. 85, inserted ‘‘and nonresident aliens’’ after ‘‘estates’’ in item 684. 1997—Pub. L. 105–34, title XI, § 1131(c)(6), title XIII, § 1309(b), Aug. 5, 1997, 111 Stat. 980, 1043, added items 684 and 685. 1976—Pub. L. 94–455, title XXI, § 2131(e)(2), Oct. 4, 1976, 90 Stat. 1924, substituted ‘‘Use of trust as an exchange fund’’ for ‘‘Applicability of provisions’’ in item 683. § 681. Limitation on charitable deduction (a) Trade or business income In computing the deduction allowable under section 642(c) to a trust, no amount otherwise allowable under section 642(c) as a deduction shall be allowed as a deduction with respect to income of the taxable year which is allocable to its unrelated business income for such year. For purposes of the preceding sentence, the term ‘‘unrelated business income’’ means an amount equal to the amount which, if such trust were exempt from tax under section 501(a) by reason of section 501(c)(3), would be computed as its un- related business taxable income under section 512 (relating to income derived from certain business activities and from certain property ac- quired with borrowed funds). (b) Cross reference For disallowance of certain charitable, etc., deduc- tions otherwise allowable under section 642(c), see sections 508(d) and 4948(c)(4). (Aug. 16, 1954, ch. 736, 68A Stat. 232; Pub. L. 90–630, § 6(b), Oct. 22, 1968, 82 Stat. 1330; Pub. L. 91–172, title I, §§ 101(j)(18), (19), 121(d)(2)(B), Dec. 30, 1969, 83 Stat. 528, 547.) Editorial Notes AMENDMENTS 1969—Subsec. (a). Pub. L. 91–172, § 121(d)(2)(B), sub- stituted reference to certain property acquired with borrowed funds for reference to certain leases. Subsec. (b). Pub. L. 91–172, § 101(j)(18), (19), redesig- nated subsec. (d) as (b) and substituted ‘‘sections 518(d) and 4948(c)(4)’’ for ‘‘section 503(e)’’. Former subsec. (b), dealing generally with the operation of trusts, was struck out. Subsec. (c). Pub. L. 91–172, § 101(j)(18), struck out sub- sec. (c) dealing with accumulated income. Subsec. (d). Pub. L. 91–172, § 101(j)(19), redesignated subsec. (d) as (b). 1968—Subsec. (c). Pub. L. 90–630 inserted provision that par. (1) does not apply to income attributable to property transferred to a trust before January 1, 1951, by the creator thereof if the trust was irrevocable on such date and if the income is required to be accumu- lated pursuant to the mandatory terms of the instru- ment creating the trust. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1969 AMENDMENT Amendment by section 101(j)(18), (19) of Pub. L. 91–172 effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91–172, set out as an Effective Date note under section 4940 of this title. Amendment by section 121(d)(2)(B) of Pub. L. 91–172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91–172, set out as a note under section 511 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Pub. L. 90–630, § 6(c), Oct. 22, 1968, 82 Stat. 1330, pro- vided that: ‘‘The amendments made by subsection (a) [amending section 504 of this title] and (b) [amending this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after Au- gust 16, 1954. For purposes of sections 3814 and 162(g)(4) of the Internal Revenue Code of 1939, provisions having the same effect as such amendments shall be treated as included in such sections effective with respect to tax- able years beginning after December 31, 1950.’’ [§ 682. Repealed. Pub. L. 115–97, title I, § 11051(b)(1)(C), Dec. 22, 2017, 131 Stat. 2089] Section, Aug. 16, 1954, ch. 736, 68A Stat. 234; Pub. L. 98–369, div. A, title IV, § 422(d)(2), July 18, 1984, 98 Stat. 798, related to income of an estate or trust in case of di- vorce. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable to any divorce or separation instru- ment (as defined in former section 71(b)(2) of this title as in effect before Dec. 22, 2017) executed after Dec. 31, 2018, and to such instruments executed on or before Dec. 31, 2018, and modified after Dec. 31, 2018, if the modification expressly provides that the amendment made by section 11051 of Pub. L. 115–97 applies to such modification, see section 11051(c) of Pub. L. 115–97, set out as an Effective Date of 2017 Amendment note under section 61 of this title. § 683. Use of trust as an exchange fund (a) General rule Except as provided in subsection (b), if prop- erty is transferred to a trust in exchange for an interest in other trust property and if the trust would be an investment company (within the meaning of section 351) if it were a corporation, then gain shall be recognized to the transferor. (b) Exception for pooled income funds Subsection (a) shall not apply to any transfer to a pooled income fund (within the meaning of section 642(c)(5)). (Aug. 16, 1954, ch. 736, 68A Stat. 235; Pub. L. 94–455, title XXI, § 2131(e)(1), Oct. 4, 1976, 90 Stat. 1924.)