SECTION 7. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been submitted to the Office of Management and Bud

fied revocable trusts as defined in section 645(b)(1), as well as to trusts that would have been included in the decedent’s gross estate for federal estate tax purposes under section 2036, 2037, or 2038 had the decedent’s executor not made the Section 1022 Election.

The provisions of section 1040, however, do not apply to the distribution of property that constitutes the right to receive an item of IRD in satisfaction of a pecuniary bequest.

(6) Sale or Exchange Treatment of Transfers to Nonresident Aliens . Section 684, enacted in 1997, generally provides that any transfer of property by a United States person to a foreign estate or trust (except to the extent that a person is treated as the owner of the trust under section 671) is treated as a sale or exchange of such property, and requires the transferor to recognize gain in the amount of any excess of the FMV of the property at the time of the transfer over the transferor’s adjusted basis in the property. For transfers of property occurring on the death of a decedent whose executor makes the Section 1022 Election, this provision also applies to transfers of property by United States persons to nonresident aliens.

The existing regulations provide an exception to the general rule of taxation under section 684 in the case of a transfer of property by reason of the death of a United States transferor, but only if the basis of such property in the hands of the recipient is determined under section 1014(a). Section 1.684–3(c). If the recipient’s basis in such property is not determined under section 1014(a), section 684 continues to apply, and the United States transferor is treated as having transferred the property immediately before death and is required to recognize the built in gain in the property transferred at that time. Section 1.684–3(g), Example 3 . For purposes of applying section 684 to transfers of property by reason of the death of a United States person in 2010 whose executor makes the Section 1022 Election, the question has arisen as to whether (1) section 684 applies prior to section 1022, with the effect of treating the transfer as a sale for FMV before any Basis Increase may be allocated to the property, or (2) whether the executor’s allocation of Basis Increase is deemed to increase the recipient’s basis in the property before the

amount of any unrecognized gain taxable under section 684 is determined.

If the property is owned by and acquired from the decedent, the executor’s allocation of Basis Increase will be deemed to occur prior to the application of section 684. Specifically, in determining the adjusted basis of the property in the hands of the decedent under section 684(a)(2), any allocation of Basis Increase shall be deemed to occur prior to the computation of gain under section 684. Thus, the amount of gain recognized under section 684 on the transfer may be reduced or even eliminated if sufficient Basis Increase is allocated to such property.

However, if the property transferred is not owned by the decedent at death, then no Basis Increase may be allocated to the property, and the decedent will be required to recognize all of the unrealized gain in the property transferred to the foreign estate or trust or to the nonresident alien as provided in section 684.

The provisions of this section 4.06(6) are illustrated by the following examples:

Example 12 . D, a United States citizen, acquired stock in 1984 for $1,000 that had a FMV of $30,000 on D’s date of death in 2010. D bequeathed the stock to D’s brother (N), a nonresident alien. The executor of D’s estate made the Section 1022 Election, and, therefore, may allocate General Basis Increase of up to $29,000 to this stock. Such an allocation of basis will be deemed to have occurred prior to the deemed sale under section 684. Accordingly, if the executor allocates $29,000 of General Basis Increase to the stock, then D will recognize zero gain on D’s final Form 1040 under section 684 on the bequest of the stock to N.

Example 13 . D, a United States citizen, acquired real property located in the United States in 1984 for $1,000,000 that had a FMV of $10,000,000 on D’s date of death in 2010. D’s executor made the Section 1022 Election. D’s will devised the real property to D’s brother (N), a nonresident alien. Assuming that the General Basis Increase available to the executor of D’s estate for allocation is $1,300,000, the executor may allocate up to the entire amount of General Basis Increase to this property. Such an allocation will be deemed to have occurred prior to the deemed sale under section 684. Accordingly, if the executor allocates $1,300,000 of General Basis Increase to this property, D will recognize gain on D’s final Form 1040 under section 684 in the amount of $7,700,000 ($10,000,000 of FMV less $2,300,000 of basis) on the devise of the property to N.

Example 14 . In 2005, D, a United States citizen, transferred securities with a FMV of $5,000 and an adjusted basis of $1,000 to a foreign trust (FT). The income from FT was payable to D during D’s life, but D retained no other right to and no power over FT. At all times after the 2005 transfer through D’s death, FT has a United States beneficiary, D (within the meaning of section 679(c)), and D was treated

2011–35 I.R.B. 195 August 29, 2011

as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103.