§644. Special rule for gain on property transferred to trust at less than fair market value

(a) Imposition of tax

(1) In general

If-

(A) a trust (or another trust to which the property is distributed) sells or exchanges property at a gain not more than 2 years after the date of the initial transfer of the property in trust by the transferor, and

(B) the fair market value of such property at the time of the initial transfer in trust by the transferor exceeds the adjusted basis of such property immediately after such transfer,

there is hereby imposed a tax determined in accordance with paragraph (2) on the includible gain recognized on such sale or exchange.

(2) Amount of tax

The amount of the tax imposed by paragraph (1) on any includible gain recognized on the sale or exchange of any property shall be equal to the sum of-

(A) the excess of-

(i) the tax which would have been imposed under this chapter for the taxable year of the transferor in which the sale or exchange of such property occurs had the amount of the includible gain recognized on such sale or exchange, reduced by any deductions properly allocable to such gain, been included in the gross income of the transferor for such taxable year, over

(ii) the tax actually imposed under this chapter for such taxable year on the transferor, plus

(B) if such sale or exchange occurs in a taxable year of the transferor which begins after the beginning of the taxable year of the trust in which such sale or exchange occurs, an amount equal to the amount determined under subparagraph (A) multiplied by the underpayment rate established under section 6621.

The determination of tax under clause (i) of subparagraph (A) shall be made by not taking into account any carryback, and by not taking into account any loss or deduction to the extent that such loss or deduction may be carried by the transferor to any other taxable year.

(3) Taxable year for which tax imposed

The tax imposed by paragraph (1) shall be imposed for the taxable year of the trust which begins with or within the taxable year of the transferor in which the sale or exchange occurs.

(4) Tax to be in addition to other taxes

The tax imposed by this subsection for any taxable year of the trust shall be in addition to any other tax imposed by this chapter for such taxable year.

(b) Definition of includible gain

For purposes of this section, the term "includible gain" means the lesser of-

(1) the gain recognized by the trust on the sale or exchange of any property, or

(2) the excess of the fair market value of such property at the time of the initial transfer in trust by the transferor over the adjusted basis of such property immediately after such transfer.

(c) Character of includible gain

For purposes of subsection (a)-

(1) The character of the includible gain shall be determined as if the property had actually been sold or exchanged by the transferor, and any activities of the trust with respect to the sale or exchange of the property shall be deemed to be activities of the transferor, and

(2) the portion of the includible gain subject to the provisions of section 1245 and section 1250 shall be determined in accordance with regulations prescribed by the Secretary.

(d) Special rules

(1) Short sales

If the trust sells the property referred to in subsection (a) in a short sale within the 2-year period referred to in such subsection, such 2-year period shall be extended to the date of the closing of such short sale.

(2) Substituted basis property

For purposes of this section, in the case of any property held by the trust which has a basis determined in whole or in part by reference to the basis of any other property which was transferred to the trust-

(A) the initial transfer of such property in trust by the transferor shall be treated as having occurred on the date of the initial transfer in trust of such other property,

(B) subsections (a)(1)(B) and (b)(2) shall be applied by taking into account the fair market value and the adjusted basis of such other property, and

(C) the amount determined under subsection (b)(2) with respect to such other property shall be allocated (under regulations prescribed by the Secretary) among such other property and all properties held by the trust which have a basis determined in whole or in part by reference to the basis of such other property.

(e) Exceptions

Subsection (a) shall not apply to property-

(1) acquired by the trust from a decedent or which passed to a trust from a decedent (within the meaning of section 1014), or

(2) acquired by a pooled income fund (as defined in section 642(c)(5)), or

(3) acquired by a charitable remainder annuity trust (as defined in section 664(d)(1)) or a charitable remainder unitrust (as defined in sections 664(d)(2) and (3)), or

(4) if the sale or exchange of the property occurred after the death of the transferor.

(f) Special rule for installment sales

If the trust reports income under section 453 on any sale or exchange to which subsection (a) applies, under regulations prescribed by the Secretary-

(1) subsection (a) (other than the 2-year requirement of paragraph (1)(A) thereof) shall be applied as if each installment were a separate sale or exchange of property to which such subsection applies, and

(2) the term "includible gain" shall not include any portion of an installment received by the trust after the death of the transferor.

(Added Pub. L. 94–455, title VII, §701(e)(1), Oct. 4, 1976, 90 Stat. 1578 ; amended Pub. L. 95–600, title VII, §701(p)(1)–(3), Nov. 6, 1978, 92 Stat. 2908 ; Pub. L. 96–471, §2(b)(4), Oct. 19, 1980, 94 Stat. 2254 ; Pub. L. 99–514, title XV, §1511(c)(5), Oct. 22, 1986, 100 Stat. 2745 .)

Amendments

1986-Subsec. (a)(2)(B). Pub. L. 99–514 substituted "the underpayment rate established under section 6621" for "the annual rate established under section 6621".

1980-Subsec. (f). Pub. L. 96–471 substituted "reports income under section 453" for "elects to report income under section 453".

1978-Subsec. (a)(1). Pub. L. 95–600, §701(p)(1)(A), substituted "gain recognized" for "gain realized".

Subsec. (a)(2). Pub. L. 95–600, §701(p)(1)(A), (2), substituted in introductory text and subpar. (A)(i) "gain recognized" for "gain realized" and provided that the determination of tax under cl. (i) of subpar. (A) shall be made by not taking into account any carryback, and by not taking into account any loss or deduction to the extent that such loss or deduction may be carried by the transferor to any other taxable year.

Subsec. (b)(1). Pub. L. 95–600, §701(p)(1)(A), substituted "gain recognized" for "gain realized".

Subsec. (d). Pub. L. 95–600, §701(p)(1)(B), substituted "Special rules" for "Special rule for short sales" in heading, designated existing provisions as par. (1) with "Short sales" heading, and added par. (2).

Subsec. (f)(1). Pub. L. 95–600, §701(p)(3), inserted "(other than the 2-year requirement of paragraph (1)(A) thereof)" after "subsection (a)".

Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 applicable for purposes of determining interest for periods after Dec. 31, 1986, see section 1511(d) of Pub. L. 99–514, set out as a note under section 47 of this title.

Effective Date of 1980 Amendment

For effective date of amendment by Pub. L. 96–471, see section 6(a)(1) of Pub. L. 96–471, set out as an Effective Date note under section 453 of this title.

Effective Date of 1978 Amendment

Section 701(p)(5) of Pub. L. 95–600 provided that:

"(A) Except as provided in subparagraph (B), the amendment made by this subsection [amending this section] shall apply to transfers in trust made after May 21, 1976.

"(B) The amendment made by paragraph (4) [repealing section 1402(b)(1)(K) of Pub. L. 94–455, see Repeals note below] shall take effect on October 4, 1976."

Effective Date

Section applicable to transfers in trust made after May 21, 1976, see section 701(h) of Pub. L. 94–455, set out as an Effective of 1976 Amendment note under section 667 of this title.

Repeals

Section 1402(b)(1)(K) of Pub. L. 94–455, which directed an amendment of this section that was incapable of being executed to the text, was repealed by section 701(p)(4) of Pub. L. 95–600, Nov. 6, 1978, 92 Stat. 2909 .

Section Referred to in Other Sections

This section is referred to in sections 1, 641, 6103 of this title.