Grantor Trust 26 CFR 1.671-1 - Grantors and others treated as substantial owners; scope.
§ 1.671-1
Grantors and others treated as substantial owners; scope.
(a) Subpart E (section 671 and following),
part I, subchapter J, chapter 1 of the Code, contains provisions taxing income
of a trust to the grantor or another person under certain circumstances even
though he is not treated as a beneficiary under subparts A through D (section
641 and following) of such part I. Sections 671 and 672 contain general
provisions relating to the entire subpart. Sections 673 through 677 define the
circumstances under which income of a trust is taxed to a grantor. These
circumstances are in general as follows:
(1) If the grantor has retained a
reversionary interest in the trust, within specified time limits (section 673);
(2) If the grantor or a nonadverse party
has certain powers over the beneficial interests under the trust (section 674);
(3) If certain administrative powers over
the trust exist under which the grantor can or does benefit (section 675).
(4) If the grantor or a nonadverse party
has a power to revoke the trust or return the corpus to the grantor (section
676); or
(5) If the grantor or a nonadverse party
has the power to distribute income to or for the benefit of the grantor or the
grantor's spouse (section 677).
Under
section 678, income of a trust is taxed to a person other than the grantor to
the extent that he has the sole power to vest corpus or income in himself.
(b) Sections 671 through 677 do not apply
if the income of a trust is taxable to a grantor's spouse under section 71 or
682 (relating respectively to alimony and separate maintenance payments, and
the income of an estate or trust in the case of divorce, etc.).
(c) Except as provided in such subpart E,
income of a trust is not included in computing the taxable income and credits
of a grantor or another person solely on the grounds of his dominion and
control over the trust. However, the provisions of subpart E do not apply in
situations involving an assignment of future income, whether or not the
assignment is to a trust. Thus, for example, a person who assigns his right to
future income under an employment contract may be taxed on that income even
though the assignment is to a trust over which the assignor has retained none
of the controls specified in sections 671 through 677. Similarly, a bondholder
who assigns his right to interest may be taxed on interest payments even though
the assignment is to an uncontrolled trust. Nor are the rules as to family
partnerships affected by the provisions of subpart E, even though a partnership
interest is held in trust. Likewise, these sections have no application in determining
the right of a grantor to deductions for payments to a trust under a transfer
and leaseback arrangement. In addition, the limitation of the last sentence of
section 671 does not prevent any person from being taxed on the income of a
trust when it is used to discharge his legal obligation. See § 1.662
(a)-4. He is then treated as a beneficiary under subparts A through
D or treated as an owner under section 677 because the income is distributed
for his benefit, and not because of his dominion or control over the trust.
(d) The provisions of subpart E are not
applicable with respect to a pooled income fund as defined in paragraph (5) of
section 642(c) and the regulations thereunder, a charitable remainder annuity
trust as defined in paragraph (1) of section 664(d) and the regulations
thereunder, or a charitable remainder unitrust as defined in paragraph (2) of
section 664(d) and the regulations thereunder.
(e) For the effective date of subpart E see
section 683 and the regulations thereunder.
(f) For rules relating to the treatment of
liabilities resulting on the sale or other disposition of encumbered trust
property due to a renunciation of powers by the grantor or other owner, see § 1.1001-2.
[T.D. 6500,
25 FR 11814, Nov. 26, 1960, as amended by T.D. 7148, 36 FR 20749, Oct. 29,
1971; T.D. 7741, 45 FR 81745, Dec. 12, 1980]
