26 C.F.R. § 1.671-1

Grantors and others treated as substantial owners; scope

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(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]

Notes of Decisions

Cited in 9 cases, 1971–1999 · leading case: Johnson v. Comm'r, 78 T.C. 882 (Tax Ct. 1982).

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Johnson v. Comm'r, 78 T.C. 882 (Tax Ct. 1982). · cites it 2× “Although some of the cited cases deal with trusts rather than with corporations, their discussions of general sec.”

Est. of O'Connor v. Comm'r, 69 T.C. 165 (Tax Ct. 1977). · cites it 2× “) refer to including *184 in the income of the grantor, or other person to whom the income is taxed under subpart E, the "income * * * of the trust.”

Lerner v. Comm'r, 71 T.C. 290 (Tax Ct. 1978). · cites it 2× “1.671-1(c), Income Tax Regs. Thus, while this is not a typical sale and leaseback arrangement, and we are more concerned at this point with the taxability of the income produced by, rather than the deductibility of, the rent, we believe we should examine the arrangement in the…”

Bennett v. Comm'r, 79 T.C. 470 (Tax Ct. 1982). · cites it 2× “For example, whatever the result under the Clifford regulations, *68 under the 1954 Code, if the grantor has the power to borrow only ordinary income without adequate interest and security (see sec.”

Madorin v. Comm'r, 84 T.C. 667 (Tax Ct. 1985). · cites it 2× “, provides, in part, as follows: Except *119 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.”

Benson v. Comm'r, 76 T.C. 1040 (Tax Ct. 1981). · cites it 2× “" Thus, income of a trust is not attributed to the trust grantor because of the grantor's dominion and control over the trust unless one of the specific grantor trust rules, see secs.”

Hudlow v. Comm'r, 30 T.C.M. 894 (Tax Ct. 1971). · cites it 2× “, provides that "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.”

Deutsch v. Comm'r, 1997 T.C. Memo. 470 (Tax Ct. 1997). · cites it 2× “However, the bill was never enacted. 12. This is in contrast to secs. 671-679, found in subpart E of subchapter J (concerning the income tax treatment of grantor trusts), which are expressly granted the attribute of exclusiveness by the last sentence of sec.”

In Re Forte, 234 B.R. 607 (Bankr. E.D.N.Y. 1999). “” 26 C.F.R. § 1.671-1 (a)(1999). The circumstances applicable here are: (1) if the grantor or a nonadverse party has certain powers over the beneficial interest under the trust ( 26 U.”

Annotations are extracted automatically from the opinions in the Syfert caselaw corpus and ranked by authority, recency, and treatment. Dots show Syfertize treatment of the citing case itself.