[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.671-1]

[Page 272-273]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 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

[[Page 273]]

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 Sec. 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 Sec. 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]