[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: 26CFR1.671-3]

[Page 276-277]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.671-3  Attribution or inclusion of income, deductions, and 
credits against tax.

    (a) When a grantor or another person is treated under subpart E 
(section 671 and following) as the owner of any portion of a trust, 
there are included in computing his tax liability those items of income, 
deduction, and credit against tax attributable to or included in that 
portion. For example:
    (1) If a grantor or another person is treated as the owner of an 
entire trust (corpus as well as ordinary income), he takes into account 
in computing his income tax liability all items of income, deduction, 
and credit (including capital gains and losses) to which he would have 
been entitled had the trust not been in existence during the period he 
is treated as owner.
    (2) If the portion treated as owned consists of specific trust 
property and its income, all items directly related to that property are 
attributable to the portion. Items directly related to trust property 
not included in the portion treated as owned by the grantor or other 
person are governed by the provisions of subparts A through D (section 
641 and following), part I, subchapter J, chapter 1 of the Code. Items 
that relate both to the portion treated as owned by the grantor and to 
the balance of the trust must be apportioned in a manner that is 
reasonable in the light of all the circumstances of each case, including 
the terms of the governing instrument, local law, and the practice of 
the trustee if it is reasonable and consistent.
    (3) If the portion of a trust treated as owned by a grantor or 
another person consists of an undivided fractional interest in the 
trust, or of an interest represented by a dollar amount, a pro rata 
share of each item of income, deduction, and credit is normally 
allocated to the portion. Thus, where the portion owned consists of an 
interest in or a right to an amount of corpus only, a fraction of each 
item (including items allocated to corpus, such as capital gains) is 
attributed to the portion. The numerator of this fraction is the amount 
which is subject to the control of the grantor or other person and the 
denominator is normally the fair market value of the trust corpus at the 
beginning of the taxable year in question. The share not treated as 
owned by the grantor or other person is governed by the provisions of 
subparts A through D. See the last three sentences of paragraph (c) of 
this section for the principles applicable if the portion treated as 
owned consists of an interest in part of the ordinary income in contrast 
to an interest in corpus alone.
    (b) If a grantor or another person is treated as the owner of a 
portion of a trust, that portion may or may not include both ordinary 
income and other income allocable to corpus. For example:
    (1) Only ordinary income is included by reason of an interest in or 
a power over ordinary income alone. Thus, if a grantor is treated under 
section 673 as an owner by reason of a reversionary interest in ordinary 
income only, items of income allocable to corpus will not be included in 
the portion he is treated as owning. Similarly, if a grantor or another 
person is treated under sections 674-678 as an owner of a portion by 
reason of a power over ordinary income only, items of income allocable 
to corpus are not included in that portion. (See paragraph (c) of this 
section to determine the treatment of deductions and credits when only 
ordinary income is included in the portion.)
    (2) Only income allocable to corpus is included by reason of an 
interest in or a power over corpus alone, if satisfaction of the 
interest or an exercise of the power will not result in an interest in 
or the exercise of a power over ordinary income which would itself cause

[[Page 277]]

that income to be included. For example, if a grantor has a reversionary 
interest in a trust which is not such as to require that he be treated 
as an owner under section 673, he may nevertheless be treated as an 
owner under section 677(a)(2) since any income allocable to corpus is 
accumulated for future distribution to him, but items of income included 
in determining ordinary income are not included in the portion he is 
treated as owning. Similarly, he may have a power over corpus which is 
such that he is treated as an owner under section 674 or 676 (a), but 
ordinary income will not be included in the portion he owns, if his 
power can only affect income received after a period of time such that 
he would not be treated as an owner of the income if the power were a 
reversionary interest. (See paragraph (c) of this section to determine 
the treatment of deductions and credits when only income allocated to 
corpus is included in the portion.)
    (3) Both ordinary income and other income allocable to corpus are 
included by reason of an interest in or a power over both ordinary 
income and corpus, or an interest in or a power over corpus alone which 
does not come within the provisions of subparagraph (2) of this 
paragraph. For example, if a grantor is treated under section 673 as the 
owner of a portion of a trust by reason of a reversionary interest in 
corpus, both ordinary income and other income allocable to corpus are 
included in the portion. Further, a grantor includes both ordinary 
income and other income allocable to corpus in the portion he is treated 
as owning if he is treated under section 674 or 676 as an owner because 
of a power over corpus which can affect income received within a period 
such that he would be treated as an owner under section 673 if the power 
were a reversionary interest. Similarly, a grantor or another person 
includes both ordinary income and other income allocable to corpus in 
the portion he is treated as owning if he is treated as an owner under 
section 675 or 678 because of a power over corpus.
    (c) If only income allocable to corpus is included in computing a 
grantor's tax liability, he will take into account in that computation 
only those items of income, deductions, and credit which would not be 
included under subparts A through D in the computation of the tax 
liability of the current income beneficiaries if all distributable net 
income had actually been distributed to those beneficiaries. On the 
other hand, if the grantor or another person is treated as an owner 
solely because of his interest in or power over ordinary income alone, 
he will take into account in computing his tax liability those items 
which would be included in computing the tax liability of a current 
income beneficiary, including expenses allocable to corpus which enter 
into the computation of distributable net income. If the grantor or 
other person is treated as an owner because of his power over or right 
to a dollar amount of ordinary income, he will first take into account a 
portion of those items of income and expense entering into the 
computation of ordinary income under the trust instrument or local law 
sufficient to produce income of the dollar amount required. There will 
then be attributable to him a pro rata portion of other items entering 
into the computation of distributable net income under subparts A 
through D, such as expenses allocable to corpus, and a pro rata portion 
of credits of the trust. For examples of computations under this 
paragraph, see paragraph (g) of Sec. 1.677(a)-1.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6989, 34 FR 
742, Jan. 17, 1969]