[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: 26CFR1.675-1]

[Page 302-303]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.675-1  Administrative powers.

    (a) General rule. Section 675 provides in effect that the grantor is 
treated as the owner of any portion of a trust if under the terms of the 
trust instrument or circumstances attendant on its operation 
administrative control is exercisable primarily for the benefit of the 
grantor rather than the beneficiaries of the trust. If a grantor retains 
a power to amend the administrative provisions of a trust instrument 
which is broad enough to permit an amendment causing the grantor to be 
treated as the owner of a portion of the trust under section 675, he 
will be treated as the owner of the portion from its inception. See 
section 671 and Sec. Sec. 1.671-2 and 1.671-3 for rules for treatment 
of items of income, deduction, and credit when a person is treated as 
the owner of all or only a portion of a trust.
    (b) Prohibited controls. The circumstances which cause 
administrative controls to be considered exercisable primarily for the 
benefit of the grantor are specifically described in paragraphs (1) 
through (4) of section 675 as follows:
    (1) The existence of a power, exercisable by the grantor or a 
nonadverse party, or both, without the approval or consent of any 
adverse party, which enables the grantor or any other person to 
purchase, exchange, or otherwise deal with or dispose of the corpus or 
the income of the trust for less than adequate consideration in money or 
money's worth. Whether the existence of the power itself will constitute 
the holder an adverse party will depend on the particular circumstances.
    (2) The existence of a power exercisable by the grantor or a 
nonadverse party, or both, which enables the grantor to borrow the 
corpus or income of the trust, directly or indirectly, without adequate 
interest or adequate security. However, this paragraph does not apply 
where a trustee (other than the grantor acting alone) is authorized 
under a general lending power to make loans to any person without regard 
to interest or security. A general lending power in the grantor, acting 
alone as trustee, under which he has power to determine interest rates 
and the adequacy of security is not in itself an indication that the 
grantor has power to borrow the corpus or income without adequate 
interest or security.
    (3) The circumstance that the grantor has directly or indirectly 
borrowed the corpus or income of the trust and has not completely repaid 
the loan, including any interest, before the beginning of the taxable 
year. The preceding sentence does not apply to a loan which provides for 
adequate interest and adequate security, if it is made by a trustee 
other than the grantor or a related or subordinate trustee subservient 
to the grantor. See section 672(c) for definition of ``a related or 
subordinate party''.
    (4) The existence of certain powers of administration exercisable in 
a nonfiduciary capacity by any nonadverse party without the approval or 
consent of any person in a fiduciary capacity. The term powers of 
administration means one or more of the following powers:
    (i) A power to vote or direct the voting of stock or other 
securities of a corporation in which the holdings of the grantor and the 
trust are significant from the viewpoint of voting control;
    (ii) A power to control the investment of the trust funds either by 
directing investments or reinvestments, or by vetoing proposed 
investments or reinvestments, to the extent that the trust funds consist 
of stocks or securities of corporations in which the holdings of the 
grantor and the trust are significant from the viewpoint of voting 
control; or
    (iii) A power to reacquire the trust corpus by substituting other 
property of an equivalent value.

If a power is exercisable by a person as trustee, it is presumed that 
the power is exercisable in a fiduciary capacity

[[Page 303]]

primarily in the interests of the beneficiaries. This presumption may be 
rebutted only by clear and convincing proof that the power is not 
exercisable primarily in the interests of the beneficiaries. If a power 
is not exercisable by a person as trustee, the determination of whether 
the power is exercisable in a fiduciary or a nonfiduciary capacity 
depends on all the terms of the trust and the circumstances surrounding 
its creation and administration.
    (c) Authority of trustee. The mere fact that a power exercisable by 
a trustee is described in broad language does not indicate that the 
trustee is authorized to purchase, exchange, or otherwise deal with or 
dispose of the trust property or income for less than an adequate and 
full consideration in money or money's worth, or is authorized to lend 
the trust property or income to the grantor without adequate interest. 
On the other hand, such authority may be indicated by the actual 
administration of the trust.