[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: 26CFR1.677(b)-1]

[Page 306-307]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.677(b)-1  Trusts for support.

    (a) Section 677(b) provides that a grantor is not treated as the 
owner of a trust merely because its income may in the discretion of any 
person other than the grantor (except when he is acting as trustee or 
cotrustee) be applied or distributed for the support or maintenance of a 
beneficiary (other than the grantor's spouse in the case of income from 
property transferred in trust after October 9, 1969), such as the child 
of the grantor, whom the grantor or his spouse is legally obligated to 
support. If income of the current year of the trust is actually so 
applied or distributed the grantor may be treated as the owner of any 
portion of the trust under section 677 to that extent, even though it 
might have been applied or distributed for other purposes. In the case 
of property transferred to a trust before October 10, 1969, for the 
benefit of the grantor's spouse, the grantor may be treated as the owner 
to the extent income of the current year is actually applied for the 
support or maintenance of his spouse.
    (b) If any amount applied or distributed for the support of a 
beneficiary, including the grantor's spouse in the case of property 
transferred in trust before October 10, 1969, whom the grantor is 
legally obligated to support is paid out of corpus or out of income

[[Page 307]]

other than income of the current year, the grantor is treated as a 
beneficiary of the trust, and the amount applied or distributed is 
considered to be an amount paid within the meaning of section 661(a)(2), 
taxable to the grantor under section 662. Thus, he is subject to the 
other relevant portions of subparts A through D (section 641 and 
following), part I, subchapter J, chapter 1 of the Code. Accordingly, 
the grantor may be taxed on an accumulation distribution or a capital 
gain distribution under subpart D (section 665 and following) of such 
part I. Those provisions are applied on the basis that the grantor is 
the beneficiary.
    (c) For the purpose of determining the items of income, deduction, 
and credit of a trust to be included under this section in computing the 
grantor's tax liability, the income of the trust for the taxable year of 
distribution will be deemed to have been first distributed. For example, 
in the case of a trust reporting on the calendar year basis, a 
distribution made on January 1, 1956, will be deemed to have been made 
out of ordinary income of the trust for the calendar year 1956 to the 
extent of the income for that year even though the trust had received no 
income as of January 1, 1956. Thus, if a distribution of $10,000 is made 
on January 1, 1956, for the support of the grantor's dependent, the 
grantor will be treated as the owner of the trust for 1956 to that 
extent. If the trust received dividends of $5,000 and incurred expenses 
of $1,000 during that year but subsequent to January 1, he will take 
into account dividends of $5,000 and expenses of $1,000 in computing his 
tax liability for 1956. In addition, the grantor will be treated as a 
beneficiary of the trust with respect to the $6,000 ($10,000 less 
distributable income of $4,000 (dividends of $5,000 less expenses of 
$1,000)) paid out of corpus or out of other than income of the current 
year. See paragraph (b) of this section.
    (d) The exception provided in section 677(b) relates solely to the 
satisfaction of the grantor's legal obligation to support or maintain a 
beneficiary. Consequently, the general rule of section 677(a) is 
applicable when in the discretion of the grantor or nonadverse parties 
income of a trust may be applied in discharge of a grantor's obligations 
other than his obligation of support or maintenance falling within 
section 677(b). Thus, if the grantor creates a trust the income of which 
may in the discretion of a nonadverse party be applied in the payment of 
the grantor's debts, such as the payment of his rent or other household 
expenses, he is treated as an owner of the trust regardless of whether 
the income is actually so applied.
    (e) The general rule of section 677(a), and not section 677(b), is 
applicable if discretion to apply or distribute income of a trust rests 
solely in the grantor, or in the grantor in conjunction with other 
persons, unless in either case the grantor has such discretion as 
trustee or cotrustee.
    (f) The general rule of section 677(a), and not section 677(b), is 
applicable to the extent that income is required, without any 
discretionary determination, to be applied to the support of a 
beneficiary whom the grantor is legally obligated to support.

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 7148, 36 FR 
20750, Oct. 29, 1971]