26 U.S.C. § 672 | Definitions and rules

(a)

Adverse party

For purposes of this subpart, the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.

(b)

Nonadverse party

For purposes of this subpart, the term “nonadverse party” means any person who is not an adverse party.

(c)

Related or subordinate party

For purposes of this subpart, the term “related or subordinate party” means any nonadverse party who is—

(1)

the grantor’s spouse if living with the grantor;

(2)

any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive.

For purposes of subsection (f) and sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence.

(d)

Rule where power is subject to condition precedent

A person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent giving of notice or takes effect only on the expiration of a certain period after the exercise of the power.

(e)

Grantor treated as holding any power or interest of grantor’s spouse

(1)

In general

For purposes of this subpart, a grantor shall be treated as holding any power or interest held by—

(A)

any individual who was the spouse of the grantor at the time of the creation of such power or interest, or

(B)

any individual who became the spouse of the grantor after the creation of such power or interest, but only with respect to periods after such individual became the spouse of the grantor.

(2)

Marital status

For purposes of paragraph (1)(A), an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.

(f)

Subpart not to result in foreign ownership

(1)

In general

Notwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount (if any) being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation.

(2)

Exceptions

(A)

Certain revocable and irrevocable trusts

Paragraph (1) shall not apply to any portion of a trust if—

(i)

the power to revest absolutely in the grantor title to the trust property to which such portion is attributable is exercisable solely by the grantor without the approval or consent of any other person or with the consent of a related or subordinate party who is subservient to the grantor, or

(ii)

the only amounts distributable from such portion (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor.

(B)

Compensatory trusts

Except as provided in regulations, paragraph (1) shall not apply to any portion of a trust distributions from which are taxable as compensation for services rendered.

(3)

Special rules

Except as otherwise provided in regulations prescribed by the Secretary—

(A)

a controlled foreign corporation (as defined in section 957) shall be treated as a domestic corporation for purposes of paragraph (1), and

(B)

paragraph (1) shall not apply for purposes of applying section 1297.

(4)

Recharacterization of purported gifts

In the case of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such circumstances as the Secretary determines to be appropriate to prevent the avoidance of the purposes of this subsection.

(5)

Special rule where grantor is foreign person

If—

(A)

but for this subsection, a foreign person would be treated as the owner of any portion of a trust, and

(B)

such trust has a beneficiary who is a United States person,

such beneficiary shall be treated as the grantor of such portion to the extent such beneficiary has made (directly or indirectly) transfers of property (other than in a sale for full and adequate consideration) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b).

(6)

Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations providing that paragraph (1) shall not apply in appropriate cases.

Aug. 16, 1954, ch. 736 68A Stat. 226 Pub. L. 99–514, title XIV, § 1401(a)Oct. 22, 1986100 Stat. 2711 Pub. L. 100–647, title I, § 1014(a)(1)Nov. 10, 1988102 Stat. 3559 Pub. L. 101–508, title XI, § 11343(a)Nov. 5, 1990104 Stat. 1388–472 Pub. L. 104–188, title I, § 1904(a)Aug. 20, 1996110 Stat. 1910 Pub. L. 105–206, title VI, § 6011(c)(1)July 22, 1998112 Stat. 818(, ; , , ; , , ; , , ; , , ; , , .)

Editorial Notes

Amendments

Pub. L. 105–2061998—Subsec. (f)(3)(B). substituted “section 1297” for “section 1296”.

Pub. L. 104–188, § 1904(a)(2)1996—Subsec. (c). , inserted “subsection (f) and” before “sections 674” in closing provisions.

Pub. L. 104–188, § 1904(a)(1)Special Rule Where Grantor is Foreign Person.—Subsec. (f). , amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows: “

In general“(1) .—If—

“(A) but for this subsection, a foreign person would be treated as the owner of any portion of a trust, and

“(B) such trust has a beneficiary who is a United States person,

such beneficiary shall be treated as the grantor of such portion to the extent such beneficiary has made transfers of property by gift (directly or indirectly) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b).

Regulations“(2) .—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.”

Pub. L. 101–5081990—Subsec. (f). added subsec. (f).

Pub. L. 100–6471988—Subsec. (e). amended subsec. (e) generally. Prior to amendment, subsec. (e) read as follows: “For purposes of this subpart, if a grantor’s spouse is living with the grantor at the time of the creation of any power or interest held by such spouse, the grantor shall be treated as holding such power or interest.”

Pub. L. 99–5141986—Subsec. (e). added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date of 1998 Amendment

Pub. L. 105–206 Pub. L. 105–34 section 6024 of Pub. L. 105–206 section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, , to which such amendment relates, see , set out as a note under .

Effective Date of 1996 Amendment

Pub. L. 104–188Aug. 20, 1996section 1904(d) of Pub. L. 104–188 section 643 of this titleAmendment by effective , with exception for certain trusts, see , set out as a note under .

Effective Date of 1990 Amendment

Pub. L. 101–508, title XI, § 11343(b)Nov. 5, 1990104 Stat. 1388–472

“The amendments made by this section [amending this section] shall apply to—

“(1)

Nov. 5, 1990 any trust created after the date of the enactment of this Act [], and

“(2)

any portion of a trust created on or before such date which is attributable to amounts contributed to the trust after such date.”

, , , provided that:

Effective Date of 1988 Amendment

Pub. L. 100–647 Pub. L. 99–514 section 1019(a) of Pub. L. 100–647 section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .

Effective Date of 1986 Amendment

Pub. L. 99–514, title XIV, § 1401(b)Oct. 22, 1986100 Stat. 2711

March 1, 1986“The amendment made by this section [amending this section] shall apply with respect to transfers in trust made after .”

, , , provided that: