[Federal Register Volume 65, Number 129 (Wednesday, July 5, 2000)]
[Rules and Regulations]
[Pages 41332-41334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16931]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8890]
RIN 1545-AX25


Definition of Grantor

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations defining the term 
grantor for purposes of part I of subchapter J, chapter 1 of the 
Internal Revenue Code. These regulations provide necessary guidance in 
determining who is the grantor of a trust in applying those Code 
sections. These regulations affect trusts and any person creating or 
funding a trust.

DATES: Effective Date: These regulations are effective July 5, 2000.
    Applicability Dates: For dates of applicability of Sec. 1.671-2(e), 
see Sec. 1.671-2(e)(7).

FOR FURTHER INFORMATION CONTACT: James A. Quinn at (202) 622-3060 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION

Background

    On June 5, 1997, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-252487-96) under section 671 of the 
Internal Revenue Code (Code) in the Federal Register (62 FR 30785). 
Comments responding to the notice were received and a public hearing 
was held on August 27, 1997. After consideration of the comments, the 
proposed regulations under section 671 were re-issued as proposed (64 
FR 43323) and temporary regulations (64 FR 43267) on August 10, 1999.
    The proposed and temporary regulations provide a definition of 
grantor for purposes of part I of subchapter J, chapter 1 of the Code. 
No comments were received in response to the Notice of Proposed 
Rulemaking published on August 10, 1999, in the Federal Register, and 
no one requested to speak at the public hearing scheduled for November 
2, 1999. Accordingly, the public hearing was canceled on October 28, 
1999 (64 FR 58006). This document finalizes the proposed regulations 
and removes the temporary regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and, because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Small 
Business Administration for comment on the regulations' impact on small 
business.

Drafting Information

    The principal author of these regulations is James A. Quinn of the 
Office of the Assistant Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for section 1.671-2T and adding an entry in 
numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.671-2 also issued under 26 U.S.C. 643(a)(7) and 
672(f)(6). * * *


Sec. 1.643(h)-1  [Amended]

    Par. 2. Section 1.643(h)-1 is amended as follows:
    1. In paragraph (a)(2)(i) the language ``Sec. 1.671-2T(e)(2)'' is 
removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.
    2. In paragraph (b)(1) the language ``Sec. 1.671-2T(e)(2)'' is 
removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.
    3. In paragraph (b)(2) the language ``Sec. 1.671-2T(e)'' is 
removed, and ``Sec. 1.671-2(e)'' is added in its place.
    4. In paragraph (g) Example 1 the language ``Sec. 1.671-2T(e)(2)'' 
is removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.

    Par. 3. Section 1.671-2(e) is revised to read as follows:


Sec. 1.671-2  Applicable principles.

* * * * *
    (e)(1) For purposes of part I of subchapter J, chapter 1 of the 
Internal

[[Page 41333]]

Revenue Code, a grantor includes any person to the extent such person 
either creates a trust, or directly or indirectly makes a gratuitous 
transfer (within the meaning of paragraph (e)(2) of this section) of 
property to a trust. For purposes of this section, the term property 
includes cash. If a person creates or funds a trust on behalf of 
another person, both persons are treated as grantors of the trust. (See 
section 6048 for reporting requirements that apply to grantors of 
foreign trusts.) However, a person who creates a trust but makes no 
gratuitous transfers to the trust is not treated as an owner of any 
portion of the trust under sections 671 through 677 or 679. Also, a 
person who funds a trust with an amount that is directly reimbursed to 
such person within a reasonable period of time and who makes no other 
transfers to the trust that constitute gratuitous transfers is not 
treated as an owner of any portion of the trust under sections 671 
through 677 or 679. See also Sec. 1.672(f)-5(a).
    (2)(i) A gratuitous transfer is any transfer other than a transfer 
for fair market value. A transfer of property to a trust may be 
considered a gratuitous transfer without regard to whether the transfer 
is treated as a gift for gift tax purposes.
    (ii) For purposes of this paragraph (e), a transfer is for fair 
market value only to the extent of the value of property received from 
the trust, services rendered by the trust, or the right to use property 
of the trust. For example, rents, royalties, interest, and compensation 
paid to a trust are transfers for fair market value only to the extent 
that the payments reflect an arm's length price for the use of the 
property of, or for the services rendered by, the trust. For purposes 
of this determination, an interest in the trust is not property 
received from the trust. In addition, a person will not be treated as 
making a transfer for fair market value merely because the transferor 
recognizes gain on the transaction. See, for example, section 684 
regarding the recognition of gain on certain transfers to foreign 
trusts.
    (iii) For purposes of this paragraph (e), a gratuitous transfer 
does not include a distribution to a trust with respect to an interest 
held by such trust in either a trust described in paragraph (e)(3) of 
this section or an entity other than a trust.
    For example, a distribution to a trust by a corporation with 
respect to its stock described in section 301 is not a gratuitous 
transfer.
    (3) A grantor includes any person who acquires an interest in a 
trust from a grantor of the trust if the interest acquired is an 
interest in certain investment trusts described in Sec. 301.7701-4(c) 
of this chapter, liquidating trusts described in Sec. 301.7701-4(d) of 
this chapter, or environmental remediation trusts described in 
Sec. 301.7701-4(e) of this chapter.
    (4) If a gratuitous transfer is made by a partnership or 
corporation to a trust and is for a business purpose of the partnership 
or corporation, the partnership or corporation will generally be 
treated as the grantor of the trust. For example, if a partnership 
makes a gratuitous transfer to a trust in order to secure a legal 
obligation of the partnership to a third party unrelated to the 
partnership, the partnership will be treated as the grantor of the 
trust. However, if a partnership or a corporation makes a gratuitous 
transfer to a trust that is not for a business purpose of the 
partnership or corporation but is for the personal purposes of one or 
more of the partners or shareholders, the gratuitous transfer will be 
treated as a constructive distribution to such partners or shareholders 
under federal tax principles and the partners or the shareholders will 
be treated as the grantors of the trust. For example, if a partnership 
makes a gratuitous transfer to a trust that is for the benefit of a 
child of a partner, the gratuitous transfer will be treated as a 
distribution to the partner under section 731 and a subsequent 
gratuitous transfer by the partner to the trust.
    (5) If a trust makes a gratuitous transfer of property to another 
trust, the grantor of the transferor trust generally will be treated as 
the grantor of the transferee trust. However, if a person with a 
general power of appointment over the transferor trust exercises that 
power in favor of another trust, then such person will be treated as 
the grantor of the transferee trust, even if the grantor of the 
transferor trust is treated as the owner of the transferor trust under 
subpart E of part I, subchapter J, chapter 1 of the Internal Revenue 
Code.
    (6) The following examples illustrate the rules of this paragraph 
(e). Unless otherwise indicated, all trusts are domestic trusts, and 
all other persons are United States persons. The examples are as 
follows:

    Example 1. A creates and funds a trust, T, for the benefit of 
her children. B subsequently makes a gratuitous transfer to T. Under 
paragraph (e)(1) of this section, both A and B are grantors of T.
    Example 2. A makes an investment in a fixed investment trust, T, 
that is classified as a trust under Sec. 301.7701-4(c)(1) of this 
chapter. A is a grantor of T. B subsequently acquires A's entire 
interest in T. Under paragraph (e)(3) of this section, B is a 
grantor of T with respect to such interest.
    Example 3. A, an attorney, creates a foreign trust, FT, on 
behalf of A's client, B, and transfers $100 to FT out of A's funds. 
A is reimbursed by B for the $100 transferred to FT. The trust 
instrument states that the trustee has discretion to distribute the 
income or corpus of FT to B and B's children. Both A and B are 
treated as grantors of FT under paragraph (e)(1) of this section. In 
addition, B is treated as the owner of the entire trust under 
section 677. Because A is reimbursed for the $100 transferred to FT 
on behalf of B, A is not treated as transferring any property to FT. 
Therefore, A is not an owner of any portion of FT under sections 671 
through 677 regardless of whether A retained any power over or 
interest in FT described in sections 673 through 677. Furthermore, A 
is not treated as an owner of any portion of FT under section 679. 
Both A and B are responsible parties for purposes of the 
requirements in section 6048.
    Example 4. A creates and funds a trust, T. A does not retain any 
power or interest in T that would cause A to be treated as an owner 
of any portion of the trust under sections 671 through 677. B holds 
an unrestricted power, exercisable solely by B, to withdraw certain 
amounts contributed to the trust before the end of the calendar year 
and to vest those amounts in B. B is treated as an owner of the 
portion of T that is subject to the withdrawal power under section 
678(a)(1). However, B is not a grantor of T under paragraph (e)(1) 
of this section because B neither created T nor made a gratuitous 
transfer to T.
    Example 5. A transfers cash to a trust, T, through a broker, in 
exchange for units in T. The units in T are not property for 
purposes of determining whether A has received fair market value 
under paragraph (e)(2)(ii) of this section. Therefore, A has made a 
gratuitous transfer to T, and, under paragraph (e)(1) of this 
section, A is a grantor of T.
    Example 6. A borrows cash from T, a trust. A has not made any 
gratuitous transfers to T. Arm's length interest payments by A to T 
will not be treated as gratuitous transfers under paragraph 
(e)(2)(ii) of this section. Therefore, under paragraph (e)(1) of 
this section, A is not a grantor of T with respect to the interest 
payments.
    Example 7. A, B's brother, creates a trust, T, for B's benefit 
and transfers $50,000 to T. The trustee invests the $50,000 in stock 
of Company X. C, B's uncle, purportedly sells property with a fair 
market value of $1,000,000 to T in exchange for the stock when it 
has appreciated to a fair market value of $100,000. Under paragraph 
(e)(2)(ii) of this section, the $900,000 excess value is a 
gratuitous transfer by C. Therefore, under paragraph (e)(1) of this 
section, A is a grantor with respect to the portion of the trust 
valued at $100,000, and C is a grantor of T with respect to the 
portion of the trust valued at $900,000. In addition, A or C or both 
will be treated as the owners of the respective portions of the 
trust of which each person is a grantor if A or C or both retain 
powers over or interests in such portions under sections 673 through 
677.

[[Page 41334]]

    Example 8. G creates and funds a trust, T1, for the benefit of 
G's children and grandchildren. After G's death, under authority 
granted to the trustees in the trust instrument, the trustees of T1 
transfer a portion of the assets of T1 to another trust, T2, and 
retain a power to revoke T2 and revest the assets of T2 in T1. Under 
paragraphs (e)(1) and (5) of this section, G is the grantor of T1 
and T2. In addition, because the trustees of T1 have retained a 
power to revest the assets of T2 in T1, T1 is treated as the owner 
of T2 under section 678(a).
    Example 9. G creates and funds a trust, T1, for the benefit of 
B. G retains a power to revest the assets of T1 in G within the 
meaning of section 676. Under the trust agreement, B is given a 
general power of appointment over the assets of T1. B exercises the 
general power of appointment with respect to one-half of the corpus 
of T1 in favor of a trust, T2, that is for the benefit of C, B's 
child. Under paragraph (e)(1) of this section, G is the grantor of 
T1, and under paragraphs (e)(1) and (5) of this section, B is the 
grantor of T2.

    (7) The rules of this section are applicable to any transfer to a 
trust, or transfer of an interest in a trust, on or after August 10, 
1999.


Sec. 1.671-2T  [Removed]

    Par. 4. Section 1.671-2T is removed.


Sec. 1.672(f)-2  [Amended]

    Par. 5. Section 1.672(f)-2 is amended as follows:
    1. In paragraph (b)(1) the language ``Sec. 1.671-2T(e)(2)'' is 
removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.
    2. In paragraph (d) Example 1 the language ``Sec. 1.671-2T(e)'' is 
removed, and ``Sec. 1.671-2(e)'' is added in its place.


Sec. 1.672(f)-3  [Amended]

    Par. 6. Section 1.672(f)-3 is amended as follows:
    1. In paragraph (a)(1) the language ``Sec. 1.671-2T(e)'' is 
removed, and ``Sec. 1.671-2(e)'' is added in its place.
    2. In paragraph (a)(4) Example 2 the language ``Sec. 1.671-2T(e)'' 
is removed, and ``Sec. 1.671-2(e)'' is added in its place.
    3. In paragraph (b)(1) the language ``Sec. 1.671-2T(e)(2)'' is 
removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.
    4. In paragraph (b)(1) the language ``Sec. 1.671-2T(e)'' is 
removed, and ``Sec. 1.671-2(e)'' is added in its place.
    5. In paragraph (b)(4) Example 1 the language ``Sec. 1.671-2T(e)'' 
is removed, and ``Sec. 1.671-2(e)'' is added in its place.
    6. In paragraph (b)(4) Example 2 the language ``Sec. 1.671-2T(e)'' 
is removed and ``Sec. 1.671-2(e)'' is added in its place.


Sec. 1.672(f)-4  [Amended]

    Par. 7. Section 1.672(f)-4 is amended as follows:
    1. In paragraph (c)(1) the language ``Sec. 1.671-2T(e)(2)'' is 
removed, and ``Sec. 1.671-2(e)(2)'' is added in its place.
    2. In paragraph (c)(1) the language ``Sec. 1.671-2T(e)(4)'' is 
removed, and ``Sec. 1.671-2(e)(4)'' is added in its place.
    3. In paragraph (d)(1) the language ``Sec. 1.671-2T(e)(2)(ii)'' is 
removed, and ``Sec. 1.671-2(e)(2)(ii)'' is added in its place.
    4. In paragraph (g) Example 4 the language ``Sec. 1.671-2T(e)'' is 
removed, and ``Sec. 1.671-2(e)'' is added in its place.


Sec. 1.672(f)-5  [Amended]

    Par. 8. In Sec. 1.672(f)-5, paragraph (a)(1) is amended by removing 
the language ``Sec. 1.671-2T(e)(2)'' and adding ``Sec. 1.671-2(e)(2)'' 
in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: June 28, 2000.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-16931 Filed 7-3-00; 8:45 am]
BILLING CODE 4830-01-U