Definition of Grantor

DEPARTMENT OF THE TREASURY 
Internal Revenue Service 26 CFR Part 1 [TD 8890] RIN 1545-AX25

TITLE: Definition of Grantor

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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 �1.671- 2(e), see
�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.2 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.3 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).
* * *

�1.643(h)-1 [Amended]

Par. 2. Section 1.643(h)-1 is amended as follows: 1. In paragraph
(a)(2)(i) the language A �1.671-2T(e)(2) @ is removed, and A
�1.671-2(e)(2) @ is added in its place. 2. In paragraph (b)(1) the
language A �1.671-2T(e)(2) @ is removed, and A �1.671-2(e)(2) @ is
added in its place. 3. In paragraph (b)(2) the language A
�1.671-2T(e) @ is removed, and A �1.671-2(e) @ is added in its
place. In paragraph (g) Example 1 the language A �1.671-2T(e)
(2) @ is removed, and A �1.671-2(e)(2) @ is added in its place. Par.
3. Section 1.671-2(e) is revised to read as follows: �1.671-2
Applicable principles.

* * * * *

(e)(1) For purposes of part I of subchapter J, chapter 1 of the
Internal 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 �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.5 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.6 �301.7701-4(c)
of this chapter, liquidating trusts described in �301.7701-4(d) of
this chapter, or environmental remediation trusts described in
�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.7 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 �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.8 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.

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.9 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.

�1.671-2T [Removed] Par. 4. Section 1.671-2T is removed. �1.672(f)-2
[Amended] Par. 5. Section 1.672(f)-2 is amended as follows:

1. In paragraph (b)(1) the language A �1.671-2T(e)(2) @ is removed,
and A �1.671-2(e)(2) @ is added in its place.

2. In paragraph (d) Example 1 the language A �1.671-2T(e) @ is
removed, and A �1.671-2(e) @ is added in its place. �1.672(f)-3
[Amended] Par. 6. Section 1.672(f)-3 is amended as follows:

1. In paragraph (a)(1) the language A �1.671-2T(e) @ is removed, and
A �1.671-2(e) @ is added in its place.

2. In paragraph (a)(4) Example 2 the language A �1.671-2T(e) @ is
removed, and A �1.671-2(e) @ is added in its place.

3. In paragraph (b)(1) the language A �1.671-2T(e)(2) @ is removed,
and A �1.671-2(e)(2) @ is added in its place.

4. In paragraph (b)(1) the language A �1.671-2T(e) @ is removed, and
A �1.671-2(e) @ is added in its place.

5. In paragraph (b)(4) Example 1 the language A �1.671-2T(e) @ is
removed, and A �1.671-2(e) @ is added in its place.

6. In paragraph (b)(4) Example 2 the language A �1.671-2T(e) @ is
removed and A �1.671-2(e) @ is added in its place. �1.672(f)-4
[Amended] Par. 7. Section 1.672(f)-4 is amended as follows:

1. In paragraph (c)(1) the language A �1.671-2T(e)(2) @ is removed,
and A �1.671-2(e)(2) @ is added in its place.

2. In paragraph (c)(1) the language A �1.671-2T(e)(4) @ is removed,
and A �1.671-2(e)(4) @ is added in its place.

3. In paragraph (d)(1) the language A �1.671-2T(e)(2)(ii) @ is
removed, and A �1.671-2(e)(2)(ii) @ is added in its place.

4. In paragraph (g) Example 4 the language A �1.671-2T(e) @ is
removed, and A �1.671-2(e) @ is added in its place. �1.672(f)-5
[Amended] Par. 8. In �1.672(f)-5, paragraph (a)(1) is amended by
removing the language A �1.671-2T(e)(2) @ and adding A �1.671- 2(e)
(2) @ in its place.

Deputy Commissioner of Internal Revenue
Approved:
Assistant Secretary of the Treasury

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