Abusive Trust Tax Evasion Schemes - Law and Arguments (Section II)
II. Grantors May Be Treated as Owners of Trusts
Grantor trust rules provide that if the owner of property transferred to a trust retains an economic interest in or control over it, the owner is treated for income tax purposes as the owner of the trust property. Thus all transactions by the trust are treated as transactions of the owner. (IRC §§ 671 - 677)
In addition, a U.S. person who directly or indirectly transfers property to a foreign trust is treated as the owner of that property if there is a U.S. beneficiary of the trust. (IRC § 679) This means all expenses and income of the trust would belong to and must be reported by the owner, and tax deductions and losses arising from transactions between the owner and the trust would be ignored. Furthermore, there would be no "nontaxable exchange" of property with the trust, and the tax basis of property supposedly transferred to the trust would not be stepped up for depreciation purposes. (Rev. Rul. 85-13, 1985-1 C.B. 184)
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.