PRIA Logo™
Title 26 — Internal Revenue CodeRelease 119-73not60

§672 Definitions and Rules

Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter J— Estates, Trusts, Beneficiaries, and Decedents › Part I— ESTATES, TRUSTS, AND BENEFICIARIES › Subpart E— Grantors and Others Treated as Substantial Owners › § 672

Last updated Apr 5, 2026|Official source

Summary

Defines who counts as an adverse party, a nonadverse party, and a related or subordinate party, and explains when certain powers over a trust are treated as held by the grantor. Adverse party: someone with a big financial interest that would be hurt by how a power over the trust is used. Nonadverse party: anyone who is not adverse. Related or subordinate party: a nonadverse person who is the grantor’s spouse (if living with them), close family (parents, children, siblings), certain employees, or certain companies tied to the grantor. A power still counts even if using it requires giving notice or waits for a time to take effect. A grantor is treated as holding powers that their spouse held at the time the power was created, or that a later spouse holds after marriage; a legally separated person is not treated as married. The rules only apply when they cause a U.S. citizen, resident, or a domestic corporation to include trust amounts in taxable income. Exceptions include trust parts the grantor can take back alone or with a submissive related party’s consent, trust parts that only pay the grantor or spouse during the grantor’s life, and portions taxed as pay for services (unless rules say otherwise). Controlled foreign corporations may be treated like domestic ones for this purpose, Treasury can reclassify some transfers to prevent avoidance, and the Secretary must write regulations to carry out these rules.

Full Legal Text

Title 26, §672

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)For purposes of this subpart, the term “nonadverse party” means any person who is not an adverse party.
(c)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.
(d)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)(1)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)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)(1)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)(A)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)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)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)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)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,
(6)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.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

1998—Subsec. (f)(3)(B). Pub. L. 105–206 substituted “section 1297” for “section 1296”. 1996—Subsec. (c). Pub. L. 104–188, § 1904(a)(2), inserted “subsection (f) and” before “section 674” in closing provisions. Subsec. (f). Pub. L. 104–188, § 1904(a)(1), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows: “Special Rule Where Grantor is Foreign Person.— “(1) In general.—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). “(2)

Regulations

.—The Secretary shall prescribe such

Regulations

as may be necessary to carry out the purposes of this subsection.” 1990—Subsec. (f). Pub. L. 101–508 added subsec. (f). 1988—Subsec. (e). Pub. L. 100–647 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.” 1986—Subsec. (e). Pub. L. 99–514 added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date

of 1998 AmendmentAmendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title.

Effective Date

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

Effective Date

of 1990 Amendment Pub. L. 101–508, title XI, § 11343(b), Nov. 5, 1990, 104 Stat. 1388–472, provided that: “The

Amendments

made by this section [amending this section] shall apply to— “(1) any trust created after the date of the enactment of this Act [Nov. 5, 1990], 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.”

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 Amendment Pub. L. 99–514, title XIV, § 1401(b), Oct. 22, 1986, 100 Stat. 2711, provided that: “The amendment made by this section [amending this section] shall apply with respect to transfers in trust made after March 1, 1986.”

Reference

Citations & Metadata

Citation

26 U.S.C. § 672

Title 26 — Internal Revenue Code

Last Updated

Apr 5, 2026

Release point: 119-73not60