Title 26, Internal Revenue CodeRelease 119-110
§672 Definitions and Rules
Title 26 › 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
Summary
Defines key words and gives simple rules about who counts when the tax rules for trusts apply. Adverse party — a person with a real financial interest in the trust that could be hurt by someone’s power over the trust. Nonadverse party — anyone who is not an adverse party. Related or subordinate party — a nonadverse person like a spouse living with the grantor, close family (parents, children, siblings), employees, or certain corporate associates; these related people are assumed to follow the grantor unless proven otherwise. A power still counts even if it needs a notice or a waiting period to take effect. The grantor is treated as holding any power or interest held by the grantor’s spouse (but not a legally separated spouse). The rules only apply when they cause income to be taxed to a U.S. person or a domestic corporation. Exceptions include trust parts where the grantor alone can revest title, or where only the grantor or the grantor’s spouse can get payments during the grantor’s life, and parts that pay amounts taxed as pay for services. Certain foreign companies can be treated as domestic for these rules. The Treasury Secretary can make regulations, reclassify transfers to prevent abuse, and, in some cases, treat a U.S. beneficiary who transferred property to a foreign person as the grantor (excluding gifts allowed under section 2503(b)).
Full Legal Text
Title 26, §672
Internal Revenue Code, Source: USLM XML via OLRC
(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 section 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.
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
Sep 22, 2026
Release point: 119-110