26 U.S.C. § 672 — Definitions and rules

(a) Adverse party. For this subpart, an “adverse party” is a person with a substantial beneficial interest in a trust that would be harmed if the person used, or did not use, a power the person has over the trust. A person with a general power of appointment over trust property is treated as having a beneficial interest. (b) Nonadverse party. For this subpart, a “nonadverse party” is anyone who is not an adverse party. (c) Related or subordinate party. A “related or subordinate party” is a nonadverse party who is one of the following: (1) the grantor’s spouse, if the spouse lives with the grantor; or (2) the grantor’s father, mother, child or other descendant, brother, or sister; an employee of the grantor; a corporation, or an employee of a corporation, in which the grantor’s and the trust’s stock holdings are significant for voting control; or a subordinate employee of a corporation where the grantor is an executive. For subsection (f) and sections 674 and 675, this person is presumed to be subject to the grantor’s direction about using or not using the powers given to the person, unless the person proves by more likely than not that the person is not subject to that direction. (d) Power subject to a condition. A person is treated as having a power covered by this subpart even if the person must first give notice before using it, or the power takes effect only after a stated period following its exercise. (e) Grantor treated as holding a spouse’s power or interest. (1) General rule. For this subpart, a grantor is treated as holding a power or interest held by (A) someone who was the grantor’s spouse when the power or interest was created, or (B) someone who became the grantor’s spouse after the power or interest was created, but only for periods after that person became the spouse. (2) Marital status. For paragraph (1)(A), a person legally separated from a spouse under a divorce or separate-maintenance decree is not treated as married. (f) Subpart not to result in foreign ownership. (1) General rule. Despite other provisions of this subpart, it applies only to the extent it causes an amount, if any, to be currently counted, directly or through one or more entities, under this chapter when computing the income of a United States citizen or resident or a domestic corporation. (2) Exceptions. (A) Certain revocable and irrevocable trusts. Paragraph (1) does not apply to a trust portion if (i) only the grantor can exercise, without another person’s approval or consent, the power to return full title to the grantor—or the grantor can do so with the consent of a related or subordinate party who is subject to the grantor’s direction—or (ii) during the grantor’s life, the only amounts that may be distributed from that portion, whether income or principal, are amounts to the grantor or the grantor’s spouse. (B) Compensatory trusts. Unless regulations provide otherwise, paragraph (1) does not apply to a trust portion whose distributions are taxable as payment for services. (3) Special rules. Unless regulations provide otherwise, (A) a controlled foreign corporation, as defined in section 957, is treated as a domestic corporation for paragraph (1), and (B) paragraph (1) does not apply when applying section 1297. (4) Recharacterizing claimed gifts. If a transfer comes directly or indirectly from a partnership or foreign corporation and the recipient treats it as a gift or bequest, the Secretary may recharacterize it as the Secretary considers appropriate to prevent avoidance of this subsection’s purposes. (5) Foreign grantor. If (A) without this subsection a foreign person would be treated as owning a trust portion, and (B) the trust has a United States-person beneficiary, that beneficiary is treated as the grantor of the portion to the extent the beneficiary directly or indirectly transferred property to the foreign person, other than in a sale for full and adequate consideration. A gift is not counted to the extent section 2503(b) would exclude it from taxable gifts. (6) Regulations. The Secretary must issue regulations needed or appropriate to carry out this subsection, including regulations providing that paragraph (1) does not apply in appropriate cases.