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regulations is limited to certain types of litigation settlement
funds. Funds that satisfy obligations "to repair or replace,
products regularly sold in the ordinary course of the
transferor's trade or business" are specifically excluded from
coverage. Sec. 1.468B-1(g)(2), Income Tax Regs.
The rules governing the taxation of grantor trusts are
contained in subpart E of subchapter J, sections 671-679.
Section 671 provides that when the grantor is treated as the
owner of any portion of a trust, the grantor's taxable income and
credits are computed taking into account those items of the
trust's income, deductions, and credits attributable to the
portion of the trust that the grantor is treated as owning.
Section 677(a) provides that the grantor is treated as the owner
of any portion of a trust whose income without the approval or
consent of any adverse party is, or, in the discretion of the
grantor or a nonadverse party, or both, may be: (1) Distributed
to the grantor, or (2) held or accumulated for future
distribution to the grantor. The regulations provide the
following interpretive gloss on the scope of the statutory
language:
Under Section 677 the grantor is treated as the owner
of a portion of a trust if he has retained any interest
which might, without the approval or consent of an
adverse party, enable him to have the income from that
portion distributed to him at some time either actually
or constructively * * *. [Sec. 1.677(a)-1(c), Income
Tax Regs.; emphasis added.]
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