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Use of the income of the trust for the purpose of discharging a
legal obligation of the grantor constitutes a distribution to the
grantor within the meaning of section 677(a). Anesthesia Serv.
Med. Group, Inc. v. Commissioner, 85 T.C. 1031, 1055 (1985),
affd. on other grounds 825 F.2d 241 (9th Cir. 1987); sec.
1.677(a)-1(d), Income Tax Regs.
Section 672(a) defines an "adverse party" as any person
having a substantial beneficial interest in a trust that would be
adversely affected by the exercise or nonexercise of a power that
the party possesses respecting the trust. Section 672(b) defines
"nonadverse party" as any person who is not an adverse party.
The legislative history of the Internal Revenue Code of 1954
explains that section 677 contemplates situations in which
payment of trust income to or for the benefit of the grantor is
either required under the terms of the trust or discretionary.
H. Rept. 1337, 83d Cong., 2d Sess. A217 (1954). The
classification of persons that participate in the administration
of the trust as adverse or nonadverse parties becomes relevant to
the application of section 677 only if such persons exercise
discretion. The theory behind this distinction is that where a
power to pay trust income to the grantor or for his benefit is
held by some person other than the grantor, the power should
nevertheless be attributed to the grantor if the holder of the
power has no substantial beneficial interest that would be
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