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Section 674(b) provides that subsection (a) does not apply to
certain powers. A power held by any person to add to the
beneficiaries or to a class of beneficiaries designated to
receive the income or corpus, except where such action is to
provide for after-born or after-adopted children, does not fall
within the powers excepted from the application of section
674(a). Section 672 provides that an adverse party is a party
that has a substantial beneficial interest that could be
adversely affected by the exercise or nonexercise of a power he
possesses respecting the trust.
Section 1.674(a)-1, Income Tax Regs., defines the scope of
the power of disposition which will require taxation of trust
income to the grantor. In general a power that can affect
beneficial enjoyment of a trust or a portion of a trust is a
power to dispose of the beneficial enjoyment, even if it is held
in a fiduciary capacity. Section 1.674(a)-1(a), Income Tax
Regs., provides:
Under section 674, the grantor is treated as the
owner of a portion of a trust if the grantor or a
nonadverse party has a power, beyond specified limits,
to dispose of the beneficial enjoyment of the income or
corpus, whether the power is a fiduciary power, a power
of appointment, or any other power.
Section 3.2 of article III of the trust agreement gives Kanter a
power of appointment over all but one of the original trusts.
That power could be exercised during his lifetime or as a
testamentary power.
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