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has directly or indirectly borrowed the corpus or income of the
trust and has not completely repaid the loan, including any
interest, before the beginning of the taxable year. However,
this section does not apply to a loan which provides for adequate
interest and adequate security if such loan is made by a trustee
other than the grantor and other than a related or subordinate
trustee subservient to the grantor.
Prior to 1987, Kanter borrowed money from BRT. As of
January 1, 1987, he owed $287,030 to BRT. As of October 21,
1987, he still owed $287,030 to BRT. As of January 1, 1989, he
owed $1,311,430 to BRT. Kanter introduced no evidence that this
loan provided for adequate interest and adequate security.
Because we conclude that Kanter was the true grantor of BRT
and that sections 674 and 675(3) apply, we hold that he is
taxable on the income of the trusts in 1986 and 1987. To the
extent that the income, set forth in the notice of deficiency for
1987, was earned by partnerships in 1986, such income is taxable
to Kanter for 1986. With respect to the years involved in this
issue which coincide with or involve the same year or years that
are involved with Century Industries (Issue 2), to the extent
certain payments to Century Industries have been determined to
constitute Kanter's income, such income should not be considered
in determining BRT's allocable share of income as a partner in
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