- 26 -
transferor and the trust property. See, e.g., Zmuda v.
Commissioner, 79 T.C. 714, 719-722 (1982), affd 731 F.2d 1417
(9th Cir. 1984). Recently, in Muhich v. Commissioner, T.C. Memo.
1999-192, affd. 238 F.3d 860 (7th Cir. 2001), we listed the
following factors to be considered in determining whether a trust
lacks economic substance for tax purposes:
(1) Whether the taxpayer’s relationship as grantor to
the property differed materially before and after the
trust’s formation; (2) whether the trust had an
independent trustee; (3) whether an economic interest
passed to other beneficiaries of the trust; and
(4) whether the taxpayer felt bound by any restrictions
imposed by the trust itself or by the law of trusts.
* * * [Citations omitted.]
(3) Grantor Trust Provisions
Under specified circumstances, the statutory grantor trust
provisions, sections 671–679, treat the grantor of the trust and,
sometimes, a third party, as the substantial owner of all or part
of the trust. Trust income is taxed to the substantial owner
under the rules of section 671. Because the conditions imposed
by each of the grantor trust provisions are independent of those
imposed by the others, the grantor can avoid taxation only if
(1) he does not possess a disqualifying reversionary interest,
sec. 673, (2) the trust cannot be revoked by the grantor or a
nonadverse party, sec. 676, (3) trust income cannot be
distributed to the grantor or the grantor’s spouse or be used to
pay for insurance on their lives without the consent of an
adverse party, sec. 677, (4) specified powers to control
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011