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items of income, deductions, and credits attributable to the
portion of the trust of which the person is deemed the owner.
Sections 672 through 678 prescribe a number of detailed rules
with respect to various circumstances under which a grantor or
other person will be deemed the owner of all or a portion of a
trust. For example, section 674(a) generally provides a grantor
will be treated as the owner of any portion of a trust whose
income, without the approval of an adverse party, is subject to a
power of disposition held by the grantor or a nonadverse party.
In still another instance, section 675(3) provides a grantor will
be treated as the owner of any portion of a trust in respect of
which the grantor has directly or indirectly borrowed the corpus
or income of the trust, where the grantor has not completely
repaid the loan, including interest, before the beginning of the
taxable year. However, section 675(3) does not apply to a loan
from the trust bearing an adequate interest rate and having
adequate security, if the loan is made by an independent trustee
to the grantor.
In applying the grantor trust rules described above, the
principle of substance over form is particularly applicable
considering the potential for manipulation of trusts. See Zmuda
v. Commissioner, 79 T.C. 714 (1982), affd. 731 F.2d 1417 (9th
Cir. 1984); Lazarus v. Commissioner, 58 T.C. 854, 864 (1972),
affd. 513 F.2d 824 (9th Cir. 1975). The grantor of a trust may
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