Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-41

1954-1 C.B. 22

Sec. 61

IRS Headnote

The income of a trust created under an instrument which (1) vests in the grantor-trustee the power to distribute from trust income or corpus such amounts at such time as he in his sole discretion shall determine to be necessary for certain needs of the beneficiary and (2) provides that upon death of the beneficiary the remainder shall be paid over to a designated educational organization constitutes taxable income to the grantor under section 22(a) of the Internal Revenue Code.

Full Text

Rev. Rul. 54-41

Advice is requested whether the income of a trust created under an instrument the provisions of which are set forth below constitute taxable income to the grantor.

In the case presented, the taxpayer created a trust naming himself as trustee of certain personal property which he then owned. The trust instrument provides that the principal and income of the trust shall be paid to the taxpayer's mother during her lifetime in such amounts and at such time as the trustee, in his sole discretion, shall determine necessary for her care, comfort, support, maintenance, benefit, and best interests. The trust is to terminate upon the mother's death and the balance of the principal and income remaining in the hands of the trustee is to be paid over to a designated educational organization to be added to certain scholarship funds. The grantor-trustee has unlimited power to invest and reinvest the principal and income of the trust in such investments as he may choose in the exercise of his judgment and discretion. He has full power and authority to change investments, and to sell, grant, convey, pledge, or mortgage any property, real or personal, of which the trust fund may at any time, in whole or in part, consist. The general administrative powers vested in the trustee are to be exercised primarily for the benefit of the beneficiary of the trust. Furthermore, the trust instrument does not vest in any person the power to borrow or to acquire the trust corpus or income for less than adequate consideration.

Section 39.22(a)-21 of Regulations 118 provides in pertinent part that the income of a trust is taxable to the grantor under section 22(a) of the Internal Revenue Code, although not payable to the grantor himself and not to be applied in satisfaction of his legal obligations, if he has retained a control of the trust so complete that he is still in practical effect the owner of its income. Such section further provides that a grantor has retained control so complete as to render the income of a trust taxable to him, whatever the duration of the trust, if the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable in any capacity (except a power exercisable in one of certain ways set forth in the regulations, none of which are present here), by the grantor or any person not having a substantial adverse interest in the beneficial enjoyment of the corpus or income, whichever is subject to the power, or both.

Under the trust instrument, the grantor-trustee has the power to distribute to his mother during her lifetime from trust income or corpus such amounts at such time as he shall, in his sole discretion, determine to be necessary for her care, comfort, support, maintenance, benefit, and best interests. By virtue of such power, he also determines the amount of income and corpus paid over to the designated educational organization upon termination of the trust. Accordingly, beneficial enjoyment of the corpus and the income therefrom is subject to the power of disposition by the grantor within the purview of section 39.22(a)-21 of Regulations 118.

In view of the foregoing, it is held that the income of the trust is taxable to the grantor under section 22(a) of the Internal Revenue Code.