Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-70

1969-1 C.B. 182

Sec. 674

IRS Headnote

An individual beneficiary who is a resident of the United States is not taxable on a distribution from a foreign trust considered to be owned by a nonresident alien grantor under subpart E of subchapter J of the Code.

Full Text

Rev. Rul. 69-70

Advice has been requested whether the income of a foreign trust, under the circumstances described below, is taxable to the beneficiary, an individual who is a resident of the United States.

X, a nonresident alien individual, created a foreign trust for the benefit of a resident of the United States. Under the terms of the trust instrument, X reserved absolute power to dispose of the beneficial enjoyment of both the income and the corpus of the trust. The trustees were nonresident aliens, and all of the trust property had a situs outside of the United States.

When income-producing property is placed in trust, the Federal income tax liability generally shifts from the grantor to the trust and beneficiaries in accordance with subparts A through D of part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1954 (sections 641 through 669).

However, where the grantor retains dominion and control over the income and corpus of the trust, subpart E of subchapter J (sections 671 through 678), rather than subparts A through D of subchapter J, is applicable. Under section 671 of the Code, where the grantor is treated as the owner of any portion of a trust, there are included in computing the taxable income and credits of the grantor, those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income or credits against the tax of an individual.

Since X, a nonresident alien grantor, retained the absolute power to dispose of the beneficial enjoyment of both the income and the corpus of the trust, he is treated as the owner of the trust under section 674(a) of the Code. Accordingly, an individual beneficiary who is a resident of the United States is not taxable on that portion of the income distributed to him from the foreign trust which is considered to be owned by the nonresident alien grantor under subpart E of subchapter J of the Code.

It should be noted that United States source income of a foreign trust controlled by a nonresident alien grantor is taxed to the grantor. If the grantor is a resident of a non-treaty country, the provisions of section 871 of the Code apply concerning the tax. However, if the grantor is a resident of a treaty country, the provisions of the treaty may determine the tax.