Rev. Rul. 80-74

                       Internal Revenue Service
                                 Revenue Ruling

        "FOREIGN TAX HAVEN DOUBLE TRUST"; INCOME FOR BENEFIT OF GRANTOR

                           Published: March 17, 1980

Section 671.--Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners, 26 CFR 1.671-1: Grantors and others treated as substantial owners; scope.

  "Foreign tax haven double trust"; income for benefit of grantor. An example is set forth of a "foreign tax haven double trust" in which an agent in a foreign country, who is named as the "creator" created a trust in that country, naming the taxpayer as trustee. The trust received certain income-producing property from the taxpayer. The "creator" then created a second trust in the same country naming the first trust as trustee. The creation of both trusts will be considered a sham, and the substance of the transaction will control.

ISSUE

  What are not federal income tax consequences of the scheme to create trusts in a foreign country in the circumstances described below?

FACTS

  The taxpayer is a U.S. citizen. In 1979, the taxpayer attended a meeting arranged by a promoter of the 'foreign tax haven double trust.'  The promoter represented that the 'double trust' would radically reduce or eliminate the United States income tax liabilities of the taxpayer.  According to the promoter, the 'double trust' would also provide various other benefits such as avoidance of probate, elimination of federal estate and gift tax liability, and avoidance of various state and local taxes.  Also, according to the promoter, the 'double trust' is a contractual arrangement known as a 'pure trust' and the taxpayer has a constitutional right to create such trusts without fear of interference by federal or state authority.

  Under a promoter's direction, the taxpayer agreed to the creation of a 'double trust' arrangement.  Pursuant to this agreement, the promoter directed an agent in a foreign country to create a trust in that country, referred to as 'Trust 1,' for the taxpayer.  The foreign agent, referred to as the 'creator,' named the taxpayer as trustee and the taxpayer transferred to Trust 1 certain income-producing real estate and corporate securities, and the assets of the taxpayer's sole proprietorship.  The foreign 'creator' of Trust 1 then created a second trust (Trust 2) in the same foreign country, naming Trust 1 as trustee of Trust 2.

  Except for the names of the trustees, Trust 1 and Trust 2 are identical. Each trust instrument provides that the original trustee may select a second trustee and that the two trustees may name a third trustee.  The trusts each provided for broad powers of the trustees to deal with trust property, in their sole discretion, in any fashion that they choose.  The instruments also contain the statement that a resolution by the trustees to take an action shall itself be evidence that such action is within their authority.  The trustees are empowered to distribute trust property, as they see fit, to whomever they choose.

  The term of each trust is stated to be 25 years, but the trustees are explicitly empowered to extend or shorten the term. Each trust instrument also contains a statement that nothing in its terms shall be construed as intended to evade or contravene any law.

  The taxpayer, in accordance with the promoter's advice, distributed income received by Trust 1 to Trust 2, as soon as it was received by Trust 1.  Trust 2 retains the income amounts, and, from time to time, makes distributions to the taxpayer and to other members of the taxpayer's family as directed by the taxpayer as trustee of Trust 1.

  The business assets and operations transferred to Trust 1 continue to be managed by the taxpayer in essentially the same fashion as before the taxpayer entered into the 'double trust' arrangement.

LAW AND ANALYSIS

  Section 61 of the Internal Revenue Code provides that the term gross income means all income 'from whatever source' derived, including, among other things, income from an interest in an estate or trust.

  The substance, rather than the form, of a transaction in which a taxpayer is involved govern the tax consequences of the transaction.  See, for example, Commission v. Court Holding Company, 324 U.S. 331 (1945), Ct. D. 1636, 1945 C.B. 58; Helvering v. Clifford, 309 U.S. 331 (1940), Ct. D. 1444, 1940-1 C.B. 105; Gregory v. Helvering, 293 U.S. 465, Ct. D. 911, XIV-1 C.B. 193 (1935).

  Subpart E of subchapter J of the Code (sections 671-679) deals with grantor trusts.  Under section 671, if the grantor is treated as the owner of a trust as a result of application of the rules in subpart E, then those items of income, deductions, and credits that are attributable to the trust are includible, in computing the grantor's taxable income, to the extent that such items would be taken into account in determining the tax liability of an individual.

  Section 7701(a)(31) of the Code defines 'foreign trust' to mean a trust, the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A.

  Under Subpart E of the Code income of a trust over which the grantor has retained substantial dominion or control is taxable to the grantor rather than to the trust which received the income or to the beneficiary to whom the income may be distributed.  In the present case, the taxpayer, while purporting to, did not give up ownership and control of the assets.  The use of a 'creator' in the foreign country is irrelevant as the taxpayer is the grantor of both trusts for federal tax purposes.  The taxpayer's transfer of property to Trust 1 is a contribution by the taxpayer as the grantor.  The taxpayer is also the grantor of Trust 2, because of the taxpayer's control over Trust 1.  See sections 674, 675, 676, and 677 of the Code.

HOLDINGS

  The purported creation of Trust 1 and Trust 2 is a sham and the form of the transaction will be given no tax effect.  Since the taxpayer effectively continues to own and control the assets, the arrangements between the trusts will be given no effect for tax purposes.  See Rev. Rul. 75-257, 1975-2 C.B. 251, dealing with the income tax treatment of transfers of an individual's property and 'lifetime services' to a 'family estate' trust, and the case of Wesenberg v. Commissioner, 69 T.C. 1005 (1978), where a similar transaction was described by the court as a 'flagrant tax avoidance scheme.'

  Moreover, Subpart E of the Code (sections 671-679) requires the taxpayer, as the grantor of the trusts, to include all items of income, deductions, or credits against tax attributable to either Trust 1 or Trust 2 in computing the taxpayer's taxable income.

  See also section 679 (treating the grantor of a foreign trust as owner) and section 1491 (imposing an excise tax on transfers to foreign trusts).

  No deduction is allowable under section 212 of the Code for the taxpayer's expenses with respect to the 'double trusts.'  See Rev. Rul. 79-324, 1979-42 I.R.B. 12.

Rev. Rul. 80-74, 1980-1 C.B. 137, 1980-11 I.R.B. 13.