Rev. Rul. 86-82

1986-1 C.B. 253, 1986-24 I.R.B. 14.

GRANTOR TRUSTS; LOAN FROM TRUST TO GRANTOR

Published: June 16, 1986

Section 675.-Administrative Powers, 26 CFR 1.675-1: Administrative powers

(Also Section 671; 1.671-3).

  Grantor Trusts; loan from trust to grantor. A grantor-trustee is treated as owner of trust assets where grantor-trustee borrows trust funds and repays the funds with interest in the same year they were borrowed.

ISSUE

  If the grantor of a trust borrows the entire trust corpus and makes complete repayment of principal and interest within the same year is that grantor treated as owner of the trust under section 675(3) of the Internal Revenue Code?

FACTS

  On May 11, 1985, A created an irrevocable trust for the benefit of A's children. The trust instrument names A trustee and gives A power to borrow trust corpus or income at the market rate of interest with adequate security. On June 11, 1985, A borrowed 100x dollars from the trust in compliance with these requirements. The borrowed funds comprised the entire trust corpus. On November 3, 1985, A repaid the loan plus interest. Both A and the trust are calendar year taxpayers.

LAW AND ANALYSIS

  Section 671 of the Code provides that if any section of subpart E of subchapter J treats the grantor as the owner of any portion of the trust, then the grantor must include in computing taxable income those items of income, deductions, and credits which are attributable to that portion of the trust.

  Section 675(3) of the Code provides that, generally, the grantor of a trust will be treated as the owner of any portion of a trust in respect to which the grantor has borrowed the corpus or income and has not completely repaid the loan, including any interest, before the beginning of the taxable year.

  In Mau v. United States, 355 F. Supp. 909 (D. Hawaii 1973), the taxpayer established five separate trusts, with the taxpayer designated trustee of each.

In 1965, the taxpayer borrowed money from each of the trusts. These amounts were not repaid until 1969. The taxpayer argued that section 675(3) of the Code did not cause the taxpayer-grantor to be liable for federal income tax on the trusts' 1965 income because the loans were not outstanding at the beginning of the year. The court rejected this interpretation of the statute, reasoning that section 675(3) was enacted to prevent the shifting of taxable income in situations where a grantor retained control and use of trust properties through borrowing. Therefore, the court held that the borrowing of trust corpus or income by a grantor at any time during a taxable year would result in the grant or being taxed on trust income for that entire year under section 675(3). The court concluded that the taxpayer was taxable on income of the trusts in 1965, the year the borrowing occurred, even though the loans were made after the beginning of the year. If section 675(3) otherwise applies for a given year, its effect is not avoided by making repayment before the year closes. Mau therefore stands for the principle that section 675(3) applies for any year during any part of which a loan by a trust to the grantor- trustee is outstanding.

  In the present case, A borrowed the entire trust corpus during calendar 1985. Accordingly, A is treated as the owner of the entire trust under section 675(3) of the Code in spite of the fact that A made full payment of principal and interest before the close of 1985. See section 1.671-3(b)(3) of the regulations. Hence, under section 671, A must include in gross income all income earned by the trust in 1985.

HOLDING

  Under section 675(3) of the Code, a grantor-trustee who has both borrowed the entire trust corpus and repaid the borrowed funds plus interest in the same year will be treated for federal income tax purposes as the owner of the entire trust for that year.

Rev. Rul. 86-82, 1986-1 C.B. 253, 1986-24 I.R.B. 14.