26 U.S.C. § 671 — Trust income, deductions, and credits at-

Page 1844 TITLE 26—INTERNAL REVENUE CODE [§ 669 distributed net income, other than a taxable year during all of which the beneficiary re- ceiving the distribution was not a citizen or resident of the United States. (5) Determination of undistributed net income Notwithstanding section 666, for purposes of this subsection, an accumulation distribution from the trust shall be treated as reducing proportionately the undistributed net income for undistributed income years. (6) Periods before 1996 Interest for the portion of the period de- scribed in paragraph (2) which occurs before January 1, 1996, shall be determined— (A) by using an interest rate of 6 percent, and (B) without compounding until January 1, 1996. (b) Limitation The total amount of the interest charge shall not, when added to the total partial tax com- puted under section 667(b), exceed the amount of the accumulation distribution (other than the amount of tax deemed distributed by section 666(b) or (c)) in respect of which such partial tax was determined. (c) Interest charge not deductible The interest charge determined under this sec- tion shall not be allowed as a deduction for pur- poses of any tax imposed by this title. (Added Pub. L. 94–455, title X, § 1014(b), Oct. 4, 1976, 90 Stat. 1617; amended Pub. L. 101–508, title XI, § 11802(f)(3), Nov. 5, 1990, 104 Stat. 1388–530; Pub. L. 104–188, title I, § 1906(a), Aug. 20, 1996, 110 Stat. 1914.) Editorial Notes PRIOR PROVISIONS A prior section 668, acts Aug. 16, 1954, ch. 736, 68A Stat. 225; Oct. 16, 1962, Pub. L. 87–834, § 7(d), 76 Stat. 986; Dec. 30, 1969, Pub. L. 91–172, title III, § 331(a), 83 Stat. 594, related to treatment of amounts deemed distrib- uted in preceding years, prior to repeal by Pub. L. 94–455, title VII, § 701(a)(3), Oct. 4, 1976, 90 Stat. 1577. See section 667 of this title. AMENDMENTS 1996—Subsec. (a). Pub. L. 104–188 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: ‘‘For purposes of the tax determined under section 667(a), the interest charge is an amount equal to 6 percent of the partial tax com- puted under section 667(b) multiplied by a fraction— ‘‘(1) the numerator of which is the sum of the num- ber of taxable years between each taxable year to which the distribution is allocated under section 666(a) and the taxable year of the distribution (count- ing in each case the taxable year to which the dis- tribution is allocated but not counting the taxable year of the distribution), and ‘‘(2) the denominator of which is the number of tax- able years to which the distribution is allocated under section 666(a).’’ 1990—Subsec. (c). Pub. L. 101–508 substituted heading for one which read ‘‘Special rules’’ and amended text generally, restating provisions of former par. (1) as en- tire subsection and striking out former par. (2) which provided that for purposes of this section, undistrib- uted net income existing in a trust as of January 1, 1977, would be treated as allocated under section 666(a) to the first taxable year beginning after December 31, 1976. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title I, § 1906(d)(1), Aug. 20, 1996, 110 Stat. 1916, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to distributions after the date of the enactment of this Act [Aug. 20, 1996].’’ EFFECTIVE DATE Pub. L. 94–455, title X, § 1014(d), Oct. 4, 1976, 90 Stat. 1617, provided that: ‘‘The amendments made by this section [enacting this section and amending section 667 of this title] shall apply to taxable years beginning after December 31, 1976.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. [§ 669. Repealed. Pub. L. 94–455, title VII, § 701(d)(1), Oct. 4, 1976, 90 Stat. 1578] Section, acts Oct. 16, 1962, Pub. L. 87–834, § 7(e), 76 Stat. 986; Dec. 30, 1969, Pub. L. 91–172, title III, § 331(a), 83 Stat. 596, related to the treatment of capital gain deemed distributed in preceding years. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable to distributions made in taxable years beginning after Dec. 31, 1975, see section 701(h) of Pub. L. 94–455, set out as an Effective Date of 1976 Amendment note under section 667 of this title. SUBPART E—GRANTORS AND OTHERS TREATED AS SUBSTANTIAL OWNERS Sec. 671. Trust income, deductions, and credits attrib- utable to grantors and others as substantial owners. 672. Definitions and rules. 673. Reversionary interests. 674. Power to control beneficial enjoyment. 675. Administrative powers. 676. Power to revoke. 677. Income for benefit of grantor. 678. Person other than grantor treated as substan- tial owner. 679. Foreign trusts having one or more United States beneficiaries. Editorial Notes AMENDMENTS 1976—Pub. L. 94–455, title X, § 1013(e)(1), Oct. 4, 1976, 90 Stat. 1616, added item 679. § 671. Trust income, deductions, and credits at- tributable to grantors and others as substan- tial owners Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person Page 1845 TITLE 26—INTERNAL REVENUE CODE § 672 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 under this chapter in computing taxable income or credits against the tax of an individual. Any re- maining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and con- trol over the trust under section 61 (relating to definition of gross income) or any other provi- sion of this title, except as specified in this sub- part. (Aug. 16, 1954, ch. 736, 68A Stat. 226.) Statutory Notes and Related Subsidiaries CERTAIN ENTITIES NOT TREATED AS CORPORATIONS Pub. L. 99–514, title VI, § 646, Oct. 22, 1986, 100 Stat. 2292, as amended by Pub. L. 100–647, title I, § 1006(k), Nov. 10, 1988, 102 Stat. 3411, provided that: ‘‘(a) GENERAL RULE.—For purposes of the Internal Revenue Code of 1986, if the entity described in sub- section (b) makes an election under subsection (c), such entity shall be treated as a trust to which subpart E of part 1 of subchapter J of chapter 1 of such Code applies. ‘‘(b) ENTITY.—An entity is described in this sub- section if— ‘‘(1) such entity was created in 1906 as a common law trust and is governed by the trust laws of the State of Minnesota, ‘‘(2) such entity is exclusively engaged in the leas- ing of mineral property and activities incidental thereto, and ‘‘(3) income interests in such entity are publicly traded as of October 22, 1986, on a national stock ex- change. ‘‘(c) ELECTION.— ‘‘(1) IN GENERAL.—An election under this subsection to have the provisions of this section apply— ‘‘(A) shall be made by the board of trustees of the entity before January 1, 1991, and ‘‘(B) shall not be valid unless accompanied by an agreement described in paragraph (2). ‘‘(2) AGREEMENT.— ‘‘(A) IN GENERAL.—The agreement described in this paragraph is a written agreement signed by the board of trustees of the entity which provides that the entity will not acquire any additional property other than property described in subparagraph (B). ‘‘(B) PERMISSIBLE ACQUISITIONS.—Property is de- scribed in this paragraph if it is— ‘‘(i) surface rights to property the acquisition of which— ‘‘(I) is necessary to mine mineral rights held on October 22, 1986, and ‘‘(II) is required by a written binding agree- ment between the entity and an unrelated per- son entered into on or before October 22, 1986, ‘‘(ii) surface rights to property which are not described in clause (i) and which— ‘‘(I) are acquired in an exchange to which sec- tion 1031 [probably means section 1031 of this title] applies, and ‘‘(II) are necessary to mine mineral rights held on October 22, 1986, ‘‘(iii) tangible personal property incidental to the leasing of mineral property and activities in- cidental thereto, or ‘‘(iv) part of any required reserves of the entity. ‘‘(3) BEGINNING OF PERIOD FOR WHICH ELECTION IS IN EFFECT.—The period during which an election is in ef- fect under this subsection shall begin on the 1st day of the 1st taxable year beginning after the date of the enactment of this Act [Oct. 22, 1986] and following the taxable year in which the election is made. ‘‘(4) MANNER OF ELECTION.—Any election under this subsection shall be made in such manner as the Sec- retary of the Treasury or his delegate may prescribe. ‘‘(d) SPECIAL RULES FOR TAXATION OF TRUST.— ‘‘(1) ELECTION TREATED AS A LIQUIDATION.—If an election is made under subsection (c) with respect to any entity— ‘‘(A) such entity shall be treated as having been liquidated into a trust immediately before the pe- riod described in subsection (c)(3) in a liquidation to which section 333 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) applies, and ‘‘(B) for purposes of section 333 of such Code (as so in effect)— ‘‘(i) any person holding an income interest in such entity as of such time shall be treated as a qualified electing shareholder, and ‘‘(ii) the earnings and profits, and the value of money or stock or securities, of such entity shall be apportioned ratably among persons described in clause (i). The amendments made by subtitle D of this title [subtitle D (§§ 631–634) of title VI of Pub. L. 99–514, see Tables for classification] and section 1804 of this Act [see Tables for classification] shall not apply to any liquidation under this paragraph. ‘‘(2) TERMINATION OF ELECTION.—If an entity ceases to be described in subsection (b) or violates any term of the agreement described in subsection (c)(2), the entity shall, for purposes of the Internal Revenue Code of 1986, be treated as a corporation for the tax- able year in which such cessation or violation occurs and for all subsequent taxable years. ‘‘(3) TRUST CEASING TO EXIST.—Paragraph (2) shall not apply if the trust ceases to be described in sub- section (b) or violates the agreement in subsection (c)(2) because the trust ceases to exist. ‘‘(e) SPECIAL RULE FOR PERSONS HOLDING INCOME IN- TERESTS.—In applying subpart E of part I of subchapter J of chapter 1 of the Internal Revenue Code of 1986 to any entity to which this section applies— ‘‘(1) a reversionary interest shall not be taken into account until it comes into possession, and ‘‘(2) all items of income, gain, loss, deduction, and credit shall be allocated to persons holding income interests for the period of the allocation.’’ § 672. Definitions and rules (a) Adverse party For purposes of this subpart, the term ‘‘ad- verse party’’ means any person having a sub- stantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses re- specting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust. (b) Nonadverse party For purposes of this subpart, the term ‘‘non- adverse party’’ means any person who is not an adverse party. (c) Related or subordinate party For purposes of this subpart, the term ‘‘re- lated or subordinate party’’ means any non- adverse party who is— (1) the grantor’s spouse if living with the grantor; (2) any one of the following: The grantor’s father, mother, issue, brother or sister; an em- ployee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are sig-