26 U.S.C. § 678, substantial owner rules

26 U.S.C. § 678 covers when a person other than a grantor is treated as a trust owner, and the exceptions stated in the section.

Scope of section 678

Section 678 is part of Title 26, the Internal Revenue Code, within Chapter 1 on normal taxes and surtaxes. The Office of the Law Revision Counsel publishes the section in the United States Code Online.^[1]

The provision addresses when a person other than a trust grantor is treated as the owner of a portion of a trust. Its general rule focuses on powers over trust property or income, and the rest of the section gives exceptions and a cross-reference.^[1]

When another person is treated as owner

The general rule applies to a portion of a trust when a person alone can exercise a power to vest the trust corpus or its income in that person. It also reaches a person who has partly released or modified such a power but retains control that would cause grantor-owner treatment under the principles in sections 671 through 677.^[1]

The section includes a limit for a power over income when the grantor or a transferor covered by section 679 is already treated as owner under another provision of the same subpart. In that circumstance, subsection (a) does not apply to that income power.^[1]

A trustee or cotrustee's limited power to use income for support or maintenance is excluded from subsection (a) when used for someone whom the power holder is obligated to support. The exclusion applies only to the extent income is used for that support; the section separately addresses amounts paid from corpus or income from another taxable year.^[1]

A power that the holder renounces or disclaims within a reasonable time after first learning it exists is also outside subsection (a). The section separately points to section 1361(d) for a rule treating a trust beneficiary as owner of the trust portion consisting of S corporation stock.^[1]

Connection to U.S. reporting

Section 678 states an income tax ownership rule for a portion of a trust. Section 678 does not identify a U.S. return, information form, foreign trust filing, or foreign account reporting regime.^[1]

For a U.S. citizen connected to a foreign trust, the section supplies the ownership rule described above. It does not state how a person's citizenship, a trust's foreign status, or an account outside the United States changes filing requirements.^[1]

Official text and structure

The official text is available through the United States Code Online site maintained by the Office of the Law Revision Counsel.

Subsections (a) through (e) contain the general ownership rule, limits involving another owner's treatment, support obligations, renunciation or disclaimer, and the S corporation cross-reference.^[1]

Questions and answers

What does section 678 decide?

It describes when a person other than the grantor is treated as owner of part of a trust. The rule centers on certain powers over the trust corpus or income.^[1]

Does the section apply to a person who modified a power?

It can apply when a person partly releases or modifies the described power and retains control that would lead to grantor-owner treatment under principles in sections 671 through 677.^[1]

What exception concerns support payments?

A trustee or cotrustee's power to apply trust income for support or maintenance is outside subsection (a) when the holder has an obligation to support that person. The exception applies only to the extent the income is used for that purpose.^[1]

Does section 678 list foreign trust forms?

Section 678 does not identify foreign trust forms or reporting regimes. Section 678 states an ownership rule and a cross-reference to section 1361(d).^[1]

Related glossary terms

Beneficiary other than the grantor treated as owner: Section 678 describes when a person other than the grantor is treated as owner of part of a trust, based on a power over trust corpus or income and exceptions.
Power to control beneficial enjoyment: Section 674 describes when control over trust benefits causes a grantor to be treated as owner of a trust portion. The rule concerns beneficial enjoyment.
Nongrantor trust: A nongrantor trust is taxable to the extent its assets are not treated as owned by another person. Partial treatment and beneficiary reporting both apply.