206
‘‘(B) in which the property transferred by
each donor is commingled with property trans-
ferred by other donors who have made or make
similar transfers,
‘‘(C) which cannot have investments in se-
curities which are exempt from taxes imposed
by this subtitle,
‘‘(D) which includes only amounts received
from transfers which meet the requirements of
this paragraph,
‘‘(E) which is maintained by the organiza-
tion to which the remainder interest is contrib-
uted and of which no donor or beneficiary of an
income interest is a trustee, and
‘‘(F) from which each beneficiary of an in-
come interest receives income, for each year for
which he is entitled to receive the income inter-
est referred to in subparagraph (A), determined
by the rate of return earned by the trust for
such year.
For purposes of determining the amount of any
charitable contribution allowable by reason of a
transfer of property to a pooled fund, the value of
the income interest shall be determined on the basis
of the highest rate of return earned by the fund for
207
any of the 3 taxable years immediately preceding the
taxable year of the fund in which the transfer is
made. In the case of funds in existence less than 3
taxable years preceding the taxable year of the fund
in which a transfer is made the rate of return shall
be deemed to be 6 percent per annum, except that
the Secretary may prescribe a different rate of re-
turn.
‘‘(c) UNUSED LOSS CARRYOVERS.—If on the termi-
nation of an estate or trust, the estate or trust has a loss
carryover then such carryover shall be allowed as a deduc-
tion, in accordance with regulations prescribed by the Sec-
retary, to the beneficiaries succeeding to the property of
the estate or trust.
‘‘(d) CERTAIN DISTRIBUTIONS BY CEMETERY PER-
PETUAL CARE FUNDS.—In the case of a cemetery per-
petual care fund which—
‘‘(1) was created pursuant to local law by a tax-
able cemetery corporation for the care and mainte-
nance of cemetery property, and
‘‘(2) is treated for the taxable year as a trust
for purposes of this subchapter,
any amount distributed by such fund for the care and
maintenance of gravesites which have been purchased
from the cemetery corporation before the beginning of the
208
taxable year of the trust and with respect to which there
is an obligation to furnish care and maintenance shall be
considered to be a distribution solely for purposes of sec-
tions 144 and 146, but only to the extent that the aggre-
gate amount so distributed during the taxable year does
not exceed $5 multiplied by the aggregate number of such
gravesites.
‘‘SEC. 143. DEFINITIONS AND RULES APPLICABLE TO SUB-
CHAPTER I.
‘‘For purposes of this subchapter—
‘‘(a) DISTRIBUTABLE NET INCOME.—‘Distributable
net income’ means, with respect to any taxable year, the
taxable income of the estate or trust computed with the
following modifications—
‘‘(1) No deduction shall be taken under sections
144 and 146 (relating to additional deductions).
‘‘(2) No deduction shall be taken under section
142(a)(2) (relating to deduction for personal exemp-
tions).
‘‘(3) Gains from the sale or exchange of capital
assets shall be excluded to the extent that such gains
are allocated to corpus and are not (A) paid, cred-
ited, or required to be distributed to any beneficiary
during the taxable year, or (B) paid, permanently
set aside, or to be used for the purposes specified
209
in section 142(b). Losses from the sale or exchange
of capital assets shall be excluded, except to the ex-
tent such losses are taken into account in deter-
mining the amount of gains from the sale or ex-
change of capital assets which are paid, credited, or
required to be distributed to any beneficiary during
the taxable year.
‘‘(4) For purposes only of rules under section
ll, there shall be excluded those items of gross in-
come constituting extraordinary dividends or taxable
stock dividends which the fiduciary, acting in good
faith, does not pay or credit to any beneficiary by
reason of his determination that such dividends are
allocable to corpus under the terms of the governing
instrument and applicable local law.
‘‘(5) There shall be included any tax-exempt in-
terest.
‘‘(6) In the case of a foreign trust—
‘‘(A) There shall be included the amounts
of gross income from sources without the
United States, reduced by any amounts which
would be deductible in respect of disbursements
allocable to such income but for the provisions
of section 265(a)(1) (relating to disallowance of
certain deductions).
210
‘‘(B) Gross income from sources within the
United States shall be determined without re-
gard to section 894 (relating to income exempt
under treaty).
‘‘(C) Paragraph (3) shall not apply to a
foreign trust. In the case of such a trust, there
shall be included gains from the sale or ex-
change of capital assets, reduced by losses from
such sales or exchanges to the extent such
losses do not exceed gains from such sales or
exchanges.
If the estate or trust is allowed a deduction under section
142(b), the amount of the modifications specified in para-
graphs (5) and (6) shall be reduced to the extent that the
amount of income which is paid, permanently set aside,
or to be used for the purposes specified in section 142(b)
is deemed to consist of items specified in those para-
graphs. For this purpose, such amount shall (in the ab-
sence of specific provisions in the governing instrument)
be deemed to consist of the same proportion of each class
of items of income of the estate or trust as the total of
each class bears to the total of all classes.
‘‘(b) INCOME.—‘Income’, when not preceded by the
words ‘taxable’, ‘distributable net’, ‘undistributed net’, or
‘gross’, means the amount of income of the estate or trust
211
for the taxable year determined under the terms of the
governing instrument and applicable local law. Items of
gross income constituting extraordinary dividends or tax-
able stock dividends which the fiduciary, acting in good
faith, determines to be allocable to corpus under the terms
of the governing instrument and applicable local law shall
not be considered income.
‘‘(c) BENEFICIARY.—‘Beneficiary’ includes heir, leg-
atee, devisee.
‘‘(d) TREATMENT OF PROPERTY DISTRIBUTED IN
KIND.—
‘‘(1) BASIS OF BENEFICIARY.—The basis of any
property received by a beneficiary in a distribution
from an estate or trust shall be—
‘‘(A) the adjusted basis of such property in
the hands of the estate or trust immediately be-
fore the distribution, adjusted for
‘‘(B) any gain or loss recognized to the es-
tate or trust on the distribution.
‘‘(2) AMOUNT OF DISTRIBUTION.—In the case
of any distribution of property (other than cash), the
amount taken into account under sections 146(a)(2)
and 147(a)(2) shall be the lesser of—
212
‘‘(A) the basis of such property in the
hands of the beneficiary (as determined under
paragraph (1)), or
‘‘(B) the fair market value of such prop-
erty.
‘‘(3) ELECTION TO RECOGNIZE GAIN.—
‘‘(A) IN GENERAL.—In the case of any dis-
tribution of property (other than cash) to which
an election under this paragraph applies—
‘‘(i) paragraph (2) shall not apply,
‘‘(ii) gain or loss shall be recognized
by the estate or trust in the same manner
as if such property had been sold to the
distributee at its fair market value, and
‘‘(iii) the amount taken into account
under sections 146(a)(2) and 147(a)(2)
shall be the fair market value of such
property.
‘‘(B) ELECTION.—Any election under this
paragraph shall apply to all distributions made
by the estate or trust during a taxable year and
shall be made on the return of such estate or
trust for such taxable year.
Any such election, once made, may be revoked
only with the consent of the Secretary.
213
‘‘(4) EXCEPTION
FOR
DISTRIBUTIONS
DE-
SCRIBED IN SECTION 148(a).—This subsection shall
not apply to any distribution described in section
148(a).
‘‘(f) TREATMENT OF MULTIPLE TRUSTS.—For pur-
poses of this subchapter, under regulations prescribed by
the Secretary, 2 or more trusts shall be treated as 1 trust
if—
‘‘(1) such trusts have substantially the same
grantor or grantors and substantially the same pri-
mary beneficiary or beneficiaries, and
‘‘(2) a principal purpose of such trusts is the
avoidance of the tax imposed by this chapter.
For purposes of the preceding sentence, a husband and
wife shall be treated as 1 person.
‘‘(g) CERTAIN
PAYMENTS
OF
ESTIMATED
TAX
TREATED AS PAID BY BENEFICIARY.—Under rules pre-
scribed by the Secretary, a trustee may elect to treat any
portion of a payment of estimated tax made by such trust
for any taxable year of the trust as a payment made by
a beneficiary of such trust. This rule shall also apply in
the case of a taxable year reasonably expected to be the
last taxable year of an estate.
‘‘(h) FOREIGN TRUSTS AND FOREIGN INCOME.—The
Secretary shall prescribe special rules for foreign trusts
214
and foreign income of trusts. Those rules should generally
be consistent with the rules under subchapter J of chapter
1 of the Internal Revenue Code of 1986, except that they
shall take into account the principles of the Simplified
USA Tax.
‘‘(i) CERTAIN REVOCABLE TRUSTS TREATED
AS
PART OF ESTATE.—
‘‘(1) IN
GENERAL.—If both the executor (if
any) of an estate and the trustee of a qualified rev-
ocable trust elect the treatment provided in this sec-
tion, such trust shall be treated and taxed as part
of such estate (and not as a separate trust) for all
taxable years of the estate ending after the date of
the decedent’s death and before the applicable date.
‘‘(2) QUALIFIED REVOCABLE TRUST.—For pur-
poses of this subsection, ‘qualified revocable trust’
means any trust (or portion thereof) which was
treated under section 158 as owned by the decedent
of the estate referred to in paragraph (1) by reason
of a power in the grantor (determined without re-
gard to section 154(e).
‘‘(3) APPLICABLE DATE.—For purposes of this
subsection, ‘applicable date’ means—
‘‘(A) if no return of tax imposed by chap-
ter 11 is required to be filed, the date which is
215
2 years after the date of the decedent’s death,
and
‘‘(B) if such a return is required to be
filed, the date which is 6 months after the date
of the final determination of the liability for tax
imposed by chapter 11.
‘‘(4) ELECTION.—The election under this sub-
section shall be made not later than the time pre-
scribed for filing the return of tax imposed by this
chapter for the first taxable year of the estate (de-
termined with regard to extensions) and, once made,
shall be irrevocable.
‘‘SEC. 144. DEDUCTION FOR TRUSTS DISTRIBUTING CUR-
RENT INCOME ONLY.
‘‘(a) DEDUCTION.—In the case of any trust the terms
of which—
‘‘(1) provide that all of its income is required
to be distributed currently, and
‘‘(2) do not provide that any amounts are to be
paid, permanently set aside, or used for the purposes
specified in section 142(b) (relating to deduction for
charitable, etc., purposes),
there shall be allowed as a deduction in computing the
taxable income of the trust the amount of the income for
the taxable year which is required to be distributed cur-
216
rently. This section shall not apply in any taxable year
in which the trust distributes amounts other than amounts
of income described in paragraph (1).
‘‘(b) LIMITATION ON DEDUCTION.—If the amount of
income required to be distributed currently exceeds the
distributable net income of the trust for the taxable year,
the deduction shall be limited to the amount of the distrib-
utable net income. For this purpose, the computation of
distributable net income shall not include items of income
which are not included in the gross income of the trust
and the deductions allocable thereto.
‘‘SEC. 145. INCLUSION OF AMOUNTS IN GROSS INCOME OF
BENEFICIARIES OF TRUSTS DISTRIBUTING
CURRENT INCOME ONLY.
‘‘(a) INCLUSION.—Subject to subsection (b), the
amount of income for the taxable year required to be dis-
tributed currently by a trust described in section 144 shall
be included in the gross income of the beneficiaries to
whom the income is required to be distributed, whether
distributed or not. If such amount exceeds the distribut-
able net income, there shall be included in the gross in-
come of each beneficiary an amount which bears the same
ratio to distributable net income as the amount of income
required to be distributed to such beneficiary bears to the
217
amount of income required to be distributed to all bene-
ficiaries.
‘‘(b) CHARACTER OF AMOUNTS.—The amounts speci-
fied in subsection (a) shall have the same character in the
hands of the beneficiary as in the hands of the trust. For
this purpose, the amounts shall be treated as consisting
of the same proportion of each class of items entering into
the computation of distributable net income of the trust
as the total of each class bears to the total distributable
net income of the trust, unless the terms of the trust spe-
cifically allocate different classes of income to different
beneficiaries. In the application of the preceding sentence,
the items of deduction entering into the computation of
distributable net income shall be allocated among the
items of distributable net income in accordance with regu-
lations prescribed by the Secretary.
‘‘SEC. 146. DEDUCTION FOR ESTATES AND TRUSTS ACCU-
MULATING INCOME OR DISTRIBUTING COR-
PUS.
‘‘(a) DEDUCTION.—In any taxable year there shall be
allowed as a deduction in computing the taxable income
of an estate or trust (other than a trust described in sec-
tion 144), the sum of—
‘‘(1) any amount of income for such taxable
year required to be distributed currently (including
218
any amount required to be distributed which may be
paid out of income or corpus to the extent such
amount is paid out of income for such taxable year);
and
‘‘(2) any other amounts properly paid or cred-
ited or required to be distributed for such taxable
year;
but such deduction shall not exceed the distributable
net income of the estate or trust.
‘‘(b) CHARACTER OF AMOUNTS DISTRIBUTED.—The
amount determined under subsection (a) shall be treated
as consisting of the same proportion of each class of items
entering into the computation of distributable net income
of the estate or trust as the total of each class bears to
the total distributable net income of the estate or trust
in the absence of the allocation of different classes of in-
come under the specific terms of the governing instru-
ment. In the application of the preceding sentence, the
items of deduction entering into the computation of dis-
tributable net income (including the deduction allowed
under section 142(b)) shall be allocated among the items
of distributable net income in accordance with regulations
prescribed by the Secretary.
‘‘(c) LIMITATION
ON DEDUCTION.—No deduction
shall be allowed under subsection (a) in respect of any por-
219
tion of the amount allowed as a deduction under that sub-
section (without regard to this subsection) which is treated
under subsection (b) as consisting of any item of distribut-
able net income which is not included in the gross income
of the estate or trust.
‘‘SEC. 147. INCLUSION OF AMOUNTS IN GROSS INCOME OF
BENEFICIARIES OF ESTATES AND TRUSTS AC-
CUMULATING 
INCOME 
OR 
DISTRIBUTING
CORPUS.
‘‘(a) INCLUSION.—Subject to subsection (b), there
shall be included in the gross income of a beneficiary to
whom an amount specified in section 146(a) is paid, cred-
ited, or required to be distributed (by an estate or trust
described in section 146), the sum of the following
amounts:
‘‘(1) AMOUNTS REQUIRED TO BE DISTRIBUTED
CURRENTLY.—The amount of income for the taxable
year required to be distributed currently to such
beneficiary, whether distributed or not. If the
amount of income required to be distributed cur-
rently to all beneficiaries exceeds the distributable
net income (computed without the deduction allowed
by section 142(b), relating to deduction for chari-
table, etc., purposes) of the estate or trust, then, in
lieu of the amount provided in the preceding sen-
220
tence, there shall be included in the gross income of
the beneficiary an amount which bears the same
ratio to distributable net income (as so computed) as
the amount of income required to be distributed cur-
rently to such beneficiary bears to the amount re-
quired to be distributed currently to all beneficiaries.
For purposes of this section, the phrase ‘the amount
of income for the taxable year required to be distrib-
uted currently’ includes any amount required to be
paid out of income or corpus to the extent such
amount is paid out of income for such taxable year.
‘‘(2) 
OTHER
AMOUNTS
DISTRIBUTED.—All
other amounts properly paid, credited, or required to
be distributed to such beneficiary for the taxable
year. If the sum of—
‘‘(A) the amount of income for the taxable
year required to be distributed currently to all
beneficiaries, and
‘‘(B) all other amounts properly paid, cred-
ited, or required to be distributed to all bene-
ficiaries
exceeds the distributable net income of the estate or
trust, then, in lieu of the amount provided in the
preceding sentence, there shall be included in the
gross income of the beneficiary an amount which
221
bears the same ratio to distributable net income (re-
duced by the amounts specified in (A)) as the other
amounts properly paid, credited or required to be
distributed to the beneficiary bear to the other
amounts properly paid, credited, or required to be
distributed to all beneficiaries.
‘‘(b) CHARACTER OF AMOUNTS.—The amounts de-
termined under subsection (a) shall have the same char-
acter in the hands of the beneficiary as in the hands of
the estate or trust. For this purpose, the amounts shall
be treated as consisting of the same proportion of each
class of items entering into the computation of distribut-
able net income as the total of each class bears to the
total distributable net income of the estate or trust unless
the terms of the governing instrument specifically allocate
different classes of income to different beneficiaries. In the
application of the preceding sentence, the items of deduc-
tion entering into the computation of distributable net in-
come (including the deduction allowed under section
142(b)) shall be allocated among the items of distributable
net income in accordance with regulations prescribed by
the Secretary. In the application of this subsection to the
amount determined under paragraph (1) of subsection (a),
distributable net income shall be computed without regard
222
to any portion of the deduction under section 142(b) which
is not attributable to income of the taxable year.
‘‘SEC. 148. SPECIAL RULES APPLICABLE TO SECTIONS 146
AND 147.
‘‘(a) EXCLUSIONS.—There shall not be included as
amounts falling within section 146(a) or 147(a)—
‘‘(1) GIFTS, BEQUESTS, ETC.—Any amount
which, under the terms of the governing instrument,
is properly paid or credited as a gift or bequest of
a specific sum of money or of specific property and
which is paid or credited all at once or in not more
than 3 installments. For this purpose an amount
which can be paid or credited only from the income
of the estate or trust shall not be considered as a
gift or bequest of a specific sum of money.
‘‘(2) CHARITABLE, ETC., DISTRIBUTIONS.—Any
amount paid or permanently set aside or otherwise
qualifying for the deduction provided in section
142(b) (computed without regard to sections 508(d),
162, and 4948(c)(4)).
‘‘(3) DENIAL
OF
DOUBLE
DEDUCTION.—Any
amount paid, credited, or distributed in the taxable
year, if section 144 or section 146 applied to such
amount for a preceding taxable year of an estate or
223
trust because credited or required to be distributed
in such preceding taxable year.
‘‘(b) DISTRIBUTIONS IN FIRST SIXTY-FIVE DAYS OF
TAXABLE YEAR.—
‘‘(1) GENERAL RULE.—If within the first 65
days of any taxable year of an estate or a trust, an
amount is properly paid or credited, such amount
shall be considered paid or credited on the last day
of the preceding taxable year.
‘‘(2) LIMITATION.—Paragraph (1) shall apply
with respect to any taxable year of an estate or a
trust only if the executor of such estate or the fidu-
ciary of such trust (as the case may be) elects, in
such manner and at such time as the Secretary pre-
scribes by regulations, to have paragraph (1) apply
for such taxable year.
‘‘(c) SEPARATE SHARES TREATED AS SEPARATE ES-
TATES OR TRUSTS.—For the sole purpose of determining
the amount of distributable net income in the application
of sections 146 and 147, in the case of a single trust hav-
ing more than one beneficiary, substantially separate and
independent shares of different beneficiaries in the trust
shall be treated as separate trusts. Rules similar to the
rules of the preceding provisions of this subsection shall
apply to treat substantially separate and independent
224
shares of different beneficiaries in an estate having more
than 1 beneficiary as separate estates. The existence of
such substantially separate and independent shares and
the manner of treatment as separate trusts or estates, in-
cluding the application of sections 150 through 152, shall
be determined in accordance with regulations prescribed
by the Secretary.
‘‘SEC. 149. CHARITABLE REMAINDER TRUSTS.
‘‘(a) GENERAL RULE.—Notwithstanding any other
provision of this subchapter, the provisions of this section
shall, in accordance with regulations prescribed by the
Secretary, apply in the case of a charitable remainder an-
nuity trust and a charitable remainder unitrust.
‘‘(b) CHARACTER OF DISTRIBUTIONS.—Amounts dis-
tributed by a charitable remainder annuity trust or by a
charitable remainder unitrust shall be considered as hav-
ing the following characteristics in the hands of a bene-
ficiary to whom is paid the annuity described in subsection
(d)(1)(A) or the payment described in subsection
(d)(2)(A):
‘‘(1) First, as amounts of income (other than
gains, and amounts treated as gains, from the sale
or other disposition of capital assets) includible in
gross income to the extent of such income of the
225
trust for the year and such undistributed income of
the trust for prior years;
‘‘(2) Second, as a capital gain to the extent of
the capital gain of the trust for the year and the un-
distributed capital gain of the trust for prior years;
‘‘(3) Third, as other income to the extent of
such income of the trust for the year and such un-
distributed income of the trust for prior years; and
‘‘(4) Fourth, as a distribution of trust corpus.
For purposes of this section, the trust shall determine the
amount of its undistributed capital gain on a cumulative
net basis.
‘‘(c) EXEMPTION FROM INCOME TAXES.—A chari-
table remainder annuity trust and a charitable remainder
unitrust shall, for any taxable year, not be subject to any
tax imposed by this chapter. Any such trust shall be liable
for tax on its unrelated business taxable income (within
the meaning of section 255).
‘‘(d) DEFINITIONS.—
‘‘(1) 
CHARITABLE
REMAINDER
ANNUITY
TRUST.—For purposes of this section, a charitable
remainder annuity trust is a trust—
‘‘(A) from which a sum certain (which is
not less than 5 percent nor more than 50 per-
cent of the initial net fair market value of all
227
section 4975(e)(7) in a qualified gratuitous
transfer (as defined by subsection (g)).
‘‘(D) the value (determined under section
7520 of such remainder interest is at least 10
percent of the initial net fair market value of all
property placed in the trust.
‘‘(2) CHARITABLE REMAINDER UNITRUST.—For
purposes of this section, a charitable remainder
unitrust is a trust—
‘‘(A) from which a fixed percentage (which
is not less than 5 percent nor more than 50
percent) of the net fair market value of its as-
sets, valued annually, is to be paid, not less
often than annually, to one or more persons (at
least one of which is not an organization de-
scribed in section 101(c) and, in the case of in-
dividuals, only to an individual who is living at
the time of the creation of the trust) for a term
of years (not in excess of 20 years) or for the
life or lives of such individual or individuals,
‘‘(B) from which no amount other than the
payments described in subparagraph (A) and
other than qualified gratuitous transfers de-
scribed in subparagraph (C) may be paid to or
228
for the use of any person other than an organi-
zation described in section 101(c),
‘‘(C) following the termination of the pay-
ments described in subparagraph (A), the re-
mainder interest in the trust is to be trans-
ferred to, or for the use of, an organization de-
scribed in section 101(c) or is to be retained by
the trust for such a use or, to the extent the
remainder interest is in qualified employer secu-
rities (as defined in subsection (g)(4)), all or
part of such securities are to be transferred to
an employee stock ownership plan (as defined in
section 4975(e)(7) in a qualified gratuitous
transfer (as defined by subsection (g)).
‘‘(D) with respect to each contribution of
property to the trust, the value (determined
under section 7520 of such remainder interest
in such property is at least 10 percent of the
net fair market value of such property as of the
date such property is contributed to the trust.
‘‘(3) EXCEPTION.—Notwithstanding the provi-
sions of paragraphs (2)(A) and (B), the trust instru-
ment may provide that the trustee shall pay the in-
come beneficiary for any year—
229
‘‘(A) the amount of the trust income, if
such amount is less than the amount required
to be distributed under paragraph (2)(A), and
‘‘(B) any amount of the trust income
which is in excess of the amount required to be
distributed under paragraph (2)(A), to the ex-
tent that (by reason of subparagraph (A)) the
aggregate of the amounts paid in prior years
was less than the aggregate of such required
amounts.
‘‘(4) SEVERANCE
OF
CERTAIN
ADDITIONAL
CONTRIBUTIONS.—If—
‘‘(A) any contribution is made to a trust
which before the contribution is a charitable re-
mainder unitrust, and
‘‘(B) such contribution would (but for this
paragraph) result in such trust ceasing to be a
charitable unitrust by reason of paragraph
(2)(D), such contribution shall be treated as a
transfer to a separate trust under regulations
prescribed by the Secretary.
‘‘(e) VALUATION FOR PURPOSES OF CHARITABLE
CONTRIBUTION.—For 
purposes 
of 
determining 
the
amount of any charitable contribution, the remainder in-
terest of a charitable remainder annuity trust or charitable
230
remainder unitrust shall be computed on the basis that
an amount equal to 5 percent of the net fair market value
of its assets (or a greater amount, if required under the
terms of the trust instrument) is to be distributed each
year.
‘‘(f) CERTAIN CONTINGENCIES PERMITTED.—
‘‘(1) GENERAL RULE.—If a trust would, but for
a qualified contingency, meet the requirements of
paragraph (1)(A) or (2)(A) of subsection (d), such
trust shall be treated as meeting such requirements.
‘‘(2) VALUE
DETERMINED
WITHOUT
REGARD
TO QUALIFIED CONTINGENCY.—For purposes of de-
termining the amount of any charitable contribution
(or the actuarial value of any interest), a qualified
contingency shall not be taken into account.
‘‘(3) QUALIFIED CONTINGENCY.—For purposes
of this subsection, the term ‘qualified contingency’
means any provision of a trust which provides that,
upon the happening of a contingency, the payments
described in paragraph (1)(A) or (2)(A) of sub-
section (d) (as the case may be) will terminate not
later than such payments would otherwise terminate
under the trust.
‘‘(g) QUALIFIED GRATUITOUS TRANSFER OF QUALI-
FIED EMPLOYER SECURITIES.—
231
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified gratuitous transfer’ means
a transfer of qualified employer securities to an em-
ployee stock ownership plan (as defined in section
4975(e)(7) but only to the extent that—
‘‘(A) the securities transferred previously
passed from a decedent dying before January 1,
2002, to a trust described in paragraph (1) or
(2) of subsection (d),
‘‘(B) no deduction under section 404 is al-
lowable with respect to such transfer,
‘‘(C) such plan contains the provisions re-
quired by paragraph (3),
‘‘(D) such plan treats such securities as
being attributable to employer contributions but
without regard to the limitations otherwise ap-
plicable to such contributions under section
404, and
‘‘(E) the employer whose employees are
covered by the plan described in this paragraph
files with the Secretary a verified written state-
ment consenting to the application of sections
4978 and 4979A with respect to such employer.
‘‘(2) EXCEPTION.—The term ‘qualified gratu-
itous transfer’ shall not include a transfer of quali-
232
fied employer securities to an employee stock owner-
ship plan unless—
‘‘(A) such plan was in existence on August
1, 1996,
‘‘(B) at the time of the transfer, the dece-
dent and members of the decedent’s family
(within the meaning of section 171(a)(6)(D))
own (directly or through constructive ownership
rules) no more than 10 percent of the value of
the stock of the corporation referred to in para-
graph (4), and
‘‘(C) immediately after the transfer, such
plan owns (after the application of section
318(a)(4) at least 60 percent of the value of the
outstanding stock of the corporation.
‘‘(3) PLAN REQUIREMENTS.—A plan contains
the provisions required by this paragraph if such
plan provides that—
‘‘(A) the qualified employer securities so
transferred are allocated to plan participants in
a manner consistent with section 401(a)(4),
‘‘(B) plan participants are entitled to di-
rect the plan as to the manner in which such
securities which are entitled to vote and are al-
233
located to the account of such participant are to
be voted,
‘‘(C) an independent trustee votes the se-
curities so transferred which are not allocated
to plan participants,
‘‘(D) each participant who is entitled to a
distribution from the plan has the rights de-
scribed in subparagraphs (A) and (B) of section
409(h)(1),
‘‘(E) such securities are held in a suspense
account under the plan to be allocated each
year, up to the limitations under section 415(c),
after first allocating all other annual additions
for the limitation year, up to the limitations
under sections 415 (c) and (e), and
‘‘(F) on termination of the plan, all securi-
ties so transferred which are not allocated to
plan participants as of such termination are to
be transferred to, or for the use of, an organi-
zation described in section 101(c). For purposes
of the preceding sentence, the term ‘inde-
pendent trustee’ means any trustee who is not
a member of the family (within the meaning of
section 171(a)(6)(D)) of the decedent or a 5-
percent shareholder. A plan shall not fail to be
234
treated as meeting the requirements of section
401(a) by reason of meeting the requirements
of this subsection.
‘‘(4) QUALIFIED EMPLOYER SECURITIES.—For
purposes of this section, the term ‘qualified employer
securities’ means employer securities (as defined in
section 409(l)) which are issued by a domestic
corporation—
‘‘(A) which has no outstanding stock which
is readily tradable on an established securities
market, and
‘‘(B) which has only 1 class of stock.
‘‘(5) TREATMENT OF SECURITIES ALLOCATED
BY
EMPLOYEE
STOCK
OWNERSHIP
PLAN
TO
PER-
SONS
RELATED
TO
DECEDENT
OR
5-PERCENT
SHAREHOLDERS.—
‘‘(A) IN GENERAL.—If any portion of the
assets of the plan attributable to securities ac-
quired by the plan in a qualified gratuitous
transfer are allocated to the account of—
‘‘(i) any person who is related to the
decedent (within the meaning of section
171(a)(5) or a member of the decedent’s
family (within the meaning of section
171(a)(6)(D), or
235
‘‘(ii) any person who, at the time of
such allocation or at any time during the
1-year period ending on the date of the ac-
quisition of qualified employer securities by
the plan, is a 5-percent shareholder of the
employer maintaining the plan, the plan
shall be treated as having distributed (at
the time of such allocation) to such person
or shareholder the amount so allocated.
‘‘(B) 
5-PERCENT
SHAREHOLDER.—For
purposes of subparagraph (A), the term ‘5-per-
cent shareholder’ means any person who owns
(directly or through the application of construc-
tive ownership rules) more than 5 percent of
the outstanding stock of the corporation which
issued such qualified employer securities or of
any corporation which is a member of the same
controlled group of corporations (within the
meaning of section 409(l)(4)) as such corpora-
tion.
‘‘(C) CROSS REFERENCE.—For excise tax
on allocations described in subparagraph (A),
see section 4979A.
‘‘(6) 
TAX
ON
FAILURE
TO
TRANSFER
UNALLOCATED SECURITIES TO CHARITY ON TERMI-
236
NATION OF PLAN.—If the requirements of paragraph
(3)(F) are not met with respect to any securities,
there is hereby imposed a tax on the employer main-
taining the plan in an amount equal to the sum of—
‘‘(A) the amount of the increase in the tax
which would be imposed by chapter 11 if such
securities were not transferred as described in
paragraph (1), and
‘‘(B) interest on such amount at the un-
derpayment rate under section 6621 (and com-
pounded daily) from the due date for filing the
return of the tax imposed by chapter 11.
‘‘SEC. 150. DEFINITIONS APPLICABLE TO EXCESS DISTRIBU-
TION RULES.
‘‘(a) UNDISTRIBUTED NET INCOME.—For purposes
of sections 150 through 152, the term ‘undistributed net
income’ for any taxable year means the amount by which
the distributable net income of the trust for such taxable
year exceeds the sum of—
‘‘(1) the amounts for such taxable year speci-
fied in paragraphs (1) and (2) of section 146(a),
and
‘‘(2) the amount of taxes imposed on the trust
attributable to such distributable net income.
237
‘‘(b) ACCUMULATION DISTRIBUTION.—For purposes
of sections 150 through 152, except as provided in sub-
section (c), the term ‘accumulation distribution’ means,
for any taxable year of the trust, the amount by which—
‘‘(1) the amounts specified in paragraph (2) of
section 146(a) for such taxable year, exceed
‘‘(2) distributable net income for such year re-
duced (but not below zero) by the amounts specified
in paragraph (1) of section 146(a).
For purposes of section 152 (other than subsection (c)
thereof, relating to multiple trusts), the amounts specified
in paragraph (2) of section 146(a) shall not include
amounts properly paid, credited, or required to be distrib-
uted to a beneficiary from a trust (other than a foreign
trust) as income accumulated before the birth of such ben-
eficiary or before such beneficiary attains the age of 21.
If the amounts properly paid, credited, or required to be
distributed by the trust for the taxable year do not exceed
the income of the trust for such year, there shall be no
accumulation distribution for such year.
‘‘(c) EXCEPTION
FOR ACCUMULATION DISTRIBU-
TIONS FROM CERTAIN DOMESTIC TRUSTS.—For purposes
of sections 150 through 152—
‘‘(1) IN GENERAL.—In the case of a qualified
trust, any distribution in any taxable year beginning
238
after the date of the enactment of this subsection
shall be computed without regard to any undistrib-
uted net income.
‘‘(2) QUALIFIED TRUST.—For purposes of this
subsection, the term ‘qualified trust’ means any
trust other than—
‘‘(A) a foreign trust (or, except as provided
in regulations, a domestic trust which at any
time was a foreign trust), or
‘‘(B) a trust created before March 1, 1984,
unless it is established that the trust would not
be aggregated with other trusts under section
143(f) if such section applied to such trust.
‘‘(d) TAXES IMPOSED ON THE TRUST.—For purposes
of sections 150 through 152—
‘‘(1) IN GENERAL.—The term ‘taxes imposed
on the trust’ means the amount of the taxes which
are imposed for any taxable year of the trust under
this chapter (without regard to sections 150 through
152) and which, under regulations prescribed by the
Secretary, are properly allocable to the undistributed
portions of distributable net income and gains in ex-
cess of losses from sales or exchanges of capital as-
sets. The amount determined in the preceding sen-
tence shall be reduced by any amount of such taxes
239
deemed distributed under section 151(b) and (c) to
any beneficiary.
‘‘(2) FOREIGN TRUSTS.—In the case of any for-
eign trust, the term ‘taxes imposed on the trust’ in-
cludes the amount, reduced as provided in the last
sentence of paragraph (1), of any income, war prof-
its, and excess profits taxes imposed by any foreign
country or possession of the United States on such
foreign trust which, as determined under paragraph
(1), are so properly allocable. Under rules or regula-
tions prescribed by the Secretary, in the case of any
foreign trust of which the settlor or another person
would be treated as owner of any portion of the
trust but for section 154(f), the term ‘taxes imposed
on the trust’ includes the allocable amount of any
income, war profits, and excess profits taxes imposed
by any foreign country or possession of the United
States on the settlor or such other person in respect
of trust income.
‘‘SEC. 151. ACCUMULATION DISTRIBUTION ALLOCATED TO
PRECEDING YEARS.
‘‘(a) AMOUNT ALLOCATED.—In the case of a trust
which is subject to sections 146 through 149, the amount
of the accumulation distribution of such trust for a taxable
year shall be deemed to be an amount within the meaning
240
of paragraph (2) of section 146(a) distributed on the last
day of each of the preceding taxable years, commencing
with the earliest of such years, to the extent that such
amount exceeds the total of any undistributed net income
for all earlier preceding taxable years. The amount deemed
to be distributed in any such preceding taxable year under
the preceding sentence shall not exceed the undistributed
net income for such preceding taxable year. For purposes
of this subsection, undistributed net income for each of
such preceding taxable years shall be computed without
regard to such accumulation distribution and without re-
gard to any accumulation distribution determined for any
succeeding taxable year.
‘‘(b) TOTAL TAXES DEEMED DISTRIBUTED.—If any
portion of an accumulation distribution for any taxable
year is deemed under subsection (a) to be an amount with-
in the meaning of paragraph (2) of section 146(a) distrib-
uted on the last day of any preceding taxable year, and
such portion of such distribution is not less than the un-
distributed net income for such preceding taxable year, the
trust shall be deemed to have distributed on the last day
of such preceding taxable year an additional amount with-
in the meaning of paragraph (2) of section 146(a). Such
additional amount shall be equal to the taxes imposed on
the trust for such preceding taxable year attributable to
241
the undistributed net income. For purposes of this sub-
section, the undistributed net income and the taxes im-
posed on the trust for such preceding taxable year attrib-
utable to such undistributed net income shall be computed
without regard to such accumulation distribution and
without regard to any accumulation distribution deter-
mined for any succeeding taxable year.
‘‘(c) PRO RATA PORTION OF TAXES DEEMED DIS-
TRIBUTED.—If any portion of an accumulation distribu-
tion for any taxable year is deemed under subsection (a)
to be an amount within the meaning of paragraph (2) of
section 146(a) distributed on the last day of any preceding
taxable year and such portion of the accumulation dis-
tribution is less than the undistributed net income for such
preceding taxable year, the trust shall be deemed to have
distributed on the last day of such preceding taxable year
an additional amount within the meaning of paragraph (2)
of section 146(a). Such additional amount shall be equal
to the taxes imposed on the trust for such taxable year
attributable to the undistributed net income multiplied by
the ratio of the portion of the accumulation distribution
to the undistributed net income of the trust for such year.
For purposes of this subsection, the undistributed net in-
come and the taxes imposed on the trust for such pre-
ceding taxable year attributable to such undistributed net
242
income shall be computed without regard to the accumula-
tion distribution and without regard to any accumulation
distribution determined for any succeeding taxable year.
‘‘(d) RULE WHEN INFORMATION IS NOT AVAIL-
ABLE.—If adequate records are not available to determine
the proper application of this subchapter to an amount
distributed by a trust, such amount shall be deemed to
be an accumulation distribution consisting of undistrib-
uted net income earned during the earliest preceding tax-
able year of the trust in which it can be established that
the trust was in existence.
‘‘(e) DENIAL OF REFUND TO TRUSTS AND BENE-
FICIARIES.—No refund or credit shall be allowed to a trust
or a beneficiary of such trust for any preceding taxable
year by reason of a distribution deemed to have been made
by such trust in such year under this section.
‘‘SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIB-
UTED BY TRUST IN PRECEDING YEARS.
‘‘(a) GENERAL RULE.—The total of the amounts
which are treated under section 151 as having been dis-
tributed by a trust in a preceding taxable year shall be
included in the income of a beneficiary of the trust when
paid, credited, or required to be distributed to the extent
that such total would have been included in the income
of such beneficiary under section 147(a)(2) (and, with re-
243
spect to any tax-exempt interest to which section 103 ap-
plies, under section 147(b)) if such total had been paid
to such beneficiary on the last day of such preceding tax-
able year. The tax imposed by this subtitle on a beneficiary
for a taxable year in which any such amount is included
in his income shall be determined only as provided in this
section and shall consist of the sum of—
‘‘(1) a partial tax computed on the taxable in-
come reduced by an amount equal to the total of
such amounts, at the rate and in the manner as if
this section had not been enacted,
‘‘(2) a partial tax determined as provided in
subsection (b) of this section, and
‘‘(3) in the case of a foreign trust, the interest
charge determined as provided in section 152.
‘‘(b) TAX ON DISTRIBUTION.—
‘‘(1) IN GENERAL.—The partial tax imposed by
subsection (a)(2) shall be determined.
‘‘(A) by determining the number of pre-
ceding taxable years of the trust on the last day
of which an amount is deemed under section
151(a) to have been distributed,
‘‘(B) by taking from the 5 taxable years
immediately preceding the year of the accumu-
lation distribution the 1 taxable year for which
244
the beneficiary’s taxable income was the highest
and the 1 taxable year for which his taxable in-
come was the lowest,
‘‘(C) by adding to the beneficiary’s taxable
income for each of the 3 taxable years remain-
ing after the application of subparagraph (B)
an amount determined by dividing the amount
deemed distributed under section 151 and re-
quired to be included in income under sub-
section (a) by the number of preceding taxable
years determined under subparagraph (A), and
‘‘(D) by determining the average increase
in tax for the 3 taxable years referred to in sub-
paragraph (C) resulting from the application of
such subparagraph.
The partial tax imposed by subsection (a)(2) shall be
the excess (if any) of the average increase in tax de-
termined under subparagraph (D), multiplied by the
number of preceding taxable years determined under
subparagraph (A), over the amount of taxes (other
than the amount of taxes described in section
150(d)(2)) deemed distributed to the beneficiary
under sections 151 (b) and (c).
‘‘(2) TREATMENT OF LOSS YEARS.—For pur-
poses of paragraph (1), the taxable income of the
245
beneficiary for any taxable year shall be deemed to
be not less than zero.
‘‘(3) CERTAIN PRECEDING TAXABLE YEARS NOT
TAKEN INTO ACCOUNT.—For purposes of paragraph
(1), if the amount of the undistributed net income
deemed distributed in any preceding taxable year of
the trust is less than 25 percent of the amount of
the accumulation distribution divided by the number
of preceding taxable years to which the accumulation
distribution is allocated under section 151(a), the
number of preceding taxable years of the trust with
respect to which an amount is deemed distributed to
a beneficiary under section 151(a) shall be deter-
mined without regard to such year.
‘‘(4) EFFECT OF OTHER ACCUMULATION DIS-
TRIBUTIONS.—In computing the partial tax under
paragraph (1) for any beneficiary, the income of
such beneficiary for each of his prior taxable years
shall include amounts previously deemed distributed
to such beneficiary in such year under section 151
as a result of prior accumulation distributions
(whether from the same or another trust).
‘‘(5) MULTIPLE DISTRIBUTIONS IN THE SAME
TAXABLE YEAR.—In the case of accumulation dis-
tributions made from more than one trust which are
246
includible in the income of a beneficiary in the same
taxable year, the distributions shall be deemed to
have been made consecutively in whichever order the
beneficiary shall determine. Generation-skipping
transfer bears to the total accumulation distribution.
‘‘(c) SPECIAL RULE FOR MULTIPLE TRUSTS.—
‘‘(1) IN GENERAL.—If, in the same prior tax-
able year of the beneficiary in which any part of the
accumulation distribution from a trust (hereinafter
in this paragraph referred to as ‘‘third trust’’) is
deemed under section 151(a) to have been distrib-
uted to such beneficiary, some part of prior distribu-
tions by each of 2 or more other trusts is deemed
under section 151(a) to have been distributed to
such beneficiary, then subsections (b) and (c) of sec-
tion 151 shall not apply with respect to such part
of the accumulation distribution from such third
trust.
‘‘(2) ACCUMULATION
DISTRIBUTIONS
FROM
TRUST NOT TAKEN INTO ACCOUNT UNLESS THEY
EQUAL OR EXCEED $1,000.—For purposes of para-
graph (1), an accumulation distribution from a trust
to a beneficiary shall be taken into account only if
such distribution, when added to any prior accumu-
lation distributions from such trust which are
247
deemed under section 151(a) to have been distrib-
uted to such beneficiary for the same prior taxable
year of the beneficiary, equals or exceeds $1,000.
‘‘SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS AT-
TRIBUTABLE TO GRANTORS AND OTHERS AS
SUBSTANTIAL OWNERS.
‘‘Where it is specified in sections 153 through 161
that the grantor or another person shall be treated as the
owner of any portion of a trust, there shall then be in-
cluded in computing the taxable income and credits of the
grantor or the other person those items of income, deduc-
tions, and credits against tax of the trust which are attrib-
utable 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 remaining portion of the trust shall be
subject to sections 140 through 152. 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 control over the trust under
section 61 (relating to definition of gross income) or any
other provision of this title, except as specified in this sub-
part.
248
‘‘SEC. 154. DEFINITIONS AND RULES.
‘‘(a) ADVERSE PARTY.—For purposes of sections 153
through 160, ‘adverse party’ means any person having a
substantial beneficial interest in the trust which would be
adversely affected by the exercise or nonexercise of the
power which he possesses respecting 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 sections
153 through 160, ‘nonadverse party’ means any person
who is not an adverse party.
‘‘(c) RELATED OR SUBORDINATE PARTY.—For pur-
poses of sections 153 through 161, ‘related or subordinate
party’ means any nonadverse party who is—
‘‘(1) the grantor’s spouse if living with the
grantor;
‘‘(2) any one of the following: The grantor’s fa-
ther, mother, issue, brother or sister; an employee of
the grantor; a corporation or any employee of a cor-
poration in which the stock holdings of the grantor
and the trust are significant from the viewpoint of
voting control; a subordinate employee of a corpora-
tion in which the grantor is an executive.
For purposes of subsection (f) and sections 156 and 157,
a related or subordinate party shall be presumed to be
249
subservient to the grantor in respect of the exercise or
nonexercise of the powers conferred on him unless such
party is shown not to be subservient by a preponderance
of the evidence.
‘‘(d) RULE WHERE POWER IS SUBJECT TO CONDI-
TION PRECEDENT.—A person shall be considered to have
a power described in sections 153 through 161 even
though the exercise of the power is subject to a precedent
giving of notice or takes effect only on the expiration of
a certain period after the exercise of the power.
‘‘(e) GRANTOR TREATED AS HOLDING ANY POWER
OR INTEREST OF GRANTOR’S SPOUSE.—
‘‘(1) IN GENERAL.—For purposes of sections
153 through 160, a grantor shall be treated as hold-
ing any power or interest held by—
‘‘(A) any individual who was the spouse of
the grantor at the time of the creation of such
power or interest, or
‘‘(B) any individual who became the spouse
of the grantor after the creation of such power
or interest, but only with respect to periods
after such individual became the spouse of the
grantor.
‘‘(2) MARITAL STATUS.—For purposes of para-
graph (1)(A), an individual legally separated from
250
his spouse under a decree of divorce or of separate
maintenance shall not be considered as married.
‘‘(f) RULES NOT TO RESULT IN FOREIGN OWNER-
SHIP.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision in sections 153 through 160, sections 153
through 160 shall apply only to the extent such ap-
plication results in an amount (if any) being cur-
rently taken into account (directly or through 1 or
more entities) under this chapter in computing the
income of a citizen or resident of the United States
or a domestic corporation.
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN
REVOCABLE
AND
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not
apply to any portion of a trust if—
‘‘(i) the power to revest absolutely in
the grantor title to the trust property to
which such portion is attributable is exer-
cisable solely by the grantor without the
approval or consent of any other person or
with the consent of a related or subordi-
nate party who is subservient to the grant-
or, or
251
‘‘(ii) the only amounts distributable
from such portion (whether income or cor-
pus) during the lifetime of the grantor are
amounts distributable to the grantor or the
spouse of the grantor.
‘‘(B) COMPENSATORY TRUSTS.—Except as
provided in regulations, paragraph (1) shall not
apply to any portion of a trust distributions
from which are taxable as compensation for
services rendered.
‘‘(3) SPECIAL
RULES.—Except as otherwise
provided in regulations prescribed by the Secretary,
a controlled foreign corporation shall be treated as
a domestic corporation for purposes of paragraph
(1).
‘‘(4) RECHARACTERIZATION
OF
PURPORTED
GIFTS.—In the case of any transfer directly or indi-
rectly from a partnership or foreign corporation
which the transferee treats as a gift or bequest, the
Secretary may recharacterize such transfer in such
circumstances as the Secretary determines to be ap-
propriate to prevent the avoidance of the purposes of
this subsection.
‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR-
EIGN PERSON.—If—
252
‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any por-
tion of a trust, and
‘‘(B) such trust has a beneficiary who is a
United States person,
such beneficiary shall be treated as the grantor of
such portion to the extent such beneficiary has made
(directly or indirectly) transfers of property (other
than in a sale for full and adequate consideration)
to such foreign person.
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations providing that para-
graph (1) shall not apply in appropriate cases.
‘‘SEC. 155. REVERSIONARY INTERESTS.
‘‘(a) GENERAL RULE.—The grantor shall be treated
as the owner of any portion of a trust in which he has
a reversionary interest in either the corpus or the income
therefrom, if, as of the inception of that portion of the
trust, the value of such interest exceeds 5 percent of the
value of such portion.
‘‘(b) REVERSIONARY INTEREST TAKING EFFECT AT
DEATH
OF
MINOR
LINEAL
DESCENDANT
BENE-
FICIARY.—In the case of any beneficiary who—
253
‘‘(1) is a lineal descendant of the grantor, and
‘‘(2) holds all of the present interests in any
portion of a trust,
the grantor shall not be treated under subsection (a) as
the owner of such portion solely by reason of a rever-
sionary interest in such portion which takes effect upon
the death of such beneficiary before such beneficiary at-
tains age 21.
‘‘(c) SPECIAL RULE FOR DETERMINING VALUE OF
REVERSIONARY INTEREST.—For purposes of subsection
(a), the value of the grantor’s reversionary interest shall
be determined by assuming the maximum exercise of dis-
cretion in favor of the grantor.
‘‘(d) POSTPONEMENT OF DATE SPECIFIED FOR RE-
ACQUISITION.—Any postponement of the date specified for
the reacquisition of possession or enjoyment of the rever-
sionary interest shall be treated as a new transfer in trust
commencing with the date on which the postponement is
effective and terminating with the date prescribed by the
postponement. However, income for any period shall not
be included in the income of the grantor by reason of the
preceding sentence if such income would not be so includ-
ible in the absence of such postponement.
254
‘‘SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT.
‘‘(a) GENERAL RULE.—The grantor shall be treated
as the owner of any portion of a trust in respect of which
the beneficial enjoyment of the corpus or the income there-
from is subject to a power of disposition, exercisable by
the grantor or a nonadverse party, or both, without the
approval or consent of any adverse party.
‘‘(b) EXCEPTIONS
FOR CERTAIN POWERS.—Sub-
section (a) shall not apply to the following powers regard-
less of by whom held:
‘‘(1) POWER TO APPLY INCOME TO SUPPORT OF
A
DEPENDENT.—A power described in section
159(b) to the extent that the grantor would not be
subject to tax under that section.
‘‘(2) POWER
AFFECTING
BENEFICIAL
ENJOY-
MENT
ONLY
AFTER
OCCURRENCE
OF
EVENT.—A
power, the exercise of which can only affect the ben-
eficial enjoyment of the income for a period com-
mencing after the occurrence of an event such that
a grantor would not be treated as the owner under
section 155 if the power were a reversionary inter-
est; but the grantor may be treated as the owner
after the occurrence of the event unless the power is
relinquished.
‘‘(3) POWER EXERCISABLE ONLY BY WILL.—A
power exercisable only by will, other than a power in
255
the grantor to appoint by will the income of the
trust where the income is accumulated for such dis-
position by the grantor or may be so accumulated in
the discretion of the grantor or a nonadverse party,
or both, without the approval or consent of any ad-
verse party.
‘‘(4) POWER TO ALLOCATE AMONG CHARITABLE
BENEFICIARIES.—A power to determine the bene-
ficial enjoyment of the corpus or the income there-
from if the corpus or income is irrevocably payable
for a purpose specified in section 101(c) (relating to
definition of charitable contributions) or to an em-
ployee stock ownership plan (as defined in section
4975(e)(7)) in a qualified gratuitous transfer (as de-
fined in section 149(g)(1)).
‘‘(5) POWER
TO
DISTRIBUTE
CORPUS.—A
power to distribute corpus either—
‘‘(A) to or for a beneficiary or beneficiaries
or to or for a class of beneficiaries (whether or
not income beneficiaries) provided that the
power is limited by a reasonably definite stand-
ard which is set forth in the trust instrument;
or
‘‘(B) to or for any current income bene-
ficiary, provided that the distribution of corpus
256
must be chargeable against the proportionate
share of corpus held in trust for the payment
of income to the beneficiary as if the corpus
constituted a separate trust.
A power does not fall within the powers described in
this paragraph if any person has a power to add to
the beneficiary or beneficiaries or to a class of bene-
ficiaries designated to receive the income or corpus,
except where such action is to provide for after-born
or after-adopted children.
‘‘(6) POWER
TO
WITHHOLD
INCOME
TEMPO-
RARILY.—A power to distribute or apply income to
or for any current income beneficiary or to accumu-
late the income for him, provided that any accumu-
lated income must ultimately be payable—
‘‘(A) to the beneficiary from whom dis-
tribution or application is withheld, to his es-
tate, or to his appointees (or persons named as
alternate takers in default of appointment) pro-
vided that such beneficiary possesses a power of
appointment which does not exclude from the
class of possible appointees any person other
than the beneficiary, his estate, his creditors, or
the creditors of his estate, or
257
‘‘(B) on termination of the trust, or in con-
junction with a distribution of corpus which is
augmented by such accumulated income, to the
current income beneficiaries in shares which
have been irrevocably specified in the trust in-
strument.
Accumulated income shall be considered so payable
although it is provided that if any beneficiary does
not survive a date of distribution which could rea-
sonably have been expected to occur within the bene-
ficiary’s lifetime, the share of the deceased bene-
ficiary is to be paid to his appointees or to one or
more designated alternate takers (other than the
grantor or the grantor’s estate) whose shares have
been irrevocably specified. A power does not fall
within the powers described in this paragraph if any
person has a power to add to the beneficiary or
beneficiaries or to a class of beneficiaries designated
to receive the income or corpus except where such
action is to provide for after-born or after-adopted
children.
‘‘(7) POWER
TO
WITHHOLD
INCOME
DURING
DISABILITY
OF
A
BENEFICIARY.—A power exer-
cisable only during—
258
‘‘(A) the existence of a legal disability of
any current income beneficiary, or
‘‘(B) the period during which any income
beneficiary shall be under the age of 21 years,
to distribute or apply income to or for such bene-
ficiary or to accumulate and add the income to cor-
pus. A power does not fall within the powers de-
scribed in this paragraph if any person has a power
to add to the beneficiary or beneficiaries or to a
class of beneficiaries designated to receive the in-
come or corpus, except where such action is to pro-
vide for after-born or after-adopted children.
‘‘(8) POWER TO ALLOCATE BETWEEN CORPUS
AND INCOME.—A power to allocate receipts and dis-
bursements as between corpus and income, even
though expressed in broad language.
‘‘(c) EXCEPTION FOR CERTAIN POWERS OF INDE-
PENDENT TRUSTEES.—Subsection (a) shall not apply to
a power solely exercisable (without the approval or consent
of any other person) by a trustee or trustees, none of
whom is the grantor, and no more than half of whom are
related or subordinate parties who are subservient to the
wishes of the grantor—
259
‘‘(1) to distribute, apportion, or accumulate in-
come to or for a beneficiary or beneficiaries, or to,
for, or within a class of beneficiaries; or
‘‘(2) to pay out corpus to or for a beneficiary
or beneficiaries or to or for a class of beneficiaries
(whether or not income beneficiaries).
A power does not fall within the powers described in this
subsection if any person has a power to add to the bene-
ficiary or beneficiaries or to a class of beneficiaries des-
ignated to receive the income or corpus, except where such
action is to provide for after-born or after-adopted chil-
dren. For periods during which an individual is the spouse
of the grantor (within the meaning of section 154(e)(2)),
any reference in this subsection to the grantor shall be
treated as including a reference to such individual.
‘‘(d) POWER TO ALLOCATE INCOME IF LIMITED BY
A STANDARD.—Subsection (a) shall not apply to a power
solely exercisable (without the approval or consent of any
other person) by a trustee or trustees, none of whom is
the grantor or spouse living with the grantor, to distribute,
apportion, or accumulate income to or for a beneficiary
or beneficiaries, or to, for, or within a class of bene-
ficiaries, whether or not the conditions of paragraph (6)
or (7) of subsection (b) are satisfied, if such power is lim-
ited by a reasonably definite external standard which is
260
set forth in the trust instrument. A power does not fall
within the powers described in this subsection if any per-
son has a power to add to the beneficiary or beneficiaries
or to a class of beneficiaries designated to receive the in-
come or corpus except where such action is to provide for
after-born or after-adopted children.
‘‘SEC. 157. ADMINISTRATIVE POWERS.
‘‘The grantor shall be treated as the owner of any
portion of a trust in respect of which—
‘‘(1) POWER TO DEAL FOR LESS THAN ADE-
QUATE AND FULL CONSIDERATION.—A power exer-
cisable by the grantor or a nonadverse party, or
both, without the approval or consent of any adverse
party enables the grantor or any person to purchase,
exchange, or otherwise deal with or dispose of the
corpus or the income therefrom for less than an ade-
quate consideration in money or money’s worth.
‘‘(2) POWER TO BORROW WITHOUT ADEQUATE
INTEREST OR SECURITY.—A power exercisable by
the grantor or a nonadverse party, or both, enables
the grantor to borrow the corpus or income, directly
or indirectly, without adequate interest or without
adequate security except where a trustee (other than
the grantor) is authorized under a general lending
261
power to make loans to any person without regard
to interest or security.
‘‘(3) BORROWING OF THE TRUST FUNDS.—The
grantor has directly or indirectly borrowed the cor-
pus or income and has not completely repaid the
loan, including any interest, before the beginning of
the taxable year. The preceding sentence shall not
apply to a loan which provides for adequate interest
and adequate security, if such loan is made by a
trustee other than the grantor and other than a re-
lated or subordinate trustee subservient to the
grantor. For periods during which an individual is
the spouse of the grantor (within the meaning of
section 154(e)(2)), any reference in this paragraph
to the grantor shall be treated as including a ref-
erence to such individual.
‘‘(4) GENERAL POWERS OF ADMINISTRATION.—
A power of administration is exercisable in a non-
fiduciary capacity by any person without the ap-
proval or consent of any person in a fiduciary capac-
ity. For purposes of this paragraph, the term ‘power
of administration’ means any one or more of the fol-
lowing powers: (A) a power to vote or direct the vot-
ing of stock or other securities of a corporation in
which the holdings of the grantor and the trust are
262
significant from the viewpoint of voting control; (B)
a power to control the investment of the trust funds
either by directing investments or reinvestments, or
by vetoing proposed investments or reinvestments, to
the extent that the trust funds consist of stocks or
securities of corporations in which the holdings of
the grantor and the trust are significant from the
viewpoint of voting control; or (C) a power to reac-
quire the trust corpus by substituting other property
of an equivalent value.
‘‘SEC. 158. POWER TO REVOKE.
‘‘(a) GENERAL RULE.—The grantor shall be treated
as the owner of any portion of a trust, whether or not
he is treated as such owner under any other provision of
this part, where at any time the power to revest in the
grantor title to such portion is exercisable by the grantor
or a non-adverse party, or both.
‘‘(b) POWER AFFECTING BENEFICIAL ENJOYMENT
ONLY AFTER OCCURRENCE OF EVENT.—Subsection (a)
shall not apply to a power the exercise of which can only
affect the beneficial enjoyment of the income for a period
commencing after the occurrence of an event such that
a grantor would not be treated as the owner under section
155 if the power were a reversionary interest. But the
275
‘‘(2) the sole purpose of the trust is to hold, in-
vest, and reinvest funds in the trust and to use such
funds solely to make payments for such services or
property for the benefit of the beneficiaries of the
trust,
‘‘(3) the only beneficiaries of such trust are in-
dividuals with respect to whom such services or
property are to be provided at their death under
contracts described in paragraph (1),
‘‘(4) the only contributions to the trust are con-
tributions by or for the benefit of such beneficiaries,
‘‘(5) the trustee elects the application of this
subsection, and
‘‘(6) the trust would (but for the election de-
scribed in paragraph (5)) be treated as owned under
sections 153 through 161 by the purchasers of the
contracts described in paragraph (1).
‘‘(c) DOLLAR LIMITATION ON CONTRIBUTIONS.—
‘‘(1) IN
GENERAL.—Any trust which accepts
aggregate contributions by or for the benefit of an
individual in excess of $7,000 shall not be a quali-
fied funeral trust.
‘‘(2) RELATED TRUSTS.—For purposes of para-
graph (1), all trusts having trustees which are re-
lated persons shall be treated as 1 trust. For pur-