Rev. Rul. 67-241

A decedent in his will gave his widow a power, exercisable solely by her, to require the trustees of the residuary trust created under his will to pay to her at her request from corpus during any calendar year an amount equal to the greater of five percent of the value of the trust corpus or $5,000. The widow's right to exercise such power was not cumulative, so that upon her failure to exercise it before the end of any calendar year, her right as to that year lapsed. The trust income was payable in equal amounts to the decedent's two sons.

Section 678(a)(1) of the Internal Revenue Code of 1954 provides a general rule that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself.

Where a grantor or another person is treated under sections 673 through 678 of the Code as the owner of any portion of a trust, there are included under section 671 of the Code in computing his tax liability those items of income, deduction, and credit against tax, attributable to or included in that portion.

Section 1.671-2(d) of the Income Tax Regulations provides that items of income, deduction, and credit not attributable to or included in any portion of a trust of which the grantor or another person is treated as the owner under sections 671 through 687 of the Code are subject to the provisions of sections 641 through 668 of the Code.

Sections 661(a)(2) and 662(a)(2) of the Code treat all distributions (with certain exceptions) to beneficiaries, whether of income or principal, as deductible by the trust and taxable to the beneficiary, subject to the limitations determined by distributable net income of the trust.

Since the widow has a power exercisable solely by herself to vest a portion of the trust corpus in herself, she is treated as the owner of that portion of the trust under section 678 of the Code.

As the owner of a portion of the trust corpus, there are included in computing her tax liability those items of income, deduction, and credit against tax attributable to or included in that portion. Pursuant to the provisions of section 1.671-4 of the regulations, these items should not be reported by the trust on Form 1041, U.S. Fiduciary Income Tax Return (for estates, and trusts), but should be shown on a separate statement to be attached to that form.

The portions of trust corpus considered owned by the widow are not subject to the provisions of sections 661(a)(2) and 662(a)(2) of the Code when distributed to her.