Mineral Royalty Trust Transactions: The Use of the Grantor Trust to Avoid Corporate Income Tax 37 Tax Law Review 1981-1982

37 Tax L. Rev. 225 (1981-1982)
Mineral Royalty Trust Transactions: The Use of the Grantor Trust to Avoid Corporate Income Tax

handle is hein.journals/taxlr37 and id is 237 raw text is: Mineral Royalty Trust Transactions:
The Use of the Grantor Trust to Avoid
Corporate Income Tax
A.J. ALEX GELINAS *
Introduction
The principle underlying the grantor trust provisions of the Code is
that income from property held in trust, over which the grantor has
retained substantial dominion and control, should be taxed to the grantor
rather than to the trust or its beneficiaries.' The grantor trust rules orig-
inated as a means of combatting the use of a family trust as a tax avoid-
ance device for splitting income while the family head still retained a
substantial interest in the trust corpus or income.- More recently, how-
ever, grantor trusts have also been used as a financing vehicle in com-
mercial transactions. This article focuses on recent uses of grantor
trusts by publicly held corporations in mineral royalty transactions, some
of which have been challenged by the Internal Revenue Service.
One reason for this development is that a grantor trust can provide
investors with conduit tax treatment, thus avoiding corporate or other
A.J. ALEX GELINAS (B.A., University of Notre Dame, 1969; J.D., Washington
and Lee University, 1974; L.L.M. (Taxation), New York University, 1978) is a
member of the New York Bar and is an associate with the firm of Brown, Wood,
Ivey, Mitchell & Petty, New York City.
1 Reg. § 1.671-2(b). The taxation of the grantor on the income from an
inter vivos trust is governed by sections 671 through 679 of subchapter J of the
Code. Section 671 provides the general rule that where the grantor or any other
person is treated as the owner of any portion of a trust, he is required to take into
account in computing his taxable income, the income, deductions and credits of
the trust attributable to that portion. The grantor can be taxed on all or a part of
trust income depending on the extent to which he or a nonadverse party has retained
certain specified controls over the trust property. These controls, or prohibited
powers, are set forth in sections 673 through 679, which provide rules for determin-
ing when the grantor should be treated as the owner of all or a part of trust
income. The current statutory scheme derives from the Supreme Court's decision
in Helvering v. Clifford, 309 U.S. 331 (1940).
2 Another typical example of a grantor trust is a funded revocable living trust,
a favored tool of estate planners for avoiding probate. The tax treatment and
traditional uses of grantor trusts are discussed generally in 1 CAsNER, EsTrATE
PLANNING 249 (4th ed. 1980); PESCHEL & SPURGEON, FEDERAL TAxATIoN OF
TRUSTS, GRANTORS AND BENEFICIARIES ch. 4 (1978).
225

Imaged with the Permission of N.Y.U. Tax Law Review

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